**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K**

** **

**[X] Annual Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

For the Fiscal Year Ended September 30, 2005

or

[  ] **Transition Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

For the Transition Period _____ to _____

 

**Commission file number**

0-17187

 

| LOGIC DEVICES INCORPORATED                                     |
|----------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)

  |

| **California**           | **94-2893789**                               |
|--------------------------|----------------------------------------------|
| (State of Incorporation) | (I.R.S. Employer Identification No.)

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| 395 West Java  Drive, Sunnyvale, CA 94089                            |
|----------------------------------------------------------------------|
| (Address of principal executive offices, including Zip Code)

  |

| **(408) 542-5400**                                           |
|--------------------------------------------------------------|
| (Registrant's telephone number, including Area Code)

  |

Securities registered pursuant to Section 12(b) of the Act

 

| Title of Class | Name of each exchange on which registered                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 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| NONE           | NONE
 
Securities registered pursuant to Section 12(g) of the Act

 
Common Stock,  without par value
(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, asdefined in Rule 405 of the Securities Act.   Yes            No    X   

 

Indicate by check if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.   Yes            No    X   

 

Indicate by check mark whether the registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.   Yes    X      No         

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. [     ] CHECK IF APPLICABLE

 

Indicate by check mark whether the registrant is an accelerated filer (asdefined in Exchange Act Rule 12b-2). Yes            No    X   

 

Indicate by check whether the registrant is a shell company (as defined inExchange Act Rule 12b-2). Yes            No    X   

 

Statethe aggregate market value of the voting and non-voting common stock held bynon-affiliates computed by reference to the closing price of the common stock asof March 31, 2005, the last day of the registrant's most recently completedsecond quarter:  $7,692,200.

 

As ofDecember 21, 2005, the Registrant had 6,753,188 shares of its common stockissued and outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**(See Part III)

**LOGIC DEVICES INCORPORATED**

**ANNUAL REPORT ON FORM 10-K**

**INDEX**

 

**PART I**

 
 
Item 1.

BUSINESS

3

Item 1A.

RISK  FACTORS

8

Item 1B.

UNRESOLVED STAFF COMMENTS

13

Item 2.

PROPERTIES

13

Item 3.

LEGAL  PROCEEDINGS

13

Item 4.

SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS

14

**PART II**

Item 5.

MARKET FOR REGISTRANT'S COMMON  EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

14

Item 6.

SELECTED  FINANCIAL DATA

15

Item 7.

MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

16

Item 7A.

QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

21

Item 8.

FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA

22

Item 9.

CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

38

Item 9A.

CONTROLS  AND PROCEDURES

38

Item 9B.

OTHER  INFORMATION

38

**PART III**

Item 10.

DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT

39

Item 11.

EXECUTIVE  COMPENSATION

39

Item 12.

SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS

39

Item 13.

CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS

39

Item 14.

PRINCIPAL  ACCOUNTANT FEES AND SERVICES

39

**PART IV**

Item 15.

EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES

40

SIGNATURES

41

**CAUTIONARY STATEMENT**
 

This Annual Report on Form 10-K containsforward-looking statements which include, but are not limited to, statementsconcerning projected revenues, expenses, gross margin, net income, marketacceptance of our products, the competitive nature of and anticipated growth inour markets, our ability to achieve further product integration, the status ofevolving technologies and their growth potential, the timing and acceptance ofnew product introductions, the adoption of future industry standards, ourproduction capacity, our ability to migrate to smaller process geometries, andthe need for additional capital. These forward-looking statements are based on ourcurrent expectations, estimates, and projections about our industry,management's beliefs, and certain assumptions made by it. Words such as"anticipates, appears, expects, intends, plans, believes, seeks, estimates,may, will," and variations of these words or similar expressions are intendedto identify forward-looking statements. In addition, any statements that referto expectations, projections, or other characterizations of future events orcircumstances, including any underlying assumptions, are forward-lookingstatements. These statements are not guarantees of future performance and aresubject to risks, uncertainties, and assumptions that are difficult to predict.Therefore, actual results could differ materially and adversely from thoseresults expressed in any forward-looking statements, as a result of variousfactors, some of which are listed under the section, "Item 1A - Risk Factors,"of this Annual Report on Form 10-K. We undertake no obligation to revise orupdate publicly any forward-looking statements for any reason.

 

**PART I**

 
ITEM 1.    BUSINESS
** **
General Development of the Business
 

LOGIC Devices Incorporateddevelops and markets high-speed digital integrated circuits that performhigh-density storage and signal/image processing functions. Our products enablehigh definition video display, transport, editing, composition, and specialeffects. We also provide solutions for digital filtering in televisionbroadcast stations and image enhancement in medical diagnostic scanning andimaging equipment.

 

Our products generally addressdigital signal processing (DSP) requirements involving high-performancearithmetic computational and high-speed storage functions. We are focused ondeveloping proprietary catalog products to address specific functionalapplication needs or performance levels that are not otherwise commerciallyavailable. We seek to provide related groups of circuits that originalequipment manufacturers (OEMs) purchase for incorporation into high-performanceelectronic systems. As a result of our focus on higher value products, we havereduced our number of products offerings by over 85 percent over the past fiveyears.

 

We rely on third-partysilicon foundries to process silicon wafers, each wafer having up to severalhundred integrated circuits of a given LOGIC design, from which finishedproducts are then assembled. Our strategy is to avoid the substantialinvestment in capital equipment required to establish a wafer fabricationfacility, by outsourcing wafer processing to third-party foundries and takingadvantage of their expertise. See "Business - Background." Wecurrently have two primary wafer suppliers and continue to explore additionalfoundry relationships to reduce our dependence on any single wafer foundry.

 

We market our productsworldwide through a direct sales force and through 21 internationaldistributors. In fiscal year 2005, approximately 32 percent of our net revenueswere derived from OEMs, while sales through foreign and domestic distributorsaccounted for approximately 68 percent of net revenues (we terminated therelationship with a domestic distributor in May 2005). Among our customers areGE Medical, Lockheed Martin, Qualcomm, Texas Instruments, Sony, Teradyne, andRaytheon. Approximately 38 percent of the fiscal 2005 net revenues were derivedfrom within North America and approximately 62 percent were derived fromforeign sales.

 

LOGIC was incorporated underthe laws of the State of California in April 1983. Our headquarters are locatedat 395 West Java Drive, Sunnyvale, California 94089 and our telephone number is(408) 542-5400.

**Available Information**

 

We make available our annualreport on Form 10-K, quarterly reports on Form 10-Q, current reports on Form8-K, and amendments to those reports filed or furnished pursuant to Section13(a) or Section 15(d) of the Securities Exchange Act of 1934 free of charge onour website, www.logicdevices.com, as soon as reasonably practicableafter we electronically file such material with or furnish such material to theSecurities and Exchange Commission.
 Background
 

Rapid advances in fabricatingsilicon-based semiconductors are driving a global revolution in electronics.With these ongoing advances, the ability to economically compute, communicate,and control seems to be limited only by the creativity required to implementever more complex electronic systems. It is becoming increasingly common toimplement entire electronic systems on a single small sliver of silicon. Thechallenges to the industry have increasingly turned toward innovative productdefinition, timely product development, technical customer support, and heavycapital investments in advanced semiconductor wafer fabrication facilities. Therapid advances in chip fabrication technology have resulted in a specializationof skills within the industry. In addition to the specialization of materialsprocessing skills required to fabricate semiconductor wafers, the industryincreasingly requires and values system architecture development,interoperability standards, signal processing algorithms, and circuit designexpertise as essential skills for developing financially successful products.Opportunities have thus emerged for semiconductor companies that focus onproduct definition, advanced design techniques, and technical applicationsupport, and that rely on third parties for wafer fabrication. We focus our resourceson defining and developing high-performance integrated circuit components forgrowing markets, which require demanding computational throughput.

 

The semiconductor industry isintensely competitive, highly cyclical, and characterized by rapidtechnological change, product obsolescence, wide fluctuations in both demandand capacity, and steep price erosion. These factors can obsolete processes andproducts currently utilized or produced by us. In such cases, we are requiredto develop products utilizing new processes and to either integrate suchproducts into our existing foundry processes, or seek new foundry sources.

