**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K**

** **

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

For the Fiscal Year Ended September 30, 2006

or

[  ] **Transition Report Pursuant to Section13 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.) |

 

# 395 West Java Drive, Sunnyvale, CA 94089

(Address of principal executive offices, including ZipCode)

 

**(408) 542-5400**

(Registrant's telephone number, including Area Code)

 

Securities registered pursuant to Section 12(b) of theAct

| Title of Class | Name of each exchange on which registered |
|----------------|-------------------------------------------|
| NONE           | NONE                                      |

 

Securities registered pursuant to Section 12(g) of theAct

# Common Stock, without par value

(Title of Class)

 

Indicate by check mark if the registrant is a well-knownseasoned issuer, as defined in Rule 405 of the Securities Act.

Yes            No   X   

 

Indicate by check if the registrant is not required tofile reports pursuant to Section 13 or Section 15(d) of the Act. 

Yes            No   X   

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days. Yes    X      No        

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant'sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.[     ] CHECK IF APPLICABLE

 

Indicate by check mark whether the registrant is an acceleratedfiler (as defined in Exchange Act Rule 12b-2). Yes            No   X   

 

Indicate by check whether theregistrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes            No   X   

 

State the aggregate marketvalue of the voting and non-voting common stock held by non-affiliates computedby reference to the closing price of the common stock as of March 31, 2006, thelast day of the registrant's most recently completed second quarter:  $6,636,700.

 

As of December 6, 2006, theRegistrant had 6,793,188 shares of its common stock issued and outstanding.

 

**DOCUMENTS INCORPORORATED 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

22

 

Item 8.

FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA

23

Item 9.

 

 

CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

39

 

Item 9A.

CONTROLS  AND PROCEDURES

39

 

Item 9B.

OTHER  INFORMATION

40

 

**PART III**

 

Item 10.

DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT

40

 

Item 11.

EXECUTIVE  COMPENSATION

40

Item 12.

 

 

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

40

 

Item 13.

CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS

40

 

Item 14.

PRINCIPAL  ACCOUNTANT FEES AND SERVICES

40

 

**PART IV**

 

Item 15.

EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES

40

 

SIGNATURES

42

 **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 are used in thebroadcast, medical, military and consumer electronics markets. Our productsgenerally address digital signal processing (DSP) requirements involvinghigh-performance arithmetic computational and high-speed storage functions. Weare focusing on developing proprietary catalog products to address specificfunctional application needs or performance levels that are not otherwisecommercially available. 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 products worldwidethrough a combination of a direct sales force, sales representatives, and roughly20 international distributors. In fiscal year 2006, approximately 62 percent ofour net revenues were derived from OEMs, while sales through distributorsaccounted for approximately 38 percent of net revenues. We continue to makechanges in our sales structure to address appropriate emerging sales channelrequirements. Additionally, changes in the sales structure will be required ascustomers continue to move engineering design efforts to regions, such as China, Malaysia, and   India. LOGIC Devices counts among its customers Texas Instruments, BAESystems, Harmonic, GE Medical, Lockheed Martin, Qualcomm, and Raytheon.Approximately 60 percent of the fiscal 2006 net revenues were derived from the United States and approximately 40 percent were derived from foreign 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 Section 13(a)or Section 15(d) of the Securities Exchange Act of 1934 free of charge on ourwebsite, www.logicdevices.com, as soon as reasonably practicable afterwe 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 application support,and that rely on third parties for wafer fabrication. We focus our resources ondefining 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 important technologyfor many emerging product technologies. It involves converting light, sound, orother naturally occurring analog phenomena into a stream of digital values thatmay then be processed, manipulated, exchanged, or sorted by electronic systems.DSP provides many advantages, including: the ability to store and recallinformation; the ability to extract information content and compress the amountof data that must be stored, processed, or transmitted; and the ability toprocess and manipulate digital data with consistency and precision.Manipulation of video images and speech requires signal-processing rates andprecision 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 has adversely affected our revenues in the past few fiscalyears.

  In August 2002, the FCC issuedan 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 Devices hashistorically derived a significant portion of our revenues from televisionbroadcast equipment 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. We saw the beginnings of thedeployment of HDTV studio equipment in fiscal 2006 and experienced increasedsales into this segment. Furthermore, we believe we will benefit from thefurther deployment of such HDTV studio equipment in fiscal 2007.

