A provision for income tax of $19,000 has been recorded for the three month period ended March 31, 2009, compared to a provision of $77,000 for the same period in 2008.  Income tax expense for the three months ended March 31, 2009 was a result of applying the estimated annual effective tax rate to cumulative loss before taxes adjusted for certain discrete items which are fully recognized in the period they occur.  For the same period in 2008, the income tax expense was a result of applying the estimated annual effective tax rate to cumulative income before taxes adjusted for certain discrete items which are fully recognized in the period they occur.

 

The Company has determined that negative evidence supports the need for a full valuation allowance against its net deferred tax assets at this time. The Company will maintain a full valuation allowance until sufficient positive evidence exists to support a reversal of the valuation allowance.

 

The Company adopted FIN 48, regarding accounting for uncertain tax benefits, at the beginning of calendar year 2007. As of March 31, 2009, the Company had unrecognized tax benefits of approximately $2.2 million of which none, if recognized, would result in a reduction of the Company’s effective tax rate.  There were no material changes in the amount of unrecognized tax benefits during the three months ended March 31, 2009. Future changes in the balance of unrecognized tax benefits will have no impact on the effective tax rate as they are subject to a full valuation allowance. The Company does not believe the amount of its unrecognized tax benefits will significantly change within the next twelve months.

The Company is subject to taxation in the United States and various states and foreign jurisdictions.  The tax years 1998 through 2008 remain open to examination by the federal and most state tax authorities due to certain acquired net operating loss and overall credit carryforward positions.

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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Report on Form 10-Q contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our expectations, hopes, intentions, beliefs or strategies regarding the future.  Such forward-looking statements also include statements regarding expected synergies of other effects of our acquisition of Oxford, our future gross margin, our future research and development expenses, our future selling, general and administrative expenses, our ability to meet our capital requirements for the next twelve months, our future capital requirements, current high turns fill requirements and our anticipation that sales to a small number of customers will account for a significant portion of our sales.  Actual results could differ materially from those projected in such forward-looking statements.  Factors that could cause actual results to differ include unexpected changes in the mix of our product sales, unexpected pricing pressures, unexpected capital requirements that may arise due to other possible acquisitions or other events, unanticipated changes in the businesses of our suppliers, and unanticipated cash shortfalls.  Actual results could also differ for the reasons noted under the sub-heading “Factors That May Affect Future Operating Results” in Item 1A, Risk Factors in Part II of this report on Form 10-Q and in other sections of this report on Form 10-Q.  All forward-looking statements included in this Form 10-Q are based on information available to us on the date of this report on Form 10-Q, and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements.

The following discussion should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

OVERVIEW

PLX Technology, Inc. ("PLX" or the "Company"), a Delaware corporation established in 1986, designs, develops, manufactures, and sells integrated circuits for interconnect applications.  These interconnect products are a fundamental building block for standards-based subsystems.  We market our products to major customers that sell electronic systems in the server, storage, communications, industrial, and consumer markets.

Products based on current serial interconnect technology standards such as PCI Express, USB, SATA, and Ethernet provide capabilities to customers that previous parallel technologies did not.  They offer the ability for systems to scale in performance and capabilities, and allow for a standards-based building block approach that was not feasible in the past.  As these serial technologies have become mainstream, we have been able to offer differentiated products based on standard ports that provide scalability and performance at a high-volume price point.

PLX is the market share leader in PCI Express switches and bridges.  We recognized the trend towards this serial, switched interconnect technology early, launched products for this market long before our competitors, and have deployed multiple generations of products to serve a general-purpose, horizontal market.  In addition to enabling customer differentiation through our product features, the breadth of our product offering is in itself a significant benefit to our customers, since we can serve the complete needs of our customers with cost-effective solutions tailored to the specific subsystem requirements.  Our long experience with PCI Express connectivity products enables PLX to deliver reliable devices that operate under non-ideal real-world system environments.

PLX is building on our broad, general purpose interconnect success, and in particular our success in enterprise storage, by focusing on a rapidly growing vertical market: Consumer/Small Office Home Office (SOHO) storage.  On January 2, 2009, we completed the acquisition of Oxford Semiconductor, Inc. (Oxford), a leading supplier of semiconductor components for the consumer and SOHO markets. Oxford has brought to market several generations of leadership products that allow storage customers to attach their disk subsystems directly to a computer through USB direct-attached storage (DAS), or to attach them through local area network-attached storage (NAS).  We identified the shift from parallel to serial hard disk connectivity early, and benefited from this trend to be become the leader in high performance consumer/SOHO storage connectivity.   Our products provide a rich variety of connectivity options, including USB, SATA, eSATA, FireWire, and Ethernet, and offer capabilities such as RAID and data encryption at industry leading performance levels.

PLX offers a complete solution consisting of semiconductor devices, software development kits, hardware design kits, operating system ports, and firmware solutions that enable added-value features in our products.  We differentiate our products by offering higher performance and lower power, and by enabling a richer customer experience based on proprietary features that enable system-level customer advantages, and by providing capabilities that enable a customer to get to market more quickly.

 

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We utilize a “fabless” semiconductor business model whereby we purchase wafers or packaged and tested semiconductor devices from independent manufacturing foundries.  The advantage of this approach, in our opinion, allows us to focus on defining, developing and marketing our products and eliminates the need for us to invest large amounts of capital in manufacturing facilities and work-in-process inventory.

 

We rely on a combination of direct sales personnel, distributors and manufacturers’ representatives throughout the world to sell a significant portion of our products.  We pay manufacturers’ representatives a commission on sales while we sell products to distributors at a discount from the selling price.

 

The time period between initial customer evaluation and design completion can range from six to twelve months or more.  Furthermore, there is typically an additional six to twelve month or greater period after design completion before a customer orders volume production of our products.  Due to the variability and length of these design cycles and variable demand from customers, we may experience significant fluctuations in new orders from month to month.  In addition, we typically make inventory purchases prior to receiving customer orders.  Consequently, if anticipated sales and shipments in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our results for that quarter and potentially future quarters would be materially and adversely affected.

Our long-term success will depend on our ability to successfully introduce new products.  While new products typically generate little or no revenues during the first twelve months following their introduction, our revenues in subsequent periods depend upon these new products.  Due to the lengthy sales cycle and additional time before our customers request volume production, significant revenues from our new products typically occur twelve to twenty-four months after product introduction.  As a result, revenues from newly introduced products have, in the past, produced a small percentage of our total revenues in the year the product was introduced.  See –“Our Lengthy Sales Cycle Can Result in Uncertainty and Delays with Regard to Our Expected Revenues” in Item 1A, Risk Factors, in Part II of this report on Form 10-Q.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND MARCH 31, 2008

Net Revenues

The following table shows the revenue by product type (in thousands) and as a percentage of net revenues:

 

		Three Months Ended
		March 31,
		2009				2008
Legacy products		$	7,078			$	12,190
As a percentage of revenues			43.0	%			53.6	%
PCI Express products		$	6,195			$	10,565
As a percentage of revenues			37.6	%			46.4	%
Storage products		$	3,184			$	-
As a percentage of revenues			19.4	%			-

Net revenues consist of product revenues generated principally by sales of our semiconductor devices.  Net revenues for the three months ended March 31, 2009 were $16.5 million, a decrease of 27.7% from $22.8 million for the same period in 2008. The decrease was due to lower sales as a result of the weakened global economy and economic uncertainty, partially offset by revenues generated from the Storage and Legacy products acquired as part of the Oxford acquisition.

For the three months ended March 31, 2009, sales to Excelpoint Systems Pte Ltd and Promate Electronics Co., Ltd accounted for 21% and 14%, respectively, of net revenues. For the same period in 2008, Excelpoint Systems Pte Ltd, Answer Technology, Inc. and Avnet, Inc. accounted for 30%, 12% and 12%, respectively, of net revenues. For both of these periods, no other individual direct customer or distributor represented greater than 10% of net revenues.

 

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In the fourth quarter of 2008 and the first quarter of 2009 we experienced a broad decrease in order rates across most product lines, markets and end customers, and we expect second quarter of 2009 sales to modestly expand compared to the first quarter of 2009. Future demand for our products is uncertain and is highly dependant on general economic conditions and the demand for products that contain our chips. Customer demand for semiconductors can change quickly and unexpectedly.  Our revenue levels have been highly dependent on the amount of new orders that are received for products to be delivered to the customer within the same quarter, also called “turns fill” orders.  Because of the long cycle time to build our products and our lack of visibility into demand when turