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Article by DailyStocks_admin    (02-10-09 06:50 AM)

Filed with the SEC from Jan 29 to Feb 04:

California Micro Devices (CAMD)
Dialectic Capital Management reiterated its concern over the company's strategic direction, and said that the board needs "new blood." Dialectic wants California Micro Devices to engage an investment bank to sell the company, but California Micro opposes this. Dialectic Capital owns 2,006,000 shares (8.6%).

BUSINESS OVERVIEW

We design and sell application specific circuit protection devices and display electronics devices for high volume applications in the mobile handset, digital consumer electronics and personal computer markets. We are a leading supplier of protection devices for mobile handsets that provide Electromagnetic Interference (EMI) filtering and Electrostatic Discharge (ESD) protection, and of low capacitance ESD protection devices for digital consumer electronics and personal computers. Both types of protection devices are typically used to protect various interfaces, both external and internal, used in our customers’ products. Our protection products are built using our proprietary silicon manufacturing process technology and provide the function of multiple discrete passive components in a single silicon chip. They occupy significantly less space, cost our customers less on a total cost of ownership basis, offer higher performance and are more reliable than traditional solutions based on discrete passive components. Some of these devices also include active circuit analog elements that provide additional functionality.

We also offer serial interface display electronic devices for the mobile handset market. Our serial interface display controller products offer the industry’s smallest form factor plus unique audio and video features. Our display controllers are designed using industry standard complimentary metal oxide semiconductor (CMOS) process technology.

End customers for our semiconductor products are original equipment manufacturers (OEMs). We sell to some of these end customers through original design manufacturers (ODMs) and contract electronics manufacturers (CEMs). We use a direct sales force, manufacturers’ representatives and distributors to sell our products.

Our manufacturing is completely outsourced and we use merchant foundries to fabricate our wafers and subcontractors to do backend processing and to ship to our customers.

We have one operating segment and most of our physical assets are located outside the United States. Assets located outside the United States include product inventories and manufacturing equipment consigned to our wafer foundries and backend subcontractors.

We were incorporated in California in 1980 and have been a public company since 1986. On April 13, 2006, we acquired Arques Technology, Inc. (“Arques”) and in the process, Arques Technology Taiwan, Inc. became our sole subsidiary. On September 15, 2006, we reincorporated in Delaware by merging into a newly created wholly owned Delaware corporation subsidiary.

Circuit Protection

Circuit protection devices are widely used in mobile handsets, digital consumer electronics and personal computers. The two most important protection functions are filtering out EMI and protecting against ESD. The need for robust circuit protection has increased as data rates and processing speeds have increased resulting in the generation of increased levels of EMI and integrated circuits have become more susceptible to damage from ESD strikes as they have migrated to increasingly advanced process technologies. In addition, as the number of external and internal interfaces in these products has increased, the number of protection devices required has correspondingly increased.

The design of protection devices requires significant system design expertise and application knowledge combined with extensive circuit, device and process design skills. We have been developing and marketing EMI filters and ESD protection devices since the early 1990s and have introduced a number of major innovations in their design and application.

Display Electronics

As mobile handsets have incorporated increasingly higher resolution displays to enhance their multimedia capabilities, the traditional parallel data interface between the central processing unit or CPU and the display has become larger, consumed more power and generated more EMI. High speed serial interfaces solve many of these issues by reducing the number of electrical connections from as many as thirty to as few as four, making the display interface cable significantly smaller and less expensive. Additionally, by utilizing low voltage differential signaling, power consumption is dramatically reduced and EMI is effectively eliminated. High speed serial interfaces including the Video Electronics Standard Association’s (VESA) Mobile Display Digital Interface (MDDI) standard for Code Division Multiple Access (CDMA) and Wideband CDMA (WCDMA) handsets and the Mobile Industry Processor Interface (MIPI) Alliance standard for Global System for Mobile communications (GSM) handsets are expected to replace traditional parallel interfaces for high resolution displays in mobile handsets.

We began to develop high speed serial interface display controllers for mobile handsets in 2004. We introduced our first product, based on the MDDI standard in October 2006. Products in development include enhanced versions of this product as well as a serial interface display controller for the MIPI standard. Our products feature the industry’s smallest footprint, unique audio and video features and support for the control of other components in the display subsystem such as white LED backlight drivers and touch screen controllers.

Our Target Markets

The three high volume markets on which we focus are as follows, with all market size date from iSuppli Corporation:


•

Mobile handsets . There were 1.2 billion mobile handsets sold globally in 2007, making mobile handsets the most widely adopted mobile devices today. By 2010, the number of mobile handsets sold globally is expected to grow to over 1.5 billion units.


•

Digital consumer electronics, which includes products such as digital televisions, DVD players and recorders, and digital set top boxes. OEM shipments in 2007 for products in this market included 118 million digital televisions, 156 million DVD players and recorders and 124 million digital set top boxes. By 2010, OEM shipments in these markets are expected to be 197 million digital televisions, 142 million DVD players and recorders and 193 million digital set top boxes.


•

Personal computers, which includes notebook and desktop computers and peripherals such as printers and flat panel monitors. Sales in 2007 for products in this market included 261 million desktop and notebook computers, 123 million printers and 149 million flat panel monitors. By 2010, these markets are expected to grow to 340 million desktop and notebook computers, 142 million printers and 195 million flat panel monitors.

The two major protection challenges facing designers of products for these markets are:


•

EMI filtering. EMI refers to the interference of one electronic product with the operation of another resulting from electromagnetic signals generated by the first and picked up by the second. These signals emanate from and are picked up by the internal and external data interfaces. High performance EMI filters prevent the electromagnetic signals generated within a product from interfering with its own operation and the operation of other products and from being interfered with by external EMI sources.


•

ESD protection. An ESD event is the transfer of energy between two bodies at different electrostatic potentials, either through direct contact or an air discharge in the form of a spark. Many electronic products require ESD protection for internal and external data interfaces to avoid damage or disruption of their operation. Standard ESD protection devices typically have relatively high capacitance levels that can distort high speed signals, compromising their integrity and interfering with the accurate transfer of information across those interfaces. The mobile handset, digital consumer electronics and personal computer markets are employing increasingly faster data interfaces to satisfy growing performance and functionality requirements. These high speed data interfaces have created the need for a new class of ESD protection devices that feature much lower levels of capacitance than traditional solutions and, in some cases, impedance matching to ensure that signal integrity is not compromised.