 
Markets and Product Strategies
 

DSP is an importanttechnology for many emerging product technologies. It involves convertinglight, sound, or other naturally occurring analog phenomena into a stream ofdigital values that may then be processed, manipulated, exchanged, or sorted byelectronic systems. DSP provides many advantages, including: the ability tostore and recall information; the ability to extract information content andcompress the amount of data that must be stored, processed, or transmitted; andthe ability to process and manipulate digital data with consistency andprecision. Manipulation of video images and speech requires signal-processingrates and precision that are not yet practical with analog technology or withgeneral-purpose (non-DSP) processors.

 

DSP is becoming commonplacein our lives, resulting from rapid advances in semiconductor process technologyand increasing cost effectiveness. Consequently, very large and formidablecompanies have become interested in DSP, with a focus on high-volumeapplications. To avoid direct competition with these larger companies, weattempt to identify products and market niches that demand the greaterperformance that programmable DSP circuits can achieve, yet are small enoughnot to attract significant attention from the larger chip manufacturers.

 

Beginning in November 1998,the Federal Communications Commission (FCC) directed that televisionbroadcasters begin a transition from analog broadcasts to high-definitiondigital television (HDTV), which offers clearer pictures and better sound, withall analog broadcasts now scheduled to cease by 2009 (originally scheduled for2006). Unfortunately, the broadcasters remain behind the scheduled mandates.This slow transition adversely affected our revenues in the past few fiscalyears.

  In August 2002, the FCCissued an order to television manufacturers that requires digital tuners beincorporated into 50 percent of the television sets with screens of 36 or moreinches starting in 2004, in 50 percent of the sets with screens of 25-35 inchesstarting in 2005, and in all sets with screens of 13 inches or more by 2007. OnOctober 29, 2003, the U.S. Court of Appeals for the D.C. Circuit upheld a FCCmandate that, by 2007, all but the very smallest television sets sold in the U.S. must be equipped for receiving digital, along with traditional analog, televisionsignals. The court said that the FCC's mandate was needed because the industrywas not moving quickly enough to make new tuners available.

 

LOGIC has historicallyderived a significant portion of our revenues from television broadcastequipment manufacturers. In the late 1990's, we jointly defined with ourcustomers a family of high-performance digital image filtering circuits thatfacilitate the smoothing of edges as video images are stretched and resized. Wehave developed and sampled these to OEMs for incorporation into HDTV studioproduction systems. While sales of HDTV studio equipment have lagged behindmarket forecasts, we believe our products offer effective solutions to certainvideo image filtering problems in that equipment. Therefore, if HDTV studioequipment begins to sell in higher volume, we believe we may benefit fromincreasing sales.

 

As a result of our initialwork on digital filtering and image resizing circuits, we identified secondaryapplications for this product technology. We found that the circuits wereapplicable to, and have been incorporated into, advanced medical imagingequipment, such as ultrasound and computer aided tomography (CAT) scanners, andmilitary weapons systems.

 
Products in Development
 

Companies in thesemiconductor industry typically experience a correlation between their successin introducing new products and increases in revenues. We remain committed toproduct development, but had not made significant new product introductions forseveral years prior to fiscal 2004. Our newest video frame buffer product, theLF3324, was preliminarily introduced during fiscal 2005, and another, theLF3312, was introduced in late fiscal 2004, and we continue to sample it tocustomers.

 

At current resource levels,we do not anticipate being able to complete all product opportunities we haveidentified. However, as we consider product development critical to our futuresuccess, we anticipate that our product development expenditures will continueto be significant in the future and be directed towards those products with thegreatest revenue potential. Through hiring and support of the continuingeducation of our employees, we increased the educational background of ourdesign team during the past few years, while also acquiring new software designautomation tools to increase the productivity of our product developmentefforts. Based on the investments we have made in research and development, weanticipate product development will accelerate in the future.
 Wafer Fabrication Technology
 

LOGIC is a fablessmanufacturer. We rely upon third-party foundry suppliers to produce processedwafers from mask patterns designed by us. Through these wafer suppliers, wehave access to advanced high-speed, high-density complimentary metal oxidesemiconductor (CMOS) process technology, without the significant investment incapital equipment and facilities required to establish a wafer fabricationfactory. Coupled with our structured custom design methodology and experience withhigh-speed circuit design, this CMOS technology has allowed us to produceproducts that offer high computational speeds, high reliability, high levels ofcircuit integration (complexity), and low power consumption.

 

We are primarily dependentupon two wafer suppliers and do not have a guarantee of minimum supplies.Therefore, there can be no assurance that such relationships will continue tobe on terms satisfactory to us. The inability to obtain adequate quantities ofprocessed wafers could limit our revenues. As a result of this risk, we carry alarge inventory of unassembled wafers that can be packaged into a variety ofcarrier styles to support customer requirements.

**Production, Assembly, and Test**

 

Our production operationsconsist of functional and parametric testing, package marking, hot and coldtesting, final inspection, quality inspection, and shipment. As is customary inthe industry, high-volume assembly subcontractors in the Far East assemble ourcommercial grade devices. Thereafter, the assembled devices are returned to usfor final testing and shipment to customers. We continue to test materials andproducts at various stages in the manufacturing process, utilizing automatedtest equipment.

 

We have historicallymaintained, and expect to continue to maintain, high levels of inventory. Forsome product types, we must purchase all of our anticipated inventory needs forthe life of the product (often ten or more years) in a short period of time.Our high inventory levels heighten the risk of inventory obsolescence andwrite-offs.
 Marketing, Sales, and Customers
 

We market our productsworldwide to a broad range of customers through our own direct sales effortsand through 21 international electronics distributors. We concentrate ourdirect marketing efforts on high-performance segments of the medical imaging,broadcast equipment, and telecommunications markets, in applications where highspeed is critical. Among our OEM customers are GE Medical, Lockheed Martin, Qualcomm, Texas Instruments, Sony, Teradyne, and Raytheon. In the past, we have alsoutilized a domestic distributor though we do not currently do so.

 

Distributors purchase LOGIC'sproducts for resale, generally to a broad base of small- to medium-sizedcustomers. As is customary in the industry, our distributors receive certainprice protection and limited stock rotation rights. However, our distributorsare required to simultaneously order an amount equal to or greater than anyrotation items returned. During fiscal 2005, 2004, and 2003, sales through bothinternational and domestic distributors accounted for approximately 68%, 66%,and 68% of net revenues, respectively.

 

In fiscal 2004, and 2003, JanDevices, Inc., a domestic distributor, accounted for approximately 14% and 13%of net revenues, respectively. We terminated this relationship during fiscal2005. In fiscal 2005, three international distributors, MCM Japan Ltd., Zwinz TechnicalConsulting, and 3D Industrial Electronics PTE, comprised approximately 12%,11%, and 11% of net revenues, respectively. In fiscal 2004 and 2003, MCM JapanLtd. and Zwinz Technical Consulting comprised approximately 12% and 11% of netrevenues, respectively.

 

Ourdistributors are not exclusive and they may also market products competitivewith our products. We warrant our products against defects in materials andworkmanship for a period of 12 months from the date of shipment. Warrantyexpenses to date have been nominal.

 

International sales areconducted by sales representatives and distributors located in Australia,Belgium, Canada, Denmark, England, Finland, France, Germany, Hong Kong, Israel,Italy, Japan, Korea, the Netherlands, Singapore, South Africa, Spain, Sweden,and Taiwan. During fiscal 2005, 2004, and 2003, our export sales wereapproximately 62%, 52%, and 55% of net revenues, respectively (see Note 7 in"Notes to Financial Statements" contained in Item 8). Ourinternational sales are billed in United States dollars, and therefore,settlements are not directly subject to currency exchange fluctuations.However, changes in the relative value of the dollar may create pricingpressures for our products. Although our international sales are subject tocertain export restrictions, including the Export Administration Amendments Actof 1985 and the regulations promulgated thereunder, we have not experienced anymaterial difficulties resulting from these restrictions to date.

 
Backlog
 

As of December 2, 2005 and2004, our backlog was approximately $517,700 and $377,000, respectively. Thisbacklog includes all released purchase orders shippable within the following 12months, including orders from distributors. Our backlog, although useful forscheduling production, does not represent actual sales and should not be usedas a measure of future sales or revenues at any particular time. In accordancewith accepted industry practice, all orders on the backlog that are not"last-time buys" of obsolete products are subject to cancellationwithout penalty at the option of the purchaser at any time prior to shipment.In addition, the backlog does not reflect changes in delivery schedules andprice adjustments that may be passed on to distributors and credits forreturned products. We produce catalog products that may be shipped frominventory within a short time after receipt of a purchase order. The businessfor our catalog products, like the businesses of other companies in thesemiconductor industry, is characterized by short-term orders and shipmentschedules rather than by volume purchase contracts. Our shipments are generallyconcentrated toward the end of the third month of each quarter, making itdifficult to predict our revenues and results of operations for any fiscalperiod. For these reasons, our backlog as of any particular date is notrepresentative of actual sales for any succeeding period and we believe that ourbacklog is not a good indicator of future revenues.

 
Research and Development
 

As we have not introducedsufficient new products in a few years, we view new product development as themost important factor affecting revenue growth; therefore, we continue ourcommitment to research and development. Research and development expenditureswere 21%, 31%, and 36% of net revenues in fiscal 2005, 2004, and 2003,respectively. See "Selected Financial Data," "Management'sDiscussion and Analysis of Financial Condition and Results of Operations,"and "Statements of Operations," contained in Items 6, 7, and 8,respectively.

 
Competition
 

The semiconductor industry isintensely competitive and characterized by rapid technological change and ratesof product obsolescence, price erosion, periodic shortage of materials,variations in manufacturing yields and efficiencies, and increasing foreigncompetition. The industry includes many major domestic and internationalcompanies that have substantially greater financial, technical, manufacturing,and marketing resources than LOGIC. We face competition from othermanufacturers of high-performance integrated circuits, many of which haveadvanced technological capabilities and internal wafer production capabilities.Our ability to compete in this rapidly evolving environment depends on elementsboth in and outside our control. These elements include our ability to developnew products in a timely manner, the cost effectiveness of our manufacturing,the acceptance of new products by customers, the speed at which customersincorporate our products into their systems, the continued access to advancedsemiconductor foundries, the number and capabilities of our competitors, andgeneral economic conditions. In the area of high-performance DSP circuits, wecompete with Altera, Analog Devices, Fairchild Semiconductor, Intersil, LucentTechnologies, Texas Instruments, and Xilinx, among others.
 Patents and Copyrights
 

Because of the rapidlychanging technology in the semiconductor industry, we rely primarily upon ourdesign know-how, rather than patents and copyrights, to develop and maintain ourcompetitive position. We attempt to protect our trade secrets and otherproprietary information through confidentiality agreements with employees,consultants, suppliers, and customers, but there can be no assurance that thosemeasures will be adequate to protect our interests.

 

We are of the opinion thatpatent and maskwork protection is of less significance in our business thanother factors, such as the experience and innovative skill of our personnel andthe abilities of our management. There can be no assurance that others will notdevelop or patent technology similar to our technology, or copy or otherwiseduplicate our products. We own five patents awarded by the United States Patentand Trademark Office.

 

Since others have obtained patents covering varioussemiconductor designs and processes, certain of our present or future designsor processes may be claimed to infringe upon the patents of third parties. Wehave previously received, and may in the future receive, claims that one ormore aspects or uses of our products infringe on patent or other intellectualproperty rights of third parties. See Item 3 - "Legal Proceedings." We do notbelieve that we infringe upon any known patents at this time. If any suchinfringements exist or arise in the future, we may be liable for damages andmay, like many companies in the semiconductor industry, find it necessary ordesirable to obtain licenses relating to one or more of our current or futureproducts. Based on industry practice, we expect that any necessary licenses orrights under patents could be obtained on conditions that would not have a materialadverse effect. There can be no assurance, however, that licenses could, infact, be obtained on commercially reasonable terms, or at all, or thatlitigation would not occur. Our inability to obtain such licenses oneconomically reasonable terms or the occurrence of litigation could adverselyaffect us.

**Employees**

 

As of September 30, 2005, we had 16 employees,consultants, and part-time employees, of which 12 were full-time employees. Wehave been careful to retain employees that are important to maintain ourongoing development efforts. Our ability to attract and retain qualifiedpersonnel is an important factor in our continued success. None of ouremployees are represented by a collective bargaining agreement, and we havenever experienced any work stoppage. We believe that our employee relations aregood.

 
Regulations
 

Federal, state, and local regulations impose variousenvironmental controls on the discharge of chemicals and gases in connectionwith the wafer manufacturing process. Since we rely on third partymanufacturers and our activities do not involve utilization of hazardoussubstances generally associated with semiconductor processing, we believe suchregulations are unlikely to have a material affect on our business oroperations.
 ITEM 1A.    RISKFACTORS
 

Set forth below are some ofthe risks and uncertainties that, if they were to occur, could materiallyadversely affect our business or that could cause our actual results to differmaterially from the results contemplated by the forward-looking statementscontained in this report and other public statements we make.

 

*We have a history oflosses and our future operating results could be harmed due to semiconductorindustry business cycles.*

** **

We have sustained substantialnet losses during the past five fiscal years. These net losses are attributableprincipally to delays in the television broadcast industry's transition to highdefinition digital broadcasting from current analog standards, a downturn inthe semiconductor industry, and lack of new product introductions. Many factorswill affect our ability to become profitable or sustain profitability, such ascontinued demand for our products by our customers, lack of price erosion,efficiency of our manufacturing subcontractors, continued product innovationand design wins, and our continued ability to manage operating expenses.

We produce and sell semiconductors and our operations aretherefore impacted by the repeated and severe business cycles that havehistorically been experienced by the semiconductor industry. Our financialperformance has been negatively impacted by significant downturns in thesemiconductor industry as a result of:

 
-  general reductions in     inventory levels by customers;excess production capacity;the cyclical nature of the     demand for products of semiconductor customers; andaccelerated declines in     average product selling prices.
When these or otherconditions in the industry occur, our operating results could be adverselyimpacted.

 

*We are a small companywith very limited resources compared to our current and potential competitorsand we may not be able to compete effectively in our highly competitiveindustry.*

 

The semiconductor industry is highly competitive and manyof our direct and indirect competitors and potential competitors havesubstantially greater financial, technological, manufacturing, and salesresources. If we are unable to compete successfully in this environment, ouroperating results could be harmed.

 

The current level of competition is high and may increaseas our market expands. We compete directly with companies that have developedsimilar products. We also compete indirectly with numerous semiconductorcompanies that offer products and solutions based on alternative technologies.These direct and indirect competitors are established multinationalsemiconductor companies, as well as emerging companies. In addition, we mayexperience additional competition from foreign companies in the future.

 

*We depend on a limitednumber of customers for a majority of our sales and our sales orders aretypically concentrated in the last month of every quarter, making our financialresults particularly susceptible to the loss of a key customer and making salesin a quarter difficult to predict.*

 

We anticipate that theconcentration of our sales among relatively few customers will continue in thefuture. We do not have long-term purchase commitments from any of ourcustomers. Therefore, these customers could cease purchasing our products withlimited notice and with no penalty.

 

Our dependence on a smallnumber of customers increases the risks associated with the potential loss ofcustomers resulting from business combinations or consolidations. If a customerwere acquired or combined with another company, the resulting company couldcancel purchase orders as part of the integration process.

 

In addition, we ship moreproducts during the third month of each quarter than in the first two months ofthe quarter. Moreover, shipments in the third month are generally higher towardthe end of the month. Our sales are therefore concentrated in the latter partof each quarter, making it difficult to predict our revenues and results ofoperations for any fiscal quarter or other fiscal period.

 

*Continued delay in HighDefinition Television (HDTV) broadcasting could adversely impact sales of ourHDTV application products.*

 

Beginning in November 1998, the Federal CommunicationsCommission directed that television broadcasters begin a transition fromcurrent analog broadcasts to HDTV broadcasts. All analog broadcasts wereoriginally scheduled to cease by the year 2006, but this deadline has beenmoved to 2009.

 

We developed in fiscal 1998 and tested in fiscal 1999,products that were designed-in (incorporated) into HDTV compatible studiosystems. Since fiscal 2000, sales of these HDTV-related products have not metexpectations, and we anticipate that our future revenues will be adverselyaffected if the slow transition persists.

 

We*depend onthird parties to fabricate silicon wafers and to assemble and test ourproducts, which exposes us to a risk of production disruption or uncontrolledprice changes.*

 

We do not manufacture siliconwafers. We rely upon two wafer suppliers,each of which is the sole source for certain of our products, and twoassembly/test subcontractors. These suppliers do not have a contractualobligation or commitment to supply such wafers or services in the future. Ifthe suppliers are unable or unwilling to supply wafers or services, ouroperating results could be harmed. We may not be able to find sufficientsuppliers at a reasonable price or at all if such disruptions occur. As aresult of our reliance on third parties, we face significant risks, including:
-  reduced control over delivery schedules and quality;longer lead times;the potential lack of     adequate capacity during periods of excess industry demand;difficulties selecting and     integrating new subcontractors;limited warranties on     products supplied to us;potential increases in     prices due to capacity shortages; andpotential misappropriation     of our intellectual property.
If we fail to deliver our products on time or ifthe costs of our products increase, then our profitability and customerrelationships could be harmed.

 

*Our internationaloperations subject us to risks not present in solely domestic operations.*

 

Our primary silicon wafer supplier and assemblysubcontractors are located in Asia, primarily in South Korea and Taiwan. Economic, financial, social, and political conditions in Asia have been volatile.Financial difficulties, government actions or restrictions, prolonged workstoppages, or any other difficulties experienced by our suppliers could harmfuture operating results.

  We also have many overseas customers. Our export sales areaffected by unique risks frequently associated with foreign economics,including:

 
-  governmental controls and     trade restrictions;export license requirements     and restrictions on the export of technology;changes in local economic     conditions;political instability;changes in tax rates,     tariffs, or freight rates;interruptions in air     traffic; anddifficulties in staffing     and managing foreign sales offices.
Significant changes in theeconomic climate in the foreign countries from which we derive our export salescould harm future operating results.

 

*The complex nature ofsemiconductors makes us highly susceptible to manufacturing problems and theseproblems could have a negative impact on future operating results.*

 

Making semiconductors is a highly complex and precise process,requiring production in a tightly controlled, clean environment. Even minuteimperfections in its materials, difficulties in the wafer fabrication process,defects in the masks used to print circuits on a wafer or other factors cancause a substantial percentage of wafers to be rejected or numerous chips oneach wafer to be nonfunctional. We may experience problems in achieving anacceptable quality and yield rate in the manufacture of wafers. Theinterruption of wafer fabrication or the failure to achieve acceptable yieldscould harm future operating results. We may also experience manufacturingproblems in our assembly and test operations, and in the introduction of newpackaging materials.

 

*We dependon third parties to deliver our products.*

 

We rely on independent carriers and freight haulers totransport our products between manufacturing locations and to deliver productsto our customers. Any transport or delivery problems because of their errors,or because of unforeseen interruptions, such as strikes, political instability,terrorism, natural disasters and accidents, could harm future operatingresults.

 

*Earthquakes, other naturaldisasters, and power shortages may damage our business.*

 

Our California facility and some of our suppliers arelocated near earthquake faults that have experienced major earthquakes in thepast. In addition, the risk of power shortages and outages in California hasbeen widely reported. In the event of a major earthquake or other naturaldisaster near our facility or a sustained loss of power at our facility, ouroperations could be harmed. Similarly, a major earthquake or other naturaldisaster near one or more of our suppliers, such as the one that occurred in Taiwan in September 1999, could disrupt the operations of these suppliers, which couldlimit the supply of our products and harm our business.

 

*We maintain high levels ofinventory that decrease our liquidity and substantially increase the risk ofwrite-offs.*

 

We have historically maintained and expect to continue tomaintain high levels of inventory of processed silicon wafers, packagingmaterials, and finished goods. For some product types, we must purchase all of ouranticipated inventory needs for the life of the product in a short period oftime. We commit capital to maintain these high inventory levels, which preventsus from using that capital for other purposes, such as research anddevelopment, and requires us to utilize more capital than might otherwise be required.Our high inventory levels also heighten the risk of inventory obsolescence andwrite-offs. Further, we may forecast demand incorrectly and produceinsufficient inventory, resulting in supply shortages.

*We currently have no bank credit facility and must relysolely upon existing cash reserves and funds from existing operations tofinance future operations.*

 

Although we sustained substantial net lossesduring fiscal 2005, 2004, and 2003, our cash flows from operations werepositive during these fiscal years, due to reductions in accounts receivableand inventory and our cost reduction efforts. However, these reductions areunlikely to continue indefinitely. Furthermore, significant investments, suchas those we made in fiscal 2005, could result in net cash outflows as they didin fiscal 2005.

 

If we are unable to return to profitability, wewould have to utilize cash reserves and thereafter obtain additional fundingthrough debt or equity financing. If we are able to obtain debt financing,which is not assured, the terms of such financing are unknown, since we do notpresently have a credit facility, and may be unfavorable to us. Similarly,there can be no assurance that we would be able to sell capital stock onfavorable terms or at all and any such sales may adversely affect our existingshareholders.

 

*Our operating success depends upon our ability todevelop new products and access new technologies.*

 

The semiconductor industry is a dynamicenvironment marked by rapid product obsolescence. Our future success depends onour ability to introduce new or improved products that meet critical customerneeds, while achieving acceptable profit margins. If we fail to introduce thesenew products in a timely manner or these products fail to achieve marketacceptance, operating results would be harmed. The introduction of new productsin a dynamic market environment presents significant business challenges.Product development commitments and expenditures must be made well in advanceof product sales, while the success of new products depends on accurate forecastsof long-term market demand and future technology developments.

 

Future revenue growth is dependent on marketacceptance of new products, such as our newly introduced LF3324 and LF3312, andthe continued market acceptance of existing products. The success of theseproducts is dependent on a variety of specific technical factors, including:

 
-  successful product     definition;timely and efficient     completion of product design;timely design into     customers' future products and maintenance of close working relationships     with customers;timely and efficient access     to wafer manufacturing and assembly processes; andproduct performance,     quality and reliability.
If, due to these or other factors, new productsdo not achieve market acceptance, our operating results would be harmed.Furthermore, to develop new products and maintain the competitiveness ofexisting products, we need to migrate to more advanced wafer manufacturingprocesses that use larger wafer sizes and smaller geometries.

 

*The loss of key personnelor failure to hire and retain additional qualified personnel could impair our abilityto develop and market our products.*

 

Our future success greatly depends on theability to attract and retain highly qualified technical and managementpersonnel. As a small company, we are particularly dependent on a relativelysmall group of employees. Competition for skilled technical and managementemployees is intense in the semiconductor industry. As a result, we may beunable to retain our existing key technical and management employees, orattract additional qualified personnel, which could harm operating results. Wedo not have employment agreements with any of our employees.

 

*Our failure to protect ourproprietary rights, or the costs of protecting these rights, may harm ourability to compete.*

 

We own several patents butrely primarily on our design know-how and continued access to advanced waferprocess technology to develop and maintain our competitive position. We attemptto protect our trade secrets and other proprietary information throughconfidentiality agreements with employees, consultants, suppliers andcustomers. However, competitors may develop, patent or gain access to similarknow-how and technology, or reverse engineer our products. Our inability toadequately protect these proprietary rights could result in our competitorsoffering similar products, potentially causing us to lose a competitiveadvantage and leading to decreased revenue. We may not obtain an adequateremedy in the event our confidentiality agreements are breached or any remedyif our trade secrets are independently developed by others. Despite our effortsto protect our proprietary rights, existing intellectual property laws affordonly limited protection, especially under the laws of some foreign countries.Litigation may be necessary in the future to enforce our intellectual propertyrights, to protect our trade secrets or to determine the validity and scope ofthe proprietary rights of others. This litigation could result in substantialcosts and diversion of resources.

 

*We could be harmed bylitigation involving patents and other intellectual property rights.*

 

As a general matter, thesemiconductor and related industries are characterized by substantiallitigation regarding patent and other intellectual property rights. We have beenand in the future may be accused of infringing the intellectual property rightsof third parties. Furthermore, we may have certain indemnification obligationsto customers with respect to the infringement of third-party intellectualproperty rights by our products. Infringement claims by third parties or claimsfor indemnification by customers or end-users of our products resulting frominfringement claims may be asserted in the future and such assertions, if provento be true, may harm our business.

 

Any litigation relating tothe intellectual property rights of third parties, whether or not determined inour favor or settled by us, could be costly and could divert the efforts andattention of management and engineering personnel. In the event of any adverseruling in any such litigation, we could be required to pay substantial damages,cease the manufacturing, use and sale of infringing products, discontinue theuse of certain processes or obtain a license under the intellectual propertyrights of the third party claiming infringement. A license might not beavailable on reasonable terms, if at all.

 

*We have adopted certainanti-takeover, indemnification and limited liability provisions which mayadversely affect our stock price.*

 

We have adopted a shareholderrights plan that is designed to make a change of control through theacquisition of large amounts of our common stock, or through a tender offer to ourshareholders, prohibitively expensive unless our board of directors hasapproved the transaction. Our restated articles of incorporation and bylawsalso provide for the indemnification of our officers and directors and insulateour directors from monetary liability for certain breaches of their duty ofcare to us. These provisions may also have the effect of delaying or preventinga change in control without action by our shareholders, and therefore couldadversely affect the price of our common stock.

 

*The price of our commonstock may continue to be volatile and our trading volume may continue to berelatively low.*

 

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

 
-  our anticipated or actual     operating results;announcements or     introductions of new products;technological innovations     or setbacks by us or our competitors;conditions in the     semiconductor markets;the commencement of     litigation; andgeneral economic and market     conditions.ITEM 1B.     UNRESOLVEDSTAFF COMMENTS
 

We are not an accelerated filer as defined in SEC Rule12b-2 so this Item is not applicable.
ITEM 2.    PROPERTIES
 

LOGIC's executive offices, as well as our inventories andprincipal research and design facilities, are located in approximately 15,400square feet, in Sunnyvale, California, with a lease expiring September 30,2007. We also maintain an additional sales office in Warminster, England. We believe that our facilities will be adequate to meet our reasonably foreseeable needsand, if necessary, that alternative facilities will be available on acceptableterms, so as to meet our requirements.
 ITEM 3.    LEGAL PROCEEDINGS
 

From time to time,we receive demands from various partiesasserting patent claims. These demands are often not based on any specificknowledge of our products or operations. Because of the uncertainties inherentin litigation, the outcome of any such claim, including simply the cost of asuccessful defense against such a claim, could have a material adverse impact.

 

In June 2005, LOGIC was contacted by Scanner TechnologiesCorporation (Scanner), the owner of certain patents. Scanner accused us ofinfringing certain of their patents. Scanner has not filed suit, but has urged usto enter into a licensing agreement in order to avoid litigation. We understanda similar demand has been made upon other manufacturers of integrated circuits.Should Scanner file suit, we would vigorously defend ourselves in this matter.However, because of the inherent uncertainties of litigation, the outcome ofthis action could be unfavorable, in which event, we might be required to paydamages and other expenses, which could have a material adverse effect on ourfinancial position and results of operations. In addition, we could be requiredto alter certain of our production processes or products as a result of thismatter.

 
ITEM 4.    SUBMISSION OF MATTERSTO VOTE OF SECURITY HOLDERS
 

No matters were submitted to a vote of our securityholders during the last quarter of fiscal 2005.

 

 

**PART II**

** **
ITEM5.    MARKET FOR REGISTRANT'S COMMONEQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 

Our Common Stock is traded under the symbol, LOGC, on TheNasdaq National Market. The following table sets forth, for the periodsindicated, the high and low closing sale prices for LOGIC's Common Stock, asreported by Nasdaq during the following calendar quarters:

 

**Calendar Year**

**High**

**Low**

 

**2003**

Fourth quarter

$2.58

$1.42

 

**2004**

First quarter

$1.95

$1.65

Second quarter

$1.79

$1.45

Third quarter

$1.55

$1.02

Fourth quarter

$1.55

$1.02

 

**2005**

First quarter

$1.65

$1.31

Second quarter

$1.50

$1.01

Third quarter

$1.40

$1.01

**Holders**

 

As of December 21, 2005, there were approximately 2,300holders of record of our Common Stock.

 

**Dividends**

 

We have not paid any dividends on our Common Stock since ourincorporation.

 

**Securities Authorized for Issuance Under EquityCompensation Plans**

 

The following tablerepresents the position of our equity compensation plans as of September 30,2005:

 

Plan category
 
Number of securities to be issued upon exercise of  outstanding options, warrants, and rights

Weighted-average exercise price of outstanding  options, warrants, and rights

Number of securities remaining available for future  issuance under equity compensation plans (excluding securities reflected in  column a)

(a)

   

(b)

   

(c)

 

Equity compensation plans

approved by security  holders

385,000 

$1.593 

522,000 

 

Equity compensation plans  not

approved by security  holders

-  

-  

-  

 

Total

385,000 

$1.593 

522,000 
 ITEM 6.    SELECTED FINANCIAL DATA
 

On December 15, 2003, we elected to change our calendarbusiness year to a fiscal year ending September 30. Previously, our fiscalyears were comprised of 52 weeks of seven days, each beginning on Monday andending on Sunday, with fiscal 2003 ending September 28, 2003. As a result ofthis change, our 2004 fiscal year ended September 30, 2004 rather thanSeptember 26, 2004. The additional four days were included in our first quarterfor fiscal 2004, which ended December 31, 2003.

 

The following table sets forth selected financial data forour last five fiscal years. This information is derived from our auditedfinancial statements, unless otherwise stated. This data should be read inconjunction with the financial statements, related notes, and other financialinformation included elsewhere in this report.

 

(Dollars in thousands, except per share amounts)

                           Fiscal Years  Ended:

September 30,

2005

September 30,  2004

September 28,

2003

September 29,

2002

September 30,

2001

Net revenues

$   3,509 

$   4,415 

$   5,009 

$   6,573 

 

$ 10,007 

 

Research and development

$      730 

$   1,364 

$   1,785 

$   1,776 

$   1,926 

 

Net loss

$  (1,363)

$  (1,472)

$  (2,461)

$  (2,124)

$    (212)

 

Basic and diluted (loss) income      per common share

$ (0.20)

$ (0.22)

$ (0.37)

$ (0.31)

$ (0.03)

 

Weighted average common      shares outstanding (000s)

6,750 

6,715 

6,652 

6,850 

6,842 

 

Working capital

$   7,589 

$   9,583 

$ 11,084 

$ 13,674 

$ 14,882 

 

Net property and equipment

$   1,163 

$      862 

$      857 

$      931 

$   1,592 

 

Total assets

$   9,547 

$ 10,836 

$ 12,248 

$ 14,927 

$ 17,231 

 

Long-term liabilities

$        34 

$        41 

$        40 

$          -  

$          3 

 

  Shareholders' equity

$   9,238 

$ 10,590 

$ 11,943 

$ 14,627 

$ 16,652 
 ITEM 7.    MANAGEMENT'SDISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

Reported financial results may not be indicative of thefinancial results of future periods. All non-historical information containedin the following discussion constitutes forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These statements are not guarantees of futureperformance and involve a number of risks and uncertainties, including thoseidentified in "Item 1A - Risk Factors" of this Annual Report on Form 10-K. Weundertake no obligation to revise or update these forward-looking statements toreflect events or circumstances after the date of this report.

 

**Overview**

 

LOGIC is one of the smallest publicly traded semiconductormakers. Following our formation, we initially developed plug-compatible secondsource products that were form, fit, and function compatible with productsoffered by other manufacturers. Beginning in 1996, we began identifying unique,proprietary products driven by our existing customer base. While thistransition to proprietary products required us to obtain advanced designautomation tools and to increase the number of people involved in productdevelopment, it enabled us to focus our sales channels and limit the costs ofthose channels, and to compete in markets with pricing and delivery demandsthat are not as highly competitive as the markets for second source products. Weprimarily derive our revenues from the sale of semiconductor chips that performhigh-speed DSP in video image filtering and digital communicationsapplications.

  Our transition to a proprietary product focus has had asignificant impact on our financial results. We anticipated increased revenuesfrom the HDTV market starting in 1999, but the delays in the broadcastindustry's transition to high-definition from analog signals (originallyscheduled to be 2006 and currently scheduled to be completed by 2009) resultedin less revenues from these products than we anticipated. We anticipaterevenues from our newer proprietary products to increase as the HDTV marketbegins to ramp up.

 

Beginning November 1998, the FCC directed that televisionbroadcasters begin a transition from analog broadcasts to HDTV, which offerscleared pictures and better sound, with all analog broadcasts now scheduled tocease by 2009 (originally scheduled for 2006). Unfortunately, the broadcastersremain behind the schedules mandates.

 

In August 2002, the FCC issued an order to televisionmanufacturers that requires digital tuners to be incorporated into 50 percentof the television sets with screens of 36 or more inches starting in 2004, into50 percent of the sets with screens of 25-35 inches starting in 2005, and intoall sets with screens of 13 inches or more by 2007. On October 29, 2003, theU.S. Court of Appeals for the D.C. Circuit upheld the FCC mandate that, by2007, all but the very smallest television sets sold in the U.S. must be equipped for receiving digital, along with traditional analog, television signals. TheCourt said the FCC's mandate was needed because the industry was not movingquickly enough to make new tuners available.

 

On December 15, 2003, we elected to change our calendarbusiness year to a fiscal year ending September 30. Previously, our fiscalyears were comprised of 52 weeks of seven days, each beginning on Monday andending on Sunday, with fiscal 2003 ending September 28, 2003. As a result ofthis change, our 2004 fiscal year ended September 30, 2004 rather thanSeptember 26, 2004. The additional four days were included in our first quarterfor fiscal 2004, which ended December 31, 2003.

 

**Liquidity and Capital Resources**

 

Despite a loss of $1,362,900 for fiscal 2005, ouroperations produced net cash of $367,100, which is mainly the result of areduction of inventories of $810,700, the collection of a sales tax refund of$47,600, and an increase in accounts payable of $69,800 at year-end. Theincrease in accounts payable was from the timing of purchases and invoicesbeing received but not yet due at year-end. We maintain our prompt paymentterms with our vendors. The 28 percent decrease in our net cash balance from$1,788,900 in fiscal 2004 to $1,292,900 at September 30, 2005 was the result ofa substantial increase in capital expenditures totaling $540,700 (includingone-time purchases of $437,500 of engineering design software) and capitalizedsoftware development costs of $333,400.

 

During fiscal 2004, our operations produced $292,500 ofnet cash, despite a $1,472,300 net loss. This was mainly from the netcollection of accounts receivable of $114,600, reductions in inventories of$1.4 million, a decrease in prepaid expenses of $49,200, and an increase inaccounts payable of $90,200 at year-end. Even though we maintain promptpayments to vendors, the accounts payable balance increased in fiscal 2004compared to fiscal 2003, due to the invoices of some vendors being receivedduring the last week of the fiscal year and not yet being due as of the end ofthe fiscal year. We also received $119,300 of cash from the exercise of commonstock options. We used this and the cash from operations to fund capitalpurchases of $285,700 and capitalized software development costs of $143,300,which resulted in our cash position decreasing by one percent, from $1,806,100in fiscal 2003 to $1,788,900 in fiscal 2004.

 

During fiscal 2003, our operations produced $1,318,200 ofnet cash, despite a $2,461,300 net loss. This was mainly the result of the netcollection of accounts receivable of $1,972,300 and a decrease in prepaidexpenses of $333,600. At the same time, we maintained our prompt payment termswith vendors, so accounts payable decreased $82,100. We used cash from operationsto purchase capital assets aggregating $326,900 and to fund the repurchase of$233,700 of our common stock on the open market. Our cash position increasedfrom $1,061,100 at the end of fiscal 2002 to $1,806,100 at the end of fiscal2003.

  Our current working capital requirements are greatlyreduced due to the cost cutting of the past few years. We believe that thesecost cutting actions and our continued focus on higher-margin products shouldresult in after-tax cash earnings being sufficient to support our workingcapital and capital expenditure requirements for the next 12 months. Based onthe fact that, as of December 20, 2005, we hold approximately $1.3 million incash reserves and our cash usage for operations is approximately equal to orless than our current revenue rate, we believe we can cover our cash operatingexpenses using future revenues, while saving current cash reserves for futurecapital expenditures, such as mask tooling for new products.

 

*Working Capital*

 

Our investment in inventories has been significant andwill continue to be significant in the future. However, during the past fewyears, we have been able to reduce our levels of inventories as we shift frommore competitive second source products to proprietary sole source products. Weseek to further streamline our inventories as we continue to shift to solesource proprietary products. 

 

We rely on third party suppliers for our raw materials,particularly our processed wafers, for which we currently rely primarily on twosuppliers, and as a result, maintain substantial inventory levels to protectagainst disruption in supplies. We have periodically experienced disruptions inobtaining wafers. As we continue to shift towards higher margin proprietaryproducts, we expect to be able to reduce inventory levels by streamlining ourproduct offerings.

 

Periodically, we reviewinventory to determine recoverability of items on-hand using thelower-of-cost-or-market (LOCOM) and excess methods. We group and evaluate ourproducts based on their underlying die or wafer type (our raw materials,silicon wafers, can generally be used to make multiple products), to determinethe total quantity on-hand and average unit costs. Management uses judgment incomparing historical sales quantities to the quantity on-hand at the end of thefiscal year. If the quantity on-hand exceeds the sales quantities, we provide areserve for the potentially obsolete or slow-moving items. For the LOCOManalysis, we compare the average historical sales price to the average unitcost of inventories at the end of the fiscal year. If the average unit costexceeds the average sales price, we provide a reserve.

 

With continuing low revenuelevels, our management felt it necessary to also review our raw materials andwork-in-process. Our products generally exhibit an active sales product lifecycle of ten or more years. However, due to rapid changes in processtechnology, we are generally unable to obtain wafers for our products for aslong a period as their life cycles. As a result, early in a product's life, weare often required to estimate the sales expectations for the entire life cycleand purchase materials upfront. On some occasions, our expectations becomelower and we provide a reserve for potential excess materials. In fiscal 2005and 2004, we increased our inventory reserve by $642,200 and $250,000,respectively, for potential excess materials. In addition, during fiscal 2005and 2004, we scrapped inventory of $75,300 and $187,200, respectively, and infiscal 2004, we wrote-off $250,300 of work-in-process inventory, all of whichwas directly expensed to the cost of revenues. We believe our current reserveof $1,685,100 for inventory provides a reasonable estimate of therecoverability of inventories at the end of fiscal 2005.

 

Although current levels of inventory impact our liquidity,we believe that this is a less costly alternative to owning a wafer fabricationfacility or continuously redesigning our products to newer processtechnologies, which would divert limited engineering resources from new productdevelopment. We continue to evaluate alternative suppliers to diversify ourrisk of supply disruption. However, this requires a significant investment inproduct development to tool masks with new suppliers. Such efforts compete forour limited product development resources. We seek to achieve on-goingreductions in inventory, although there can be no assurance we will besuccessful. In the event economic conditions remain slow, we may consideridentifying additional portions of inventory to write-off at a future date.

 

Historically, due to customer order scheduling, up to 80%of our quarterly revenues were often shipped in the last month of the quarter,so a large portion of the shipments included in year-end accounts receivablewere not yet due per our net 30-day terms. This results in year-end accountsreceivable balances being at their highest point for the respective period.

*Financing*

 

While we will continue to evaluate future debt and equityfinancing opportunities, we believe the cost reductions implemented in the pastfew years have resulted in the cash flow generated from operations providing anadequate base of liquidity to fund future operating and capital needs. Based onthe fact that, as of December 20, 2005, we hold approximately $1.3 million incash and cash equivalents and our anticipated cash usage for operations isapproximately equal to or less than our current revenue rate, we believe we cancover our cash operating expenses using future revenues, while saving currentcash reserves for future capital expenditures, such as mask tooling for newproducts.

 

*Contractual Obligations*

 

Below is a summary of fixed payments related to certaincontractual obligations. Payment timing may be subject to change.

 

                            Payments due by  period:

Total

Within 1 year

1-3 years

After 3 years

 

Operating leases:

Buildings

$    473,500 

$    226,900 

$    246,600 

$    -  

Equipment

180,600 

154,800 

25,800 

-  

 

$    654,100 

$    381,700 

$    272,400 

$    -  

 

*Off-Balance Sheet Arrangements*

 

Other than our operating leases, we have no off-balancesheet arrangements.