 

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, anddigital cinema systems.

 
Products in Development
 

With the growing adoption ofHDTV by the mass consumer marketplace, the need to deliver the high-definitioncontent is paramount for service providers. Capturing, manipulating, andtransporting high-definition video streams requires, among other end equipment,broadcast studio equipment capable of handling the large amounts of dataassociated with high-definition video. As one focus of our product development,we have identified the need to buffer and store this high-definition data as apotential product offering. To address this need, we introduced our first twodevices in the video frame buffer product family, the LF3312 and LF3324. Whilewe continue to sample these video buffer memories to potential customers, therelatively long design cycles of end equipment result in longer time torevenue.

Finally, our current developmentefforts are focused on adding members to the video buffer memory family, as welook to add devices with more features and density in the future.

 

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 Devices 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 experiencewith high-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, hot and cold testing, finalinspection, quality inspection, and shipment. As is customary in the industry,high-volume assembly subcontractors in the Far East assemble our commercialgrade devices. Thereafter, the assembled devices are returned to us for finaltesting and shipment to customers. We continue to test materials and productsat various stages in the manufacturing process, utilizing automated testequipment.

 

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 force,sales representative partners, and roughly 20 international electronicsdistributors. We concentrate our direct marketing efforts on high-performancesegments of the medical imaging, broadcast equipment, and telecommunicationsmarkets, in applications where high speed is critical. Among our OEM customersare Texas Instruments, BAE Systems, Harmonic, GE Medical, Lockheed Martin, Qualcomm, and Raytheon. In the past, we have also utilized a domestic distributor thoughwe did not during fiscal 2006.

 

International distributorspurchase our products for resale, generally to a broad base of small- tomedium-sized customers. As is customary in the industry, our distributorsreceive certain price protection and limited stock rotation rights. However, ourdistributors are required to simultaneously order an amount equal to or greaterthan any rotation items returned. During fiscal 2006, sales throughinternational distributors accounted for approximately 38% of net revenues.During fiscal 2005 and 2004, we also had a domestic distributor, Jan Devices,Inc., which it terminated in May 2005. Sales to the international distributorsand this domestic distributor accounted for approximately 68% and 66%, of netrevenues for fiscal 2005 and 2004, respectively.

 

In fiscal 2006, nodistributors comprised more than 10% of net revenues; however, Benchmark andBAE Systems comprised 23% and 12% of net revenues in fiscal 2006. In fiscal 2005,three international distributors, MCM Japan Ltd., Zwinz Technical Consulting,and 3D Industrial Electronics PTE, comprised approximately 12%, 11%, and 11% ofnet revenues, respectively. In fiscal 2004, Jan Devices, Inc. and MCM JapanLtd. accounted for approximately 14% and 12% of net revenues, respectively.

 

Our distributors are notexclusive and they may also market products competitive with our products. Wewarrant our products against defects in materials and workmanship for a periodof 12 months from the date of shipment. Warranty expenses to date have been nominal.

International sales areconducted by sales representatives and distributors located throughout Europeand Asia. During fiscal 2006, 2005, and 2004, our export sales wereapproximately 40%, 62%, and 52% 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, 2006 and 2005,our backlog was approximately $838,200 and $517,700, respectively. This backlogincludes all released purchase orders shippable within the following 12 months,including orders from distributors. Our backlog, although useful for schedulingproduction, does not represent actual sales and should not be used as a measureof future sales or revenues at any particular time. In accordance with acceptedindustry practice, all orders on the backlog that are not "last-timebuys" of obsolete products are subject to cancellation without penalty atthe option of the purchaser at any time prior to shipment. In addition, thebacklog does not reflect changes in delivery schedules and price adjustmentsthat may be passed on to distributors and credits for returned products. Weproduce catalog products that may be shipped from inventory within a short timeafter receipt of a purchase order. The business for our catalog products, likethe businesses of other companies in the semiconductor industry, ischaracterized by short-term orders and shipment schedules rather than by volumepurchase contracts. Our shipments are generally concentrated toward the end ofthe third month of each quarter, making it difficult to predict our revenuesand results of operations for any fiscal period. For these reasons, our backlogas of any particular date is not representative of actual sales for anysucceeding period and we believe that our backlog is not a good indicator offuture 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 our commitmentto research and development. Research and development expenditures were 21%, 21%,and 31% of net revenues in fiscal 2006, 2005, and 2004, respectively. See"Selected Financial Data," "Management's Discussion and Analysisof Financial Condition and Results of Operations," and "Statements ofOperations," 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. In the area of videomemory, we compete with Averlogic and Oki.
 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, 2006, we had 20 employees,consultants, and part-time employees, of which 18 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 four fiscal years prior to fiscal 2006. These net lossesare attributable principally to delays in the television broadcast industry'stransition to high definition digital broadcasting from current analogstandards, a downturn in the semiconductor industry, and lack of new product introductions.Many factors will affect our ability to become profitable or sustainprofitability, such as continued demand for our products by our customers, lackof price erosion, efficiency of our manufacturing subcontractors, continuedproduct innovation and design wins, and our continued ability to manage operatingexpenses.

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. Thesedirect and indirect competitors are established multinational semiconductorcompanies, as well as emerging companies. In addition, we may experienceadditional 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 2006, but this deadline has been moved 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 if the costs of ourproducts increase, then our profitability and customer relationships could beharmed.

 

*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 preciseprocess, requiring production in a tightly controlled, clean environment. Evenminute imperfections in its materials, difficulties in the wafer fabricationprocess, defects in the masks used to print circuits on a wafer or otherfactors can cause a substantial percentage of wafers to be rejected or numerouschips on each wafer to be nonfunctional. We may experience problems inachieving an acceptable quality and yield rate in the manufacture of wafers.The interruption of wafer fabrication or the failure to achieve acceptableyields could harm future operating results. We may also experiencemanufacturing problems in our assembly and test operations, and in theintroduction of new packaging 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 are locatednear earthquake faults that have experienced major earthquakes in the past. Inaddition, the risk of power shortages and outages in California has been widelyreported. In the event of a major earthquake or other natural disaster near ourfacility or a sustained loss of power at our facility, our operations could beharmed. Similarly, a major earthquake or other natural disaster near one ormore of our suppliers could disrupt the operations of these suppliers, whichcould limit 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, and 2004, our cash flows from operations were positiveduring these fiscal years, due to reductions in accounts receivable andinventory and our cost reduction efforts. However, these reductions areunlikely to continue indefinitely. Furthermore, significant investments, suchas those made in fiscal 2005, could result in net cash outflows.

 

We rely upon cash reserves andavailable-for-sale securities to fund our operations. If these resources shouldbe insufficient, we would be forced to obtain additional funding through debtor equity financing. If we are able to obtain debt financing, which is notassured, the terms of such financing are unknown, since we do not presentlyhave a credit facility, and may be unfavorable to us. Similarly, there can beno assurance that we would be able to sell capital stock on favorable terms orat all and any such sales may adversely affect our existing shareholders.

 

*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 accurateforecasts of long-term market demand and future technology developments.

 

Future revenue growth is dependent on marketacceptance of new products, such as our newly introduced video frame bufferproducts, the LF3324 and LF3312, and the continued market acceptance ofexisting products. The success of these products is dependent on a variety ofspecific 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 our abilityto 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.

 

*Wecould be harmed by litigation involving patents and other intellectual propertyrights.*

 

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, ifproven to 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.
*Thelease for our sole facility will expire at the end of fiscal 2007.*

 

The lease for our executive offices, research facilities, and warehouse expiresSeptember 30, 2007. We believe we will be able to either renew the lease or tofind and move to an alternate acceptable location by the end of fiscal 2007.However, should we not be able to renew the lease or find alternate space onfavorable financial or other terms, or at all, our operations would beinterrupted. Further, any move to new facilities would also interrupt operationsfor a short period.

 

 **ITEM 1B.    UNRESOLVED STAFF COMMENTS**

 

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

Our 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 on September 30,2007. We believe that our facilities will be adequate to meet our reasonablyforeseeable needs and, if necessary, that alternative facilities will beavailable on acceptable terms, so as to meet our requirements.
 ITEM 3.    LEGAL PROCEEDINGS
 

From time to time, we receive demands from various partiesasserting patent or other claims in the ordinary course of business. Thesedemands are often not based on any specific knowledge of our products oroperations. Because of the uncertainties inherent in litigation, the outcome ofany such claim, including simply the cost of a successful defense against sucha claim, could have a material adverse impact on us.
 ITEM 4.    SUBMISSION OF MATTERS TO VOTEOF SECURITY HOLDERS
 

No matters were submitted to a vote of our securityholders during the last quarter of fiscal 2006.