In mobile handsets, both EMI filtering and ESD protection are commonly required for external interfaces while EMI filtering is commonly required for internal interfaces such as parallel interfaces between the baseband processor with the display and camera. The filtering requirements for the latter are especially stringent because of the high data rates employed.

In digital consumer electronics products and personal computers and peripherals, ESD protection featuring very low capacitance and matched impedance levels is essential due to the use of high speed digital interfaces such as HDMI, Display Port and USB 2.0 to interconnect them.

Our Strategy

Our objective is to be a leading supplier of protection devices for the mobile handset, digital consumer electronics and personal computer markets and of serial interface display electronics for the mobile handset market. Our strategy includes the following key elements:

Develop Innovative Application Specific Products. We identify specific applications that are important to our customers and develop products that are optimized for those applications based on leading edge technology.

Focus on Industry Leaders in Our Target Markets. We target market and technology leaders in our target markets since we believe that products developed to meet their needs will be adopted by other customers as well and that doing business with the leaders will enhance our credibility as a supplier.

Broaden Product Offerings in Our Target Markets. We plan to develop and/or acquire additional product lines for the markets we serve in order to leverage the customer relationships and channels that we have established. The first two examples of this are our new serial interface display controller product line which we developed internally and our acquisition of Arques Technology.

Leverage Benefits of CSP. Wherever applicable we plan to offer our products in CSP to provide our customers with solutions that have lower cost, smaller footprints and, in many cases, superior electrical performance.

Provide Superior Service to our Customers. Because of our relatively small size and our tight market and customer focus, we believe that we can be more responsive to customer needs from product definition to delivery schedules than our larger competitors.

Outsource Manufacturing and Relentlessly Reduce Product Cost. We believe that by outsourcing our manufacturing to partners who are specialists we can achieve greater flexibility and lower costs than our competitors who choose to invest in captive manufacturing capabilities. This is particularly true for wafer fabrication but applies to backend processing as well.

Products

EMI Filters with ESD Protection for Mobile Handsets. We offer a broad portfolio of protection devices for the mobile handset market that combine EMI filtering with ESD protection. Consistent with our application specific approach, they are optimized for specific applications including: display interfaces, imager interfaces, speaker, headphone and microphone interfaces; smart card interfaces, including Secure Digital (SD) and Multimedia Card (MMC), and subscriber identification module (SIM) card interfaces, and USB 2.0 interfaces. In order to meet the range of filter requirements represented by these applications, we offer a broad line of filters that are optimized for filter performance at different data rates and at different cost points. For example, our Praetorian® I and II families of inductor based filters are designed to address the most demanding filtering requirements of high speed interfaces for high resolution color LCD displays and high resolution imager modules.

ESD Protection Devices for Mobile Handsets. In addition to EMI filters with ESD protection, we also offer a line of ESD only protection devices for mobile handsets. These protection products provide ESD protection for a variety of applications including high speed serial data interfaces such as USB 2.0, MDDI and MIPI, keypad interfaces, battery terminals and antenna switches.

Standard ESD Protection Devices for Personal Computers. We offer a broad portfolio of standard ESD protection devices that provide robust protection for a number of standard data interfaces found on desktop and notebook computers. Our standard ESD protection devices are typically designed with our Centurion TM zener architecture and provide high levels of ESD protection at lower levels of capacitance than traditional zener ESD protection devices. These products protect data interfaces such as USB, IEEE 1284 or parallel port, smart card interfaces and audio ports. In addition to data interfaces, we also provide devices that protect the keyboard, battery terminals and user interface devices such as buttons. Our products are available in traditional plastic packages as well as small form factor chipscale packaging.

Low Capacitance ESD Protection Devices for Digital Consumer Electronics and Personal Computers. Our PicoGuard TM family of low capacitance ESD protection devices provides robust ESD protection without compromising signal integrity for high speed data interfaces such as USB 2.0, gigabit Ethernet, DisplayPort and Serial ATA. Our recently announced XtremeESD TM family of low capacitance protection devices including the PicoGuard XP TM and the PicoGuard XS TM architectures include devices with industry leading ESD protection and signal integrity. Our MediaGuard TM family of HDMI video port protector devices integrates PicoGuard TM low capacitance ESD protection with active analog components that provide voltage level shifting, backdrive and overcurrent protection. These devices protect HDMI interfaces in digital televisions, DVD players and recorders and digital set top boxes. Our MediaGuard TM and PicoGuard XS TM devices also offer significant advantages over discrete solutions in achieving HDMI compliance.

ESD Protection Devices for High Brightness Light Emitting Diodes (HBLEDs). We offer a portfolio of ESD protection devices that provide high levels of ESD protection for high brightness LEDs. High brightness LEDs are increasingly being utilized in a variety of lighting applications including: LCD display backlighting, automotive headlamps and cockpit lighting, wide area electronic signs and interior lighting. High power and high brightness LEDs are highly susceptible to damage from ESD strikes. In addition to ESD protection, our products can also provide a sub-mount for the LED within the lighting sub-assembly that can provide benefits of ease of handling in a manufacturing environment and improved thermal dissipation.

Serial Interface Display Controllers. The CM5100, our first serial interface display controller, based upon the MDDI standard, was introduced in October 2006. This device featured a die size that was up to 60% smaller than competing products and featured compelling audio and video features that enhance video playback and support broad interconnectivity and control of components in the display subsystem such as white LED backlight drivers and touch screen controllers. Products in development include a serial interface display controller that will support the upcoming MIPI Alliance standard for GSM based handsets.

Customers

We target market and technology leaders in each of our markets. In fiscal 2008, approximately 60% of our net sales came from the sale of our products directly to OEMs, ODMs and CEMs; and 40% came from the sale of our products through distributors. In fiscal 2008, two OEM customers, Samsung and Motorola, and two distributors, RSL Microelectronics Co. Ltd. and Aeco Technology Co. Ltd. each contributed more than 10% of our net sales.

Sales and Marketing

Our sales channels consist of a small direct sales force and a larger network of independent regional sales representatives and distributors managed by our sales force. Our direct sales force is headquartered in Milpitas, California with regional sales offices in the United States, Europe and Asia. Major mobile handset customers primarily buy our devices directly.

International sales, based on the location where we shipped the product, accounted for 91% of net sales in fiscal 2008. We use independent foreign sales representatives and distributors to provide international sales support, along with our employees based abroad. We expect that international sales will continue to represent a majority of our sales for the foreseeable future. Our sales are denominated in U.S. dollars. Refer to Item 7 of this Form 10-K for information related to sales by geographic region.