 

**Results of Operations**

 

*Fiscal Year Ended September 30, 2005 compared to FiscalYear Ended September 30, 2004 *

Net revenues for fiscal 2005 decreased 20 percent, from$4,414,600 in fiscal 2004 to $3,508,800. We continue to experience a drop-offin sales of our older products that is not yet offset by revenues from newerproducts. A downturn in the semiconductor industry and a sluggish economy alsocontributed to the decrease in revenues. In fiscal 2005, we introduced a newvideo frame buffer product, the LF3324, and continue to pursue new sales of theLF3312, which we introduced at the end of fiscal 2004. We hope to generate increasedrevenues from the LF3312 and its related family of parts in fiscal 2006.

 

While net revenues decreased by 20 percent, cost ofrevenues increased three percent, from $2,773,600 in fiscal 2004 to $2,861,600in fiscal 2005. As a result, our gross profit as a percentage of revenuesactually decreased from 37 percent in fiscal 2004 to 18 percent in fiscal 2005.Gross profit declined as a result of a $642,200 increase to our inventoryreserve, which is included in cost of revenues. Our products generally exhibitan active sales product life cycle of ten or more years. However, due to rapidchanges in process technology, we are generally unable to obtain wafers for ourproducts for as long a period as their life cycles. As a result, early in aproduct's life, we are often required to estimate the sales expectations forthe entire life cycle and purchase materials upfront. On some occasions, ourexpectations become lower and we provide a reserve for or write-down potentialexcess materials.

 

While new product introductions are key to our futuregrowth and success, our decreasing revenues continue to strain our research anddevelopment efforts. Research and development (R&D) expenditures decreasedfrom $1,363,900 in fiscal 2004 to $729,800 in fiscal 2005, resulting primarilyfrom reductions in staffing that took place during fiscal 2004. As a percentageof revenues, this amount is closer to our goal of 20 percent (21 percent infiscal 2005 compared to 31 percent in fiscal 2004). We believe our current teamis made up of very qualified individuals that are capable of accelerating newproduct introductions in the future.

 

We continue to control our spending by reducingselling, general, and administrative (SG&A) expenses, while still supportingan adequate sales force to sell existing products and new productintroductions. In fiscal 2005, our SG&A expenditures decreased 27 percentfrom $1,772,100 in fiscal 2004 to $1,298,700.

 

While net revenues decreased, the greater reductions inexpenditures resulted in a decrease in our loss from operations from $1,495,000in fiscal 2004 to $1,381,300 in fiscal 2005, an 8 percent reduction, eventhough we made a significant increase to our inventory reserve.

 

A reduction in our cash balances during fiscal 2005 resultedin interest income from deposits decreasing from $19,700 in fiscal 2004 to$18,600 in fiscal 2005.

 

As a result of the foregoing, our net loss decreased from$1,472,300 in fiscal 2004 to $1,362,900 in fiscal 2005, despite the 20 percentreduction in net revenues.

 

*Fiscal Year Ended September 30, 2004 compared to FiscalYear Ended September 28, 2003*

 

Net revenues for fiscal 2004 decreased 12 percent, from$5,009,000 in fiscal 2003 to $4,414,600. This decrease was due to a down cycleof the semiconductor industry, a continued sluggish economy, and the prolongeddelay in the widespread adoption of HDTV broadcasting. In addition, we continuedto experience a drop-off in sales of our older products that is not counterbalancedby revenues from newer products.

 

While our net revenues decreased by 12 percent, our costof revenues, as a percentage of net revenues, decreased by 9 percentage points.This reduction in the cost of revenues is the result of the cost cutting of thepast several years and the changes to the inventory reserve being much higherin fiscal 2003 compared to fiscal 2004. We increased our inventory reserve byapproximately $1.8 million in fiscal 2003, while we increased the reserve by only$250,000 in fiscal 2004. As a result of the foregoing, our gross profitincreased by 16 percent from $1,411,800 in fiscal 2003 to $1,641,000 in fiscal2004. As a percentage of net revenues, gross profit increased from 28 percentin fiscal 2003 to 37 percent in fiscal 2004.

 

Revenue constraints forced us to decrease R&D expenditures24 percent, from $1,784,600 in fiscal 2003 to $1,363,900 in fiscal 2004.However, as a percentage of net revenues, this decrease in expenditures still leftus over our target of 20 percent. As a percentage of net revenues, R&Dexpenditures decreased from 36 percent in fiscal 2003 to 31 percent in fiscal2004. 

 

Selling, general and administrative expenditures decreased16 percent from $2,110,900 in fiscal 2003 to $1,772,100 in fiscal 2004. Thisreduction is a result of the cost cutting of the past several years, includingbut not limited to a reduction in staffing, a reduction of office space andrent, and reductions in directors and officers insurance levels.

 

While we incurred a reduction of net revenues in fiscal2004, greater reductions of expenditures resulted in a 40 percent decrease inthe loss from operations, from $2,483,700 in fiscal 2003 to $1,495,000 infiscal 2004.

 

Due to slightly decreased cash balances during the year, ourinterest income from deposits decreased 15 percent in fiscal 2004 from $23,600in fiscal 2003 to $19,700.

 

As a result of the foregoing, our net loss for fiscal 2004decreased 40 percent from $2,461,300 in fiscal 2003 to $1,472,300 in fiscal2004.

 

**Critical Accounting Policies**

 

Management's discussion and analysis of our financialcondition and the results of operations are based upon the financial statementsincluded in this report and the data used to prepare them. The financialstatements have been prepared in accordance with the accounting principles generallyaccepted in the United States of America and we are required to make judgments,estimates, and assumptions in the course of such preparation. The Summary ofAccounting Policies included with the financial statements describes thesignificant accounting policies and methods used in the preparation of thefinancial statements. On an ongoing basis, we reevaluate our judgments,estimates, and assumptions, including those related to revenue recognition,allowance for doubtful accounts, valuation of inventories, and valuation oflong-lived assets. We base our judgments and estimates on historicalexperience, knowledge of current conditions, and our beliefs of what couldoccur in the future considering available information. Actual results maydiffer from these estimates under different assumptions or conditions. Thefollowing are the critical accounting policies we believe are affected bysignificant judgments, estimates, and assumptions used in the preparation ofthe financial statements.

 

*Revenue Recognition*

 

Revenue is generally recognized upon shipment of product.Sales to distributors are made pursuant to agreements that provide thedistributors certain rights of return and price protection on unsoldmerchandise. Revenues from such sales are recognized upon shipment, with aprovision for estimated returns and allowances recorded at that time, ifapplicable. While distributors are allowed to return items for stock rotation,they are required to place an order of equal or greater value at the same time.Therefore, no allowance for returns is recorded. Because we generally do notchange the pricing of our products more than once a year, there have not beenany pricing issues in the past several years; therefore, there is no allowancefor price protection recorded.

 

*Allowance for Doubtful Accounts*

 

We establish a general allowance for doubtful accountsbased on analyzing historical bad debts, specific customer creditworthiness,and current economic conditions. Historically, we have not experiencedsignificant losses related to receivables.

 

*Inventories*

 

We write down our inventories for lower of cost or marketreserves, aged inventory reserves, and obsolescence reserves. As a result ofproduction requirements and contraints, we are often required to estimate thesales expectations for the entire life cycle of a product (which can be ten ormore years) and purchase materials upfront. If actual product demand or sellingprices are less favorable than estimated, additional inventory write-downs maybe required in the future. Conversely, if demand increases for product typesthat have been fully reserved, future margins may be higher.

 

*Long-Lived Assets*

 

Long-lived assets, including property and equipment,goodwill, and other intangible assets, are assessed for possible impairmentwhenever events or changes in circumstances indicate that the carrying amountsmay not be recoverable, or whenever management has committed to a plan todispose of the assets. Such assets are carried at the lower of book value orfair value as estimated by management based on appraisals, current marketvalue, and comparable sales value, as appropriate. Assets to be held and usedaffected by such impairment loss are depreciated or amortized at their newcarrying amounts over the remaining estimated life; assets to be sold orotherwise disposed of are not subject to further depreciation or amortization.In determining whether an impairment exists, we use undiscounted future cashflows without interest charges compared to the carrying value of the assets.

 

*Deferred Income Taxes*

 

Incometaxes are accounted for using the asset and liability method. Deferred income taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and operatingloss and tax credit carryforwards. Deferred income tax assets and liabilitiesare measured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. The effect on deferred income tax assets and liabilities of a changein tax rates is recognized in income in the period that includes the enactmentdate. Future tax benefits are subject to a valuation allowance when we are unableto conclude that our deferred income tax assets will more likely than not berealized from the results of operations. We have recorded a valuation allowanceto reflect the estimated amount of deferred tax income assets that may not berealized. The ultimate realization of deferred income tax assets is dependentupon generation of future taxable income during the periods in which thosetemporary differences become deductible. We consider projected future taxableincome and tax planning strategies in making this assessment.