 

**PART II**

** **
ITEM5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATEDSHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 

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

 

 

**Calendar Year**

**High**

**Low**

 

**2004**

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

Fourth quarter

$1.20

$0.93

 

**2006**

First quarter

$1.40

$0.98

Second quarter

$1.70

$1.15

Third quarter

$2.72

$1.27

 

**Holders**

 

As of December 20, 2006, there were approximately 2,000holders 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, 2006:

 

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

465,500 

$1.509 

431,500 

 

Equity compensation plans  not

approved by security  holders

- 

- 

- 

 

Total

465,500 

$1.509 

431,500 
 
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,

2006

September 30,

2005

September 30,

2004

September 28,

2003

September 29,

2002

 

Net revenues

$ 4,641 

$ 3,509 

$ 4,415 

$ 5,009 

$ 6,573 

 

Research and

    development

$ 982 

$ 730 

$ 1,364 

$ 1,785 

$ 1,776 

 

Net income (loss)

$ 129 

$ (1,363)

$ (1,472)

$ (2,461)

$ (2,124)

 

Basic earnings (loss)

    per common share

$ 0.02 

$ (0.20)

$ (0.22)

$ (0.37)

$ (0.31)

 

Basic weighted     average common

    shares outstanding

    (000s)

6,754 

6,750 

6,715 

6,652 

6,850 

 

Working capital

$ 7,897 

$ 7,589 

$   9,583 

$ 11,084 

$ 13,674 

 

Property and

    equipment, net

$ 1,101 

$ 1,163 

$ 862 

$ 857 

$ 931 

 

Total assets

$ 9,717 

$ 9,547 

$ 10,836 

$ 12,248 

$ 14,927 

 

Long-term liabilities

$ 20 

$ 34 

$ 41 

$ 40 

$ - 

 

Shareholders' equity

$ 9,397 

$ 9,238 

$ 10,590 

$ 11,943 

$ 14,627 
 ITEM 7.    MANAGEMENT'S DISCUSSION ANDANALYSIS 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 semiconductormanufacturers. Since 1996, we have identified unique, proprietary productsdriven by our existing customer base. Production of proprietary productsrequires us to maintain advanced design automation tools and a number of peopleinvolved in product development. However, it enables us to focus our saleschannels and limit the costs of those channels, and to compete in markets withpricing and delivery demands that are not as highly competitive as the marketsfor second source products. We primarily derive our revenues from the sale ofsemiconductor chips that perform high-speed DSP in video image filtering anddigital communications applications.

 

Our focus on HDTV broadcasting products has had asignificant impact on our financial results. We developed in fiscal 1998 andtested in 1999, products that were designed and incorporated into HDTVcompatible studio systems. We anticipated increased revenues from the HDTVmarket starting in 1999, but the delays in the broadcast industry's transitionto high-definition from analog signals (originally scheduled to be 2006 andcurrently scheduled to be completed by 2009) resulted in less revenues from theseproducts than we anticipated. We saw the beginnings of the deployment of HDTVstudio equipment in fiscal 2006 and experienced increased sales into thissegment over the prior fiscal year. Furthermore, we believe we will benefitfrom the further deployment of such HDTV studio equipment in fiscal 2007.

Beginning in November 1998, the FCC directed thattelevision broadcasters begin a transition from analog broadcasts to HDTV,which offers clearer pictures and better sound, with all analog broadcasts now scheduledto cease by 2009 (originally scheduled for 2006). Unfortunately, thebroadcasters remain 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.

 

As a result of a change in our fiscal year, our 2004fiscal year included an additional four days.

 

**Liquidity and Capital Resources**

 

While producing a net income of $129,400 during fiscal2006, our operations produced net cash of $977,600. During the year, weestablished additional inventory reserves of $1,036,900 and wrote-off $200,000of capitalized test software, both of which reduced net income but not cashflows. In addition, LOGIC collected $45,000 from a property tax refund and hadincreases in its accrued payroll and vacation and other accrued expensestotaling $81,200 due to the timing of these expenses. Capital expenditures of$196,700 for fiscal 2006 were substantially less than fiscal 2005, whichtotaled $540,700.

 

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 prompt payment termswith 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 (including a one-timepurchase of $437,500 of engineering design software) and capitalized softwaredevelopment 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.

 

Our current working capital requirements are greatlyreduced due to our past cost cutting. We believe that these cost cuttingactions and our continued focus on higher-margin products should result inafter-tax cash earnings being sufficient to support our working capital andcapital expenditure requirements for the next 12 months. Based on the factthat, as of December 6, 2006, we hold approximately $1.7 million in cashreserves and available-for-sale securities and our 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.

 

*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, 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 2006and 2005, we increased our inventory reserve by $1,036,900 and $642,200,respectively, for potential excess materials. In addition, during fiscal 2006and 2005, we scrapped inventory of $272,100 and $75,300, respectively. Webelieve our current reserve of $2,722,000 for inventory provides a reasonableestimate of the recoverability of inventories at the end of fiscal 2006.

 

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 70%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 6, 2006, we hold approximately $1.7  million incash reserves and available-for-sale securities and our anticipated cash usagefor operations is approximately equal to or less than our current revenue rate,we believe we can cover our cash operating expenses using future revenues,while saving current cash reserves for future capital expenditures, such asmask tooling for new products.

 

*Contractual Obligations*

 

Below is a summary of fixed payments related to certaincontractual obligations as of September 30, 2006. Payment timing may be subjectto change.

 

Payments due by  period:

Total

Within 1 year

1-3 years

After 3 years

Operating leases:

Buildings

$ 246,600 

$ 227,600 

$ 19,000 

$ - 

Equipment

25,800 

25,800 

- 

- 

 

$ 272,400 

$ 253,400 

$ 19,000 

$ - 

 

*Off-Balance Sheet Arrangements*

 

We have no off-balance sheet arrangements.

 

**Results of Operations**

 

*Fiscal Year Ended September 30, 2006 compared to FiscalYear Ended September 30, 2005*

 

Net revenues for fiscal 2006 increased 32 percent from$3,508,800 in fiscal 2005 to $4,640,600. These increases are due to increasesin certain customers' order quantity rates and from certain customers returningto their past order quantity rates after a slowdown in fiscal 2005. In addition,we experienced a renewed interest in fiscal 2006 in military-grade productsthat had been previously written down to zero-value.

 

While net revenues increased 32 percent, cost of revenues decreasedby 25 percent, from $2,861,600 in fiscal 2005 to $2,153,700 in fiscal 2006.This is the result of 26 percent of fiscal 2006 net revenues coming from itemspreviously written down to zero-value compared to 12 percent in fiscal 2005,and the recognition of favorable standard cost variances from jobs in process atSeptember 30, 2005 that were completed in the current year. This increase inprofitability was partially offset by increases in the inventory reservetotaling $1,036,900. Our products generally exhibit an active sales productlife cycle 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 or write-down potential excess materials.

                    Recognizing the need to increase new product development,we expanded our research and development team, which resulted in a 34 percentincrease in expenses, from $729,800 in fiscal 2005 to $981,700 in fiscal 2006.However, this amount remains within our goal of being between 20 to 25 percentof net revenues (21 percent in fiscal 2006).

 

Selling, general, and administrative expenses increased ninepercent from $1,298,700 in fiscal 2005 to $1,421,900 in fiscal 2006. We aremaking various changes to our administrative and sales structure, which webelieve will increase our visibility to customers, and in turn, increaserevenues.

 

Interest income increased 103 percent from $18,600 infiscal 2005 to $37,800 in fiscal 2006, mainly as a result of increases in ourcash balances and investments in higher yield available-for-sale securities. Otherincome increased from $600 in fiscal 2005 to $9,100 in fiscal 2006, as a resultof the sale of previously written-off fixed assets.

 

As a result of the foregoing, we had net income of $129,400in fiscal 2006, compared to a net loss of $1,362,900 in fiscal 2005.

 

*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.

 

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 revenues decreasedfrom 37 percent in fiscal 2004 to 18 percent in fiscal 2005. Gross profitdeclined as a result of a $642,200 increase to our inventory reserve, which isincluded in cost of revenues. Our products generally exhibit an active salesproduct life cycle of ten or more years. However, due to rapid changes inprocess technology, we are generally unable to obtain wafers for our productsfor as long a period as their life cycles. As a result, early in a product'slife, we are often required to estimate the sales expectations for the entirelife cycle and purchase materials upfront. On some occasions, our expectations becomelower and we provide a reserve for or write-down potential excess materials.

 

While new product introductions are key to our futuregrowth and success, decreasing revenues strained our research and developmentefforts. Research and development expenditures decreased from $1,363,900 infiscal 2004 to $729,800 in fiscal 2005, resulting primarily from reductions instaffing that took place during fiscal 2004. As a percentage of revenues, thisamount was closer to our goal of 20 to 25 percent (21 percent in fiscal 2005compared to 31 percent in fiscal 2004).

 

We continued to control our spending by reducing SG&Aexpenses, while still supporting an adequate sales force to sell existingproducts and new product introductions. In fiscal 2005, our SG&Aexpenditures decreased 27 percent from $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 2005resulted in interest income from deposits decreasing from $19,700 in fiscal2004 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.

**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 principlesgenerally accepted in the United States of America and we are required to makejudgments, estimates, and assumptions in the course of such preparation. TheSummary of Accounting Policies included with the financial statements describesthe significant 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 fordoubtful accounts, valuation of inventories, and valuation of long-livedassets. We base our judgments and estimates on historical experience, knowledgeof current conditions, and our beliefs of what could occur in the futureconsidering available information. Actual results may differ from theseestimates under different assumptions or conditions. The following are thecritical accounting policies we believe are affected by significant judgments,estimates, and assumptions used in the preparation of the financial statements.

 

*Revenue Recognition*

 

Revenue is generally recognized upon shipment of product.Sales to distributors are made pursuant to agreements that provide the distributorscertain rights of return and price protection on unsold merchandise. Revenuesfrom such sales are recognized upon shipment, with a provision for estimatedreturns and allowances recorded at that time, if applicable. While distributorsare allowed to return items for stock rotation, they are required to place anorder of equal or greater value at the same time. Therefore, no allowance forreturns is recorded. Because we generally do not change the pricing of our productsmore than once a year, there have not been any pricing issues in the pastseveral years; therefore, there is no allowance for 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 constraints, 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 income tax 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, 2006. Accordingly, we haveestablished a valuation allowance against our net deferred income tax assets asof September 30, 2006.

 

*Impact of New Financial Accounting Standards*

 

InSeptember 2006, the Securities and Exchange Commission published StaffAccounting Bulletin No. 108, *Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements* (SAB 108). The interpretations in SAB 108 are being issued toaddress diversity in practice in quantifying financial statement misstatementsand the potential under current practice to build up improper amounts on thebalance sheet. This guidance will apply to fiscal years ending after November15, 2006 and early application in interim periods is encouraged. We do notbelieve the adoption of SAB 108 will have a material impact on our financialposition, results of operations, or cash flows.

 

In June 2006, Financial Accounting Standards Board (FASB)issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes -an interpretation of FASB Statement No. 109*. The interpretation contains atwo-step approach to recognizing and measuring uncertain tax positionsaccounted for in accordance with SFAS 109. The first step is to evaluate thetax position for recognition by determining if the weight of available evidenceindicates it is more likely than not that the position will be sustained onaudit, including resolution of related appeals or litigation processes, if any.The second step is to measure the tax benefit as the largest amount which ismore than 50 percent likely of being realized upon ultimate settlement. Thoughwe are currently evaluating the impact this statement will have on ourfinancial statements, due to our net operating loss carryforward amounts, we donot believe the provisions will change our financial statements.