Our products are primarily specified through contact with customers’ engineering departments, as well as their procurement and manufacturing personnel. Most of the systems into which our products are designed have short life cycles. As a result, in order to maintain and grow revenue, we require a significant number of new design wins on an ongoing basis so that our products are incorporated into next generation systems of our customers.

MANAGEMENT DISCUSSION FROM LATEST 10K

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts and are based on current expectations, estimates, and projections about our industry; our beliefs and assumptions; and our goals and objectives. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” and variations of these words and similar expressions are intended to identify forward-looking statements. Examples of the kinds of forward-looking statements in this report include statements regarding the following: (1) our expectation that our ASP (“Average Selling Prices”) for similar products will decline at the rate of 12% to 15% per year; (2) our having a target gross margin of 38% to 40%, which we may fail to achieve ; (3) our expectation that our future environmental compliance costs will be minimal; (4) our anticipation that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs over the next 12 months; (5) our expectation not to pay dividends in the foreseeable future; (6) our having a long term target for research and development expenses of 9% to 10% of sales , however, expecting such expenses for fiscal 2009 to be higher due to our increased planned spending on serial interface display controller products and continued significant investment in protection products ; (7) our having a long term target for selling, general and administrative expenses of 15% to 16% of sales but expecting to exceed this target until our sales increase substantially; (8) our expectation of further cost reductions of our products in future; (9) our expectation of future interest income to reduce significantly as a result of decline in interest rates; (10) the iSupply estimates for growth in our target markets; (11) our six-element strategy to achieve our objective to be a leading supplier of protection devices for the mobile handset, digital consumer electronics and personal computer markets and of serial interface display electronics for the mobile handset market; and (12) our expectation for fiscal 2009 revenue to grow both for protection products and display controller devices, including for our mobile handset devices and low capacitance ESD protection devices used in digital TVs, other digital consumer electronics and personal computers . These statements are only predictions, are not guarantees of future performance, and are subject to risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include, but are not limited to, whether our target markets continue to experience their forecasted growth and whether such growth continues to require the devices we supply; whether we will be able to increase our market penetration; whether our product mix changes, our unit volume decreases materially, we experience price erosion due to competitive pressures, or our contract manufacturers and assemblers raise their prices to us or we experience lower yields from them or we are unable to realize expected cost savings in certain manufacturing and assembly processes; whether there will be any changes in tax accounting rules; whether we will be successful developing new products which our customers will design into their products and whether design wins and bookings will translate into orders; whether we encounter any unexpected environmental clean-up issues with our former Tempe facility; whether we discover any further contamination at our former Topaz Avenue Milpitas facility; and whether we will incur unexpected expenses or have large unanticipated cash requirements, as well as other risk factors detailed in this report, especially under Item 1A, Risk Factors. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

In this discussion, “CMD,” “we,” “us” and “our” refer to California Micro Devices Corporation. All trademarks appearing in this discussion are the property of their respective owners. This discussion should be read in conjunction with the other financial information and financial statements and related notes contained elsewhere in this report.

Executive Overview

We have one operating segment and primarily serve mobile handset, digital electronics and personal computer markets. We are a leading supplier of protection devices for mobile handsets that provide EMI filtering and ESD protection, and of low capacitance ESD protection devices for digital consumer electronics and personal computers. We also offer display electronics ICs for mobile handset displays including serial interface display controllers. End customers for our semiconductor products are OEMs. We sell to some of these end customers through ODMs and CEMs. We use a direct sales force, manufacturers’ representatives and distributors to sell our products. Our manufacturing is completely outsourced and we use merchant foundries to fabricate our wafers and subcontractors to do backend processing and to ship to our customers. Most of our physical assets are located outside the United States including product inventories and manufacturing equipment consigned to our wafer foundries and backend subcontractors.

Industry Overview

The semiconductor industry is characterized by rapid technological change, intense competitive pressure, price erosion, periodic oversupply conditions, occasional shortages of materials, volatile demand patterns, capacity constraints, variation in manufacturing efficiencies and significant expenditures for capital equipment and product development. Market disruptions caused by new technologies, entry of new competitors into markets we serve and other factors introduce volatility into our operating performance and cash flow from operations.

Fiscal 2008 key financial highlights

The following are key financial highlights;

Net Sales of $59.2 Million: Our net sales were $59.2 million in fiscal 2008, down 13% from $68.0 million in 2007. Sales in the mobile handset market were $10.8 million lower and sales in the digital consumer electronics and personal computer market were $2.0 million higher than a year ago.

Gross Margin of $19.6 Million: Our gross margin was $19.6 million (33% of our net sales) in fiscal 2008 as compared to gross margin of $25.2 million (37% of our net sales) a year ago.

Net Loss of $0.06 per Share - Basic and Diluted: Our net loss, basic and diluted, was $0.06 per share in fiscal 2008 whereas our net loss per share, basic and diluted, rounded to $0.00 a year ago.

Cash Provided by Operating Activities of $4.4 Million: We generated operating cash flow of $4.4 million in fiscal 2008 and $6.7 million a year ago.

Net Cash * Position: We ended the fiscal year 2008 with a net cash position of $51.6 million as compared to $49.0 million a year ago.
___________________
*Net Cash = Cash and cash equivalents + Short-term investments

Major Accomplishments in Fiscal 2008

In fiscal 2008 we began shipping to our fourth Top 5 handset maker. We also started production shipments of our new display controller for CDMA handsets to our customers, including a top 5 handset OEM. We experienced rapid growth in the sales of packaged handset protection products. In addition, we introduced the XtremeESD TM device family that includes architectures optimized for the maximum protection of advanced system integrated circuits as well as for the highest speed data interfaces. We also introduced our Praetorian II family of EMI filters during fiscal 2008.

In addition, we also made considerable progress on our major cost reduction initiatives which include outsourcing with lower cost subcontractors, migration from six inch to eight inch wafers for many of our products, migration of low capacitance ESD products to the lower cost sinker process and continued improvement in our assembly and testing processes.

Future Outlook

Based on our analysis of future customer needs, backlog and our recent and anticipated design wins, we expect revenue in fiscal 2009 to grow for both our protection products and display controller devices. We expect the demand to increase for both our mobile handset devices and low capacitance ESD protection devices used in digital TVs, other digital consumer electronics and personal computers.

We continue to invest in new products and are committed to increasing our research and development efforts in order to provide our customers with continued improvements in functionality and features. We plan to invest significantly in our display controller product family as well as our protection products.

IPR&D

IPR&D expense in fiscal 2007 of $2.2 million was related to the Arques acquisition. There was no IPR&D expense recorded during each of the fiscal years 2008 and 2006. IPR&D was expensed upon acquisition in fiscal 2007 because technological feasibility had not been established and no future alternative uses existed.

Amortization of Intangible Assets

At March 31, 2008 and 2007, intangible assets consisted of developed and core technology and distributor relationships acquired as a part of the acquisition of Arques Technology, Inc. during fiscal 2007. Developed and core technology and distributor relationships are amortized on a straight-line basis over their useful lives of four years and two years, respectively. We recorded amortization expense of $165,000 in fiscal 2008 and $158,000 in fiscal 2007. There were no such charges recorded in fiscal 2006. For further discussion of intangible assets, see Note 5 of Notes to Consolidated Financial Statements in this Form 10-K.

Other Income, Net

Other income, net includes interest income, interest expense and other non-operating income and expense in fiscal 2008, 2007 and 2006.

Interest income remained at a consistent level of $2.5 million in fiscal years 2008 and 2007. We expect future interest income to decrease significantly as a result of recent declines in interest rates.

Interest income increased to approximately $2.5 million in fiscal 2007 from $1.6 million during fiscal 2006. The increase in interest income resulted from higher average interest rates in fiscal 2007 along with a higher average cash balance as a result of positive cash flow from operations and issuance of common stock under our employee stock option and employee stock purchase plans, partially offset by cash outflow for our investing activities.

Interest expense was immaterial for fiscal years 2008, 2007 and 2006, respectively.

Income Taxes

Income tax expense is comprised of a current and deferred component. The current tax provision in fiscal 2008 was $0.1 million and primarily consists of cash payments made to taxing authorities and accruals under FIN 48 for potential additional tax in certain jurisdictions. The deferred component of the fiscal 2008 tax provision was $0.8 million and represents the net change to our tax accruals to reflect the expected future tax benefits of our net operating losses and other credits. Fiscal year ended March 31, 2008 total expense of $0.9 million compares with an income tax provision of $0.6 million recorded a year ago. Our income tax provision increased during fiscal year ended March 31, 2008 compared to a year ago, primarily as a result of our estimates in our ability to utilize loss carry forwards. During the fiscal year ended March 31, 2006, we reduced $2.7 million of the valuation allowance against deferred tax assets, resulting in a net tax benefit of $2.6 million. See Note 16 of the Notes to Consolidated Financial Statements of this Form 10-K for further discussion.

Critical Accounting Policies and Estimates

The preparation of financial statements, in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and the known facts and circumstances that we believe are relevant. We have not made any material change in the accounting methodology used to establish our estimates and assumptions during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the accounting methodology used to establish our estimates or assumptions. However, actual results may differ materially from our estimates. Our significant accounting policies are described in Note 2 of Notes to Consolidated Financial Statements in this Form 10-K. The significant accounting policies that we believe are critical, either because they relate to financial line items that are key indicators of our financial performance such as revenue or because their application requires significant management judgment, are described in the following paragraphs.

Revenue recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery or customer acceptance, where applicable, has occurred, the fee is fixed or determinable, and collection is reasonably assured.

Revenue from product sales to end user customers, or to distributors that do not receive price concessions and do not have return rights, is recognized upon shipment and transfer of risk of loss, if we believe collection is reasonably assured and all other revenue recognition criteria are met. We assess the probability of collection based on a number of factors, including past transaction history and the customer’s creditworthiness. If we determine that collection of a receivable is not probable, we defer recognition of revenue until the collection becomes probable, which is generally upon receipt of cash. Reserves for sales returns and allowances from end user customers are estimated based on historical experience and management judgment, and are provided for at the time of shipment. The sufficiency of the reserves for sales return and allowances is assessed at the end of each reporting period.

Revenue from sales of our standard products to distributors whose terms provide for price concessions or for product return rights is recognized when the distributor sells the product to an end customer. For our end of life products, if we believe that collection is probable, we recognize revenue upon shipment to the distributor, because our contractual arrangements provide for no right of return or price concessions for those products.

When we sell products to distributors, we defer our gross selling price of the product shipped and its related cost and reflect such net amounts on our balance sheet as a current liability entitled “deferred margin on shipments to distributors”.

Inventories

Forecasting customer demand is the factor in our inventory policy that involves significant judgments and estimates. We estimate excess and obsolete inventory based on a comparison of the quantity and cost of inventory on hand to management’s forecast of customer demand for the next twelve months. In forecasting customer demand, we make estimates as to, among other things, the timing of sales, the mix of products sold to customers, the timing of design wins and related volume purchases by new and existing customers, and the timing of existing customers’ transition to new products. We also use historical trends as a factor in forecasting customer demand, especially that from our distributors. We review our excess and obsolete inventory on a quarterly basis considering the known facts. Once inventory is written down, it is valued as such until it is sold or otherwise disposed of. To the extent that our forecast of customer demand materially differs from actual demand, our cost of sales and gross margin could be impacted.

Impairment of long lived assets

Long lived assets are reviewed for impairment whenever events indicate that their carrying value may not be recoverable. An impairment loss is recognized if the sum of the expected undiscounted cash flows from the use of the asset is less than the carrying value of the asset. The amount of impairment loss is measured as the difference between the carrying value of the assets and their estimated fair value.

We have accounted for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at the reporting unit level at least annually and more frequently if there are indicators of impairment. The amount of impairment loss is measured as the difference between the carrying value of the assets and their estimated fair value. An impairment loss for an intangible asset is recognized if the sum of the expected undiscounted cash flows from the use of the asset is less than the carrying value of the asset. Significant judgment required to estimate the fair value of an intangible asset includes estimating future cash flows and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value. Any impairment loss recorded in the future could have an adverse impact on our financial condition and results of operations.

Our last annual impairment analysis of goodwill, which was performed during the fourth quarter of fiscal 2008, indicated that the estimated fair value exceeded its corresponding carrying amount. Our entity is deemed as a single reporting unit for our impairment analysis. We computed fair value of our company to be equal to the market capitalization and compared it to the carrying value of the net assets of the company including goodwill and other intangible assets. The market capitalization is based on the quoted closing market price of our stock as traded on NASDAQ as of the date of our impairment analysis. As such, we determined that no impairment exists. The process for evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. Should actual results differ from our estimates, revisions to the recorded amount of goodwill could be required. We cannot predict the occurrence of future events that might lead to impairment nor the impact such events might have on these reported asset values. We plan to examine goodwill for impairment at least annually.