 

Basedon the historical taxable income and projections for future taxable income overthe periods in which the deferred tax assets become deductible, managementbelieves it more likely than not that we will not realize benefits of thesedeductible differences as of September 30, 2005. Accordingly, we haveestablished a valuation allowance against our net deferred income tax assets asof September 30, 2005. 

 

*Impact of New Financial Accounting Standards*

 

In June 2005, the Financial Accounting Standards Board(FASB) issued Statement of Financial Accounting Standard (SFAS) No. 154, *AccountingChanges and Error Corrections*, a replacement of APB Opinion No. 20, *AccountingChanges*, and SFAS No. 3, *Reporting Accounting Changes in InterimFinancial Statements*, (SFAS 154). SFAS 154 changes the requirements for theaccounting for and reporting of a change in accounting principle. Previously,most voluntary changes in accounting principles required recognition of acumulative effect adjustment within net income of the period of the change.SFAS 154 requires retrospective application to prior periods' financialstatements, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. SFAS 154 is effective foraccounting changes made in fiscal years beginning after December 15, 2005;however, it does not change the transition provisions of any existingaccounting pronouncements. We do not believe adoption of SFAS 154 will have amaterial effect on our financial position, results of operations, or cashflows.

 

In November 2004, the Financial Accounting Standards Board(FASB) issued SFAS No. 151, *Inventory Costs*(SFAS 151). SFAS 151requires that abnormal amounts of idle facility expense, freight, handlingcosts and spoilage be recognized as current-period charges. Further, SFAS 151requires the allocation of fixed production overheads to inventory based on thenormal capacity of the production facilities. Unallocated overheads must berecognized as an expense in the period in which they are incurred. SFAS 151 iseffective for inventory costs incurred beginning in the first quarter of fiscal2007. We are currently evaluating the effect of SFAS 151 on our financialstatements and related disclosures.

 

In December 2004, the FASB issued SFAS No. 123 (revised2004) (SFAS 123 (R)), *Share-Based Payments*. SFAS 123 (R) requires allentities to recognize compensation expense in an amount equal to the fair valueof share-based payments, such as stock options granted to employees. We are requiredto apply SFAS 123 (R) on a modified prospective method. Under this method, weare required to record compensation expense (as previous awards continue tovest) for the unvested portion of previously granted awards that remainoutstanding at the date of adoption. In addition, we may elect to adopt SFAS123 (R) by restating previously issued financial statements, basing the amountson the expense previously calculated and reported in their pro formadisclosures that had been required by SFAS 123. SFAS 123 (R) is effective forthe first reporting period beginning after June 15, 2006. Management has notcompleted its evaluation of the effect that SFAS 123 (R) will have, butbelieves that the effect will be consistent with the application disclosed in ourpro forma disclosures in the Notes to the Financial Statements.

 

**ITEM 7A.    QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

We conduct all of our transactions, including those withforeign suppliers and customers, in U.S. dollars. We are therefore not directlysubject to the risks of foreign currency fluctuations and do not hedge orotherwise deal in currency instruments in an attempt to minimize such risks. Ofcourse, demand from foreign customers and the ability or willingness of foreignsuppliers to perform their obligations to us may be affected by the relativechange in value of such customer or supplier's domestic currency to the valueof the U.S. dollar. Furthermore, changes in the relative value of the U.S.dollar may change the price of our products relative to the prices of ourforeign competitors. We also do not hold any market risk sensitive instrumentsthat are not considered cash under accounting principles generally accepted inthe United States of America.

 
**ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

** **

**Index to Financial Statements and Financial StatementSchedules**

 

FINANCIAL STATEMENTS:

Page

 

Report of Independent Registered Public Accounting Firm

23

Balance Sheets, September 30, 2005 and 2004

24

Statements of Operations, fiscal years ended September  30, 2005 and 2004, and September 28, 2003

25

Statements of Shareholders' Equity, fiscal years ended  September 30, 2005 and 2004, and September 28, 2003

26

Statements of Cash Flows, fiscal years ended September  30, 2005 and 2004, and September 28, 2003 

27

Summary of Accounting Policies

28

Notes to Financial Statements

32

Quarterly Financial Data (unaudited), fiscal years ended  September 30, 2005 and 2004, and September 28, 2003

38
** **

**Financial Statement Schedule**

** **

Schedule II - Valuation and Qualifying Accounts

40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

The Shareholders

   and Boardof Directors

LOGIC Devices Incorporated

Sunnyvale, California

 

Wehave audited the accompanying balance sheet of LOGIC Devices Incorporated (the"Company") as of September 30, 2005 and 2004 and the relatedstatements of operations, shareholders' equity, and cash flows for each of the threeyears in the three fiscal years then ended. Our audits also included thefinancial statement schedule of the Company listed in Item 15. These financialstatements and the financial statement schedule are the responsibility of theCompany's management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.  

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provided a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of LOGIC Devices Incorporated as ofSeptember 30, 2005 and 2004 and the results of its operations and its cashflows for each of the three years in the fiscal years then ended, in conformitywith accounting principles generally accepted in the United States of America.Also, in our opinion, the related financial statement schedule, when consideredin relation to the basic financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

 

/s/Perry-Smith LLP

 

Sacramento, California

December 16, 2005

**LOGIC Devices Incorporated**

** **

**Balance Sheets**

 

September 30,

September 30,

2005

2004

 

ASSETS

 

Current assets:

Cash and cash equivalents

$   1,292,900 

$   1,788,900 

Accounts receivable

734,900 

729,000 

Inventories (Notes 1, 7, 8,  and 11)

5,626,400 

7,079,300 

Prepaid expenses

165,700 

143,100 

Property tax refund  receivable

45,000 

- 

Sales tax refund receivable

- 

47,600 

Total current assets

7,864,900 

9,787,900 

 

Property and equipment, net  (Note 2)

1,163,400 

862,000 

Other assets, net (Note 3)

519,100 

185,700 

 

$   9,547,400 

$  10,835,600 

 

LIABILITIES AND  SHAREHOLDERS' EQUITY

 

Current liabilities:

Accounts payable

$       207,000 

$       137,200 

Accrued payroll and  vacation

61,500 

52,500 

Accrued commissions

7,100 

15,500 

Total current liabilities

275,600 

205,200 

 

Deferred rent

33,800 

40,500 

 

Total liabilities

309,400 

245,700 

 

Commitments and  contingencies (Note 5)

 

Shareholders' equity (Note  6):

Preferred stock, no par  value; 1,000,000 shares authorized;

5,000 designated as Series  A; 0 shares issued and outstanding

- 

- 

Common stock, no par value;  10,000,000 shares authorized

6,753,188 and 6,743,188  shares issued and outstanding

18,447,500 

18,436,500 

Additional paid-in capital

100,000 

100,000 

Accumulated deficit

(9,309,500)

(7,946,600)

Total shareholders' equity

9,238,000 

10,589,900 

 

$   9,547,400 

$  10,835,600 

 

*See accompanyingsummary of accounting policies and notes to financial statements.*

 

**LOGIC Devices Incorporated**

** **

**Statements ofOperations**

 

                      For the fiscal year ended:

September 30,

September 30,

September 28,

2005

2004

2003

 

Net revenues

$    3,508,800 

$    4,414,600 

$    5,009,000 

 

Cost of revenues

2,861,600 

2,773,600 

3,597,200 

 

Gross margin

647,200 

1,641,000 

1,411,800 

 

Operating expenses:

Research and development

729,800 

1,363,900 

1,784,600 

Selling, general, and administrative

1,298,700 

1,772,100 

2,110,900 

Total operating expenses

2,028,500 

3,136,000 

3,895,500 

 

Loss from operations

(1,381,300)

(1,495,000)

(2,483,700)

 

Other (income) expense:

Interest income

(18,600)

(19,700)

(23,600)

Other (income) expense, net

(600)

(3,800)

400 

  Total other income

(19,200)

(23,500)

(23,200)

 

Loss before provision for  income taxes

(1,362,100)

(1,471,500)

(2,460,500)

  |