 

In June 2005, the FASB issuedStatement of Financial Accounting Standard No. 154, *Accounting Changes andError 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 FASBissued Statement of Financial Accounting Standard No. 151, *Inventory Costs*(SFAS 151). SFAS 151 requires that abnormal amounts of idle facility expense,freight, handling costs and spoilage be recognized as current-period charges.Further, SFAS 151 requires the allocation of fixed production overheads toinventory based on the normal capacity of the production facilities.Unallocated overheads must be recognized as an expense in the period in whichthey are incurred. SFAS 151 is effective for inventory costs incurred beginningin the first quarter of fiscal 2007. We are currently evaluating the effect ofSFAS 151 on our financial statements and related disclosures

 

**ITEM7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

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. Demandfrom foreign customers and the ability or willingness of foreign suppliers toperform their obligations to us may be affected by the relative change in valueof such customer or supplier's domestic currency to the value of the U.S.dollar. Furthermore, changes in the relative value of the U.S. dollar maychange the price of our products relative to the prices of our foreigncompetitors.
**ITEM 8.    FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA**
** **

**Index to Financial Statements and Financial StatementSchedules**

 

FINANCIAL STATEMENTS:

Page

 

Report of Independent Registered Public Accounting Firm

23

Balance Sheets, September 30, 2006 and 2005

24

Statements of Operations, fiscal years ended September  30, 2006, 2005, and 2004

25

Statements of Shareholders' Equity, fiscal years ended  September 30, 2006, 2005, and 2004

26

Statements of Cash Flows, fiscal years ended September  30, 2006, 2005, and 2004 

27

Summary of Accounting Policies

28

Notes to Financial Statements

32

Quarterly Financial Data (unaudited), fiscal years ended  September 30, 2006, 2005 and 2004

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, 2006 and 2005 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 the financialstatement schedule of the Company listed in Item 15. These financial statementsand the financial statement schedule are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.  

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audits 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, 2006 and 2005 and the results of its operations and its cashflows for each of the three years in the three  fiscal years then ended, inconformity with accounting principles generally accepted in the United Statesof America. Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

 

/s/Perry-Smith LLP

 

Sacramento, California

November 29, 2006

**LOGIC Devices Incorporated**

** **

**Balance Sheets**

 

September 30, 

September 30, 

2006 

2005 

 

ASSETS

 

Current assets:

Cash and cash equivalents

$ 1,478,100 

$ 1,292,900 

Investment in  available-for-sale securities

507,000 

- 

Accounts receivable

830,900 

734,900 

Inventories

5,239,700 

5,626,400 

Prepaid expenses

141,600 

165,700 

Property tax refund  receivable

- 

45,000 

Total current assets

8,197,300 

7,864,900 

 

Property and equipment, net

1,100,700 

1,163,400 

Other assets, net

418,800 

519,100 

 

$ 9,716,800 

$ 9,547,400 

LIABILITIES AND  SHAREHOLDERS' EQUITY

 

Current liabilities:

Accounts payable

$ 146,900 

$ 207,000 

Accrued payroll, vacation,  and bonuses

142,700 

61,500 

Accrued commissions

10,400 

7,100 

Total current liabilities

300,000 

275,600 

 

Deferred rent

19,700 

33,800 

 

Total liabilities

319,700 

309,400 

 

Commitments and  contingencies

 

Shareholders' equity:

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;

6,763,188  and 6,753,188 shares issued and outstanding

18,458,500 

18,447,500 

Additional  paid-in capital

118,700 

100,000 

Accumulated deficit

(9,180,100)

(9,309,500)

Total shareholders' equity

9,397,100 

9,238,000 

 

$ 9,716,800 

$ 9,547,400 

 

*See accompanying summary of accounting policies and notes tofinancial statements.*

**LOGIC Devices Incorporated      **

** **

**Statementsof Operations      **

**    **

For the fiscal year ended:

September 30, 

September 30, 

September 30, 

2006 

2005 

2004 

 

Net revenues

$ 4,640,600 

$ 3,508,800 

$ 4,414,600 

 

Cost of revenues

2,153,700 

2,861,600 

2,773,600 

 

Gross margin

2,486,900 

647,200 

1,641,000 

 

Operating expenses:

Research and development

981,700 

729,800 

1,363,900 

Selling, general, and  administrative

1,421,900 

1,298,700 

1,772,100 

Total operating expenses

2,403,600 

2,028,500 

3,136,000 

 

Operating  income (loss)

83,300 

(1,381,300)

(1,495,000)

 

Other  income, net:

Interest income

(37,800)

(18,600)

(19,700)

Other  income, net

(9,100)

(600)

(3,800)

 

Total other income

(46,900)

(19,200)

(23,500)

 

Income  (loss) before provision for income taxes

130,200 

(1,362,100)

(1,471,500)