Stock-based compensation

In accordance with the fair value recognition provisions of SFAS 123(R), we estimate the stock-based compensation cost at the grant date based on the fair value of the award and recognize it as an expense on a graded vesting schedule over the requisite service period of the award.

We estimate the value of employee stock options on the date of grant using a Black-Scholes model. The determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. The use of a Black-Scholes model requires the use of extensive actual employee exercise behavior data and a number of complex assumptions including expected volatility, risk-free interest rate and expected dividends.

Our computation of expected volatility is based on a combination of historical and market-based implied volatility. Our computation of expected life is based on a combination of historical exercise patterns and certain assumptions regarding the exercise life of unexercised options adjusted for job level and demographics. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield assumption is based on our history and expectation of dividend payouts.

As stock-based compensation expense recognized in the consolidated statement of operations for the years ended March 31, 2008 and March 31, 2007 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on an average of historical forfeitures. The expense that we recognize in future periods could differ significantly from the current period and/or our forecasts due to adjustments in assumed forfeiture rates or change in our assumptions.

Income Taxes

We account for income taxes under the asset and liability method, which requires significant judgments in making estimates for determining certain tax liabilities and recoverability of certain deferred tax assets, including the tax effects attributable to net operating loss carry forwards and temporary differences between the tax and financial statement recognition of revenue and expenses, as well as the interest and penalties relating to these uncertain tax positions.

On a quarterly basis, we evaluate our ability to recover our deferred tax assets, including but not limited to our past operating results, the existence of cumulative losses in the most recent fiscal years, and our forecast of future taxable income on a jurisdiction by jurisdiction basis. In the event that actual results differ from our estimates in the future, we will adjust the amount of the valuation allowance that may result in a decrease or increase in income tax expense in those periods.

In the first quarter of fiscal 2008, we adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109” (FIN 48). As a result of the implementation of FIN 48, we recognize liabilities for uncertain tax positions based on a two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on examination, including resolution of any related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We will evaluate these uncertain tax positions on a quarterly basis. A change in recognition or measurement in the future may result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

See Note 16 in the Notes to Consolidated Financial Statements of this Form 10-K for further discussion.

Litigation

We are, on occasions, a party to lawsuits, claims, investigations, and proceedings, including commercial and employment matters, which are being addressed in the ordinary course of business. We review the current status of any pending or threatened proceedings with our outside counsel on a regular basis and, considering all the known relevant facts and circumstances, we recognize any loss that we consider probable and estimable as of the balance sheet date. For these purposes, we consider settlement offers we may make to be indicative of such a loss under certain circumstances. As of March 31, 2008 and 2007, we accrued $20,000 for our litigation-related matters.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

In this discussion, “CMD,” “we,” “us” and “our” refer to California Micro Devices Corporation. All trademarks appearing in this discussion are the property of their respective owners. This discussion should be read in conjunction with the other financial information and financial statements and related notes contained elsewhere in this report.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts and are based on current expectations, estimates, and projections about our industry; our beliefs and assumptions; and our goals and objectives. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” and variations of these words and similar expressions are intended to identify forward-looking statements. Examples of the kinds of forward-looking statements in this report include statements regarding the following: (1) our expectation that our ASP (“Average Selling Prices”) for similar products, based on a constant mix of products, will decline at the rate of 12% to 15% per year; (2) our having a target gross margin of 38% to 40%; (3) our expectation that our future environmental compliance costs will be minimal; (4) our anticipation that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs over the next 12 months; (5) our plan to examine goodwill at least annually; (6) our having a long term target for research and development expenses of 9% to 10% of sales and anticipated increase in serial interface display controller expenses during the remainder of fiscal 2009; (7) our having a long term target for selling, general and administrative expenses of 15% to 16% of sales but expecting to exceed this target until our sales increase substantially; (8) our belief that due to the short duration and investment grade credit ratings of our investment portfolio, there is no material exposure to interest rate risk in our investment portfolio and (9) our expectation of future interest income to continue to be at a reduced level or even decline unless interest rates increase materially in the near future. These statements are only predictions, are not guarantees of future performance, and are subject to risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include, but are not limited to, whether our target markets continue to experience their forecasted growth and whether such growth continues to require the devices we supply; whether we will be able to increase our market penetration; whether our product mix changes, our unit volume decreases materially, we experience price erosion due to competitive pressures, or our contract manufacturers and assemblers raise their prices to us or we experience lower yields from them or we are unable to realize expected cost savings in certain manufacturing and assembly processes; whether there will be any changes in tax accounting rules; whether we will be successful developing new products which our customers will design into their products and whether design wins and bookings will translate into orders; whether we encounter any unexpected environmental clean-up issues with our former Tempe facility; whether we discover any further contamination at our former Topaz Avenue Milpitas facility; and whether we will have large unanticipated cash requirements, as well as other risk factors detailed in this report, especially under Item 1A, Risk Factors. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

Executive Overview

We design and sell application specific protection devices and display electronics devices for high volume applications in the mobile handset, digital consumer electronics and personal computer markets as well as application specific protection devices in diversified markets such as high brightness light emitting diodes (HBLED), embedded computing and telecom. These protection devices provide Electromagnetic Interference (EMI) filtering and Electrostatic Discharge (ESD) protection. The display electronic devices include serial interface display controllers and interface convertors. End customers for our semiconductor products are original equipment manufacturers (OEMs). We sell to some of these end customers through original design manufacturers (ODMs) and contract electronics manufacturers (CEMs). We use a direct sales force, manufacturers’ representatives and distributors to sell our products. Our manufacturing is completely outsourced and we use merchant foundries to fabricate our wafers and subcontractors to do backend processing and to ship to our customers. We have one operating segment and most of our physical assets are located outside the United States. Assets located outside the United States include product inventories and manufacturing equipment consigned to our wafer foundries and backend subcontractors.

Second Quarter Key Financial Highlights

The following are key financial highlights of second quarter of fiscal 2009:

Net Sales: Our net sales were $16.3 million in the second quarter of fiscal 2009, up 1% from $16.1 million in the same period a year ago.

Gross Margin: Our gross margin was $5.1 million (31% of our net sales) in the second quarter of fiscal 2009 as compared to gross margin of $5.3 million (33% of our net sales) in the same period a year ago.

Net Loss Per Share: Our net loss per share, basic and diluted, was $0.08 in the second quarter of fiscal 2009 as compared to net income per share, basic and diluted, of $0.02 in the same period a year ago.

Cash Provided by Operating Activities: We generated operating cash flow of $0.6 million during the six months ended September 30, 2008 as compared to $1.8 million in the same period a year ago.

Cash * Position: We ended the second quarter of fiscal 2009 with a cash position of $52.9 million as compared to $51.6 million, as of March 31, 2008.
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* Cash = Cash and cash equivalents + Short-term investments

Amortization of Intangible Assets

Amortization of intangible assets was $22,000 and $55,000, respectively during the three and six months ended September 30, 2008 as compared to $41,000 and $82,000 respectively during the same periods a year ago. The intangible assets were related to the Arques acquisition in fiscal 2007. The decrease was primarily due to the sale of intangible assets, related to our line of LED Drivers, during the second quarter of fiscal 2009. For additional information regarding intangible assets, see Note 6 in the notes to condensed consolidated financial statements of this Form 10-Q.

Other Income, Net

Other income, net mainly includes gain on sale of intangibles and fixed assets, interest income, interest expense and other expenses.

The increase in other income is primarily due to a $1.0 million gain on sale of LED Driver intellectual property and related fixed assets partially offset by a $0.4 million and $0.8 million reduction in interest income during three and six months ended September 30, 2008, respectively. The decrease in interest income resulted from an expected decline in interest rates. We expect interest income, in the near future, to remain at this reduced level or even decline unless interest rates increase materially.

Income Taxes

During the three and six months ended September 30, 2008, our income tax provision was $1.5 million and 1.3 million, respectively, as compared to $19,000 and $7,000, respectively, during the same periods a year ago. Our income tax provision increased during the three and six months ended September 30, 2008 compared to the same periods a year ago, primarily as a result of the decrease in our estimates to utilize loss carryforwards and the resulting increase in the valuation allowance of the deferred tax assets. See Note 14 in the notes to condensed consolidated financial statements of this Form 10-Q for further discussion.

Critical Accounting Policies and Estimates

The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and the known facts and circumstances that we believe are relevant. We have not made any material change in the accounting methodology used to establish our estimates and assumptions during the second quarter of fiscal 2009. We do not believe there is a reasonable likelihood that there will be a material change in the accounting methodology used to establish our estimates or assumptions. However, actual results may differ materially from our estimates. Our significant accounting policies are described in Note 2 of notes to consolidated financial statements in our Annual Report on Form 10-K for fiscal 2008. The significant accounting policies that we believe are critical, either because they relate to financial line items that are key indicators of our financial performance such as revenue or because their application requires significant management judgment, are described in the following paragraphs.


Revenue Recognition


We recognize revenue when persuasive evidence of an arrangement exists, delivery or customer acceptance, where applicable, has occurred, the fee is fixed or determinable, and collection is reasonably assured.

Revenue from product sales to end user customers, or to distributors that do not receive price concessions and do not have return rights, is recognized upon shipment and transfer of risk of loss, if we believe collection is reasonably assured and all other revenue recognition criteria are met. We assess the probability of collection based on a number of factors, including past transaction history and the customer’s creditworthiness. If we determine that collection of a receivable is not probable, we defer recognition of revenue until the collection becomes probable, which is generally upon receipt of cash. Reserves for sales returns and allowances from end user customers are estimated based on historical experience and management judgment, and are provided for at the time of shipment. The sufficiency of the reserves for sales return and allowances is assessed at the end of each reporting period.

Revenue from sales of our standard products to distributors whose terms provide for price concessions or for product return rights is recognized when the distributor sells the product to an end customer. For our end of life products, if we believe that collection is probable, we recognize revenue upon shipment to the distributor, because our contractual arrangements provide for no right of return or price concessions for those products.

When we sell products to distributors, we defer our gross selling price of the product shipped and its related cost and reflect such net amounts on our balance sheet as a current liability entitled “deferred margin on shipments to distributors”.

Inventories


Forecasting customer demand is the factor in our inventory policy that involves significant judgments and estimates. We estimate excess and obsolete inventory based on a comparison of the quantity and cost of inventory on hand to management’s forecast of customer demand for the next twelve months. In forecasting customer demand, we make estimates as to, among other things, the timing of sales, the mix of products sold to customers, the timing of design wins and related volume purchases by new and existing customers, and the timing of existing customers’ transition to new products. We also use historical trends as a factor in forecasting customer demand, especially that from our distributors. We review our excess and obsolete inventory on a quarterly basis considering the known facts. Once inventory is written down, it is valued as such until it is sold or otherwise disposed of. To the extent that our forecast of customer demand materially differs from actual demand, our cost of sales and gross margin could be impacted.

Impairment of long lived assets

Long lived assets are reviewed for impairment whenever events indicate that their carrying value may not be recoverable. An impairment loss is recognized if the sum of the expected undiscounted cash flows from the use of the asset is less than the carrying value of the asset. The amount of impairment loss is measured as the difference between the carrying value of the assets and their estimated fair value.

We have accounted for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at the reporting unit level at least annually and more frequently if there are indicators of impairment. The amount of impairment loss is measured as the difference between the carrying value of the assets and their estimated fair value. An impairment loss for an intangible asset is recognized if the sum of the expected undiscounted cash flows from the use of the asset is less than the carrying value of the asset. Significant judgment required to estimate the fair value of an intangible asset includes estimating future cash flows and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value. Any impairment loss recorded in the future could have an adverse impact on our financial condition and results of operations.

Our last annual impairment analysis of goodwill, which was performed during the fourth quarter of fiscal 2008, indicated that the estimated fair value exceeded its corresponding carrying amount. Our entity is deemed as a single reporting unit for our impairment analysis. We computed fair value of our company to be equal to the market capitalization and compared it to the carrying value of the net assets of the company including goodwill and other intangible assets. The market capitalization is based on the quoted closing market price of our stock as traded on NASDAQ as of the date of our impairment analysis. As such, we determined that no impairment exists. The process for evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. Should actual results differ from our estimates, revisions to the recorded amount of goodwill could be required. We cannot predict the occurrence of future events that might lead to impairment nor the impact such events might have on these reported asset values. We examine goodwill for impairment on an annual basis during our fourth fiscal quarter. In addition, we also examine goodwill for impairment on a quarterly basis if an event has occurred or circumstances have changed during the quarter that would more likely than not reduce the fair value of a reporting unit below its carrying value.

Stock-based Compensation

In accordance with the fair value recognition provisions of SFAS 123(R), we estimate the stock-based compensation cost at the grant date based on the fair value of the award and recognize it as an expense on a graded vesting schedule over the requisite service period of the award.

We estimate the value of employee stock options on the date of grant using the Black-Scholes model. The determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. The use of the Black-Scholes model requires the use of extensive actual employee exercise behavior data and a number of complex assumptions including expected volatility, risk-free interest rate and expected dividends.

Our computation of expected volatility is based on a combination of historical and market-based implied volatility. Our computation of expected life is based on a combination of historical exercise patterns and certain assumptions regarding the exercise life of unexercised options adjusted for job level and demographics. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield assumption is based on our history and expectation of dividend payouts.

As stock-based compensation expense recognized in the condensed consolidated statements of operations for the three and six months ended September 30, 2008 and 2007 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on an average of historical forfeitures. The expense that we recognize in future periods could differ significantly from the current period and/or our forecasts due to adjustments in assumed forfeiture rates or change in our assumptions.

Income Taxes

We account for income taxes under the asset and liability method; which requires significant judgments in making estimates for determining certain tax liabilities and recoverability of certain deferred tax assets, including the tax effects attributable to net operating loss carryforwards and temporary differences between the tax and financial statement recognition of revenue and expenses, as well as the interest and penalties relating to these uncertain tax positions.

On a quarterly basis, we evaluate our ability to recover our deferred tax assets, including but not limited to our past operating results, the existence of cumulative losses in the most recent fiscal years, and our forecast of future taxable income on a jurisdiction by jurisdiction basis. In the event that actual results differ from our estimates in the future, we will adjust the amount of the valuation allowance that may result in a decrease or increase in income tax expense in those periods.

In the first quarter of fiscal 2008, we adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109” (FIN 48). As a result of the implementation of FIN 48, we recognize liabilities for uncertain tax positions based on a two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on examination, including resolution of any related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We will evaluate these uncertain tax positions on a quarterly basis. A change in recognition or measurement in the future may result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

See Note 14 in the notes to condensed consolidated financial statements of this Form 10-Q for further discussion.

Litigation

We are, on occasion, a party to lawsuits, claims, investigations, and proceedings, including commercial and employment matters, which are being addressed in the ordinary course of business. We review the current status of any pending or threatened proceedings with our outside counsel on a regular basis and, considering all the known relevant facts and circumstances, we recognize any loss that we consider probable and estimable as of the balance sheet date. For these purposes, we consider settlement offers we may make to be indicative of such a loss under certain circumstances. As of September 30, 2008, there was no accrual for litigation related matters.

CONF CALL

Robert Dickinson

Thanks for joining us today for our review of the first quarter of our fiscal 2009 which ended on June 30. I have mentioned in our press release earlier today, we are providing a web cast that include slide in addition to audio. I will begin with the business update following which Kevin Berry our Chief Financial Officer will present our financial results and outlook. Kyle Baker our Vice President of Marketing is currently off in business so I will include the brief update on designs webs and new products and my comment. Kevin and I will be available for questions after our remarks.

Before we start, Kevin will quickly review our use of forward-looking statement and of non-GAAP financial measures.

Kevin J. Berry

I would like to remind everyone that all the statements made during this conference call including responses to your questions which are not historical facts are forward-looking statements made in reliance upon the Federal Securities law Safe Harbor. Such forward forward-looking statements are not guarantees of future performance or events rather they are based on our current expectations, estimates, beliefs and assumptions about the future which may prove incorrect and upon our goals and objectives which may change. Often such statements can be identified by the use of words such as will, and can, expects, plan, believe, anticipates, and estimate. Forward-looking statements in this conference call include our expectation for fiscal 2009 including revenues and sources of revenue growth, gross margins and cost reductions and EPS, significant sequential revenue growth in Q2, strong demand for product or expectations for Q2 including revenue gross margins and EPS both on a GAAP and non-GAAP basis. Non-GAAP gross margins for Q3, expected cash flow and inventory for Q2, our expectation that are production business will continue to generate profits, our R&D expenses, anticipated benefits of all products, our products development and our intent to invest of the $5 million in display control alert and diversified protection R&D including for example a second generation MIPI products for a top five handset maker and our first MIPI products for the GSM market and our cash allocation.

Additional information about risks and other factors related to such statements maybe found in our press release of earlier today, the slide show of our company and our webcast of today and our form 10K, 10Q, 8K and other SEC filings. Due to these risks and other factors, our future actual results could differ materially from those contained in the forward-looking statements made during this call. Forward-looking statements speaks only as of today and we undertake no obligation to publicly update or revise these statements whether as a result of new information, future events or otherwise.

Non-GAAP measures included in our press release today and discussed on this call are included with the intention of providing investors a more complete understanding of our operational results and trends which can only be used in conjunction with the results reported in accordance with generally accepted accounting principles. The non-GAAP financial measures should enable investors to analyze our base the financial and operating performance to facilitate period to period comparisons and analysis of operating trend. Non-GAAP measures presented and discussed today are in our release, presentations and similar documents issued by us excluding income statements of facts of all forms of employee share base compensation and the effects of 123R on the number of diluted shares used in calculating non-GAAP earnings per share. The Arques Technology acquisition related cost including amortization of acquisition related intangibles and one time charges during the fiscal 2007 for acquired in process research and development and utilize the tax rate that is based upon the income taxes; we expect to actually pay relating to the activities and results of the relevance fiscal period.

Now, let me turn the call back to Bob.

Robert Dickinson

Revenue in Q1 was up year-on-year for the first time in seven quarters. Both low capacitance ESD and High Brightness LED-ESD protection sales were up nicely year-on-year. Our handset protection sales were down. Revenue was down sequentially due to lower handset protection demand than expected with low capacitance ESD protection sales up and High Brightness LED-ESD protection sales flat. In addition, approximately $300,000 in revenue was deferred to Q2 as the result of the logistics error.

On our highlights in the quarter included reaching $500,000 in display controller sales and $1 million in Praetorian filter sales. Gross margin was down sequentially but above the high end of our guidance. GAAP EPS was at the low end and non-GAAP EPS was below guidance due to a change in accounting or an asset sale from what we had anticipated. We generated $400,000 of operating cash flow in the quarter.

Bookings were down sequentially but up sharply year-on-year. The book-to-bill ratio was 1.06 and we begin Q2 with a highest backlog in almost two years. The protection business continue to be profitable in Q1 and we continue to make a major investment in display controller R&D. As we have previously discussed, we expect fiscal 2009 to represent a turning point for CAMD. We have recently begun doing business with major new customers in both the mobile handset and digital television markets and we expect both to contribute to revenue growth this year.

In addition, we expect to see growth in ESD protection for High Brightness LEDs. We also expect to see gross margin for the year improved compared to last year as the result of our ongoing cross reduction activities. Of course, all of these could be affected if there is a severe economic downturn. We expect to see significant sequential revenue growth in Q2 as the result of stronger demand pretty much across the board with display controller sales showing very strong growth, low capacitance ESD protection strong growth and handset protection moderate growth.

We expect High Brightness LED-ESD protection to be roughly flat. Revenue for the full year should be in the range of what we talked about in our Q4 earnings call. We expect gross margin to decline in Q2 and improve for the full year. We expect our protection business to continue to be profitable throughout the year. Display controller R&D expense should peak in Q2 resulting in both GAAP and non-GAAP losses in the quarter. We expect to be profitable in the second half of the year.

We made several important product announcements during Q1. We introduced the CM1234, the second part using our new PicoGuard XS Architecture which provides a very high level of ESD protection together with superior signal integrity. This device is currently being evaluated by a major digital television manufacturer. We also introduced the Praetorian III architecture, the latest and most advanced in our family of LC EMI filtering for mobile handset. It combines the filter performance of our Praetorian I products with the cost structure of our Praetorian II products.

Finally, we introduced our MDDI MIPI bridge architecture whose main purpose is to allow MDDI compliance base found processors to drive MIPI compliance displays. This architecture was defined in conjunction with key customers and industry partners. As we have mentioned, we are continuing to invest in display controller R&D. Over the last several fiscal years, we were working on our first product one of CAMD market which is now in volume production. This year, we are developing two products in parallel, the bridge that I just mentioned and our first product for the MIPI market.

As a result, our spending on display controller R&D has increased this year. Designing activity for handset protection and low capacitance ESD protection continued at roughly the same level in Q1 as in Q4. One highlight was that the number of Praetorian design went double on the number in Q4. We also secured five new display controller design ones in Q1.

Finally, I would like to touch on our thoughts about the use of our cash, something that we are frequently asked about. First, while we have been generating cash for the last several years, the future growth is sufficiently rapid and some of our cash will be consumed as we invest in additional working capital. The second requirement for cash is having a reserve in case of a severe economic or industry downturn such as the one that occurred at the beginning of this decade.

At that time, we have to do several equity offerings to provide for our cash needs resulting in significant delusion for existing shareholders. One of the things that give us the credibility needed to build relationships with leaders in the in markets we serve is our solid balance sheet. We need to maintain a larger net cash position to ensure that we do not undermine that credibility.

Finally, the best opportunities for our company to improve its market position often present themselves in times of economic uncertainty. For that reason we want to preserve maximum strategic flexibility at this point in time.

Now, let me turn the call over to Kevin.

Kevin J. Berry

We are presenting our fiscal 2009 Q1 results on a GAAP basis and also using non-GAAP measures. Our non-GAAP measures excludes stock compensation expenses and Arques acquisition cost and use of cash base with tax rate where under GAAP we include stock compensation and Arques acquisition expenses in determining use and effective tax rate which differs from the tax which we actually pay.

First on a GAAP basis, revenue for Q1 of $14.1 million was at the low end of our guidance but up 8% compared to $13.1 million in Q1 of last year. Gross margin for Q1 at 33.6% was above the high end of our guidance mainly due to product mix and cost reduction, an increase of 31.1% last year. EPS for Q1 was a loss of $0.04 compared to a loss of $0.05 in Q1 of last year and was at the low end of our guidance.

The increase was mainly due to higher gross margins and a lower effective tax rate partially offset by higher research and development expenses. Next, non-GAAP revenue for Q1 was also $14.1 million. Gross margin for Q1 is 34.2% was above the high end of our guidance mainly due to product mix, cross reduction, an increase from 31.9% last year. Operating expenses were $5.6 million, an increase of 8% over Q1 of last year. The increase was mainly due to increased R&D expenses for the zero interphase display controller products.

ASPs declined by 8% year-on-year based on a constant mix below recent trend of 12%. Cash in short term investment of $52.1 million at the end of Q1 was up from $51.6 million at the end of Q4 and up $4 million last year. Operating cash flow was about $400,000. Net receivables were $5.5 million and DSO was 35 down from 38 in Q4.

Net inventory was $6.8 million and turns were $5.7, the same at the end of Q4. Our actual taxes payable in Q1 was $31,000 for our non-GAAP guidance expect this amount in Q2 as well. As we look at Q2 representing our guidance on a GAAP basis and also using non-GAAP measures. Our non-GAAP measures excludes stock compensation expenses and Arques acquisition cost and use of cash base as tax rate or under GAAP will include stock compensation and Arques acquisition expenses and use an effective tax rate of 20%.

GAAP revenue is expected to be in the range $15 million to $17.5 million. Gross margin was expected to be between 32% and 33%. EPS is expected to be between the loss of $0.07 and a loss of $0.04. Diluted shares outstanding are expected to be between $23.4 million and $23.5 million. Non-GAAP revenue is expected to be in the range of $15 million to $17.5 million. Gross margin is expected to be between 32.5% and 33.5%. EPS is expected to be between the loss of $0.04 and a loss of $0.01.

We expect margins to decline sequentially due to product mix. We also expect margins to increase beginning in Q3. Regarding the balance sheet for Q2, we expect to have slightly positive operating cash flow and expect the DSO to be higher. Inventory turns are expected to increase. Looking at the full fiscal year 2009 revenue and both the GAAP and non-GAAP basis, we expect protection revenue to grow by between 7% and 12%. Display controller revenue to be as much as 10% of total revenue and total revenue to grow to $67 million to $73 million.

We expect GAAP gross margin for the year to be between 34.5% and 35.5% and non-GAAP gross margin to be between 35% and 36% into the rest of year above that. Although we will be investing up to $5 million in the display controller and diversified protection R&D, we expect GAAP EPS to be a profit of between $0.01 and $0.06 and non-GAAP EPS to grow by up to 100% to between $0.10 and $0.16. We expect the operating cash flow to be in the range of $3 million to $6 million.

Now, let me turn the call back over to Bob.

Robert Dickinson

Before we move on to questions, I would like to mention that we will be holding our annual shareholder meeting on August 21 and we hope to see many of you there. We will now open the call to your questions.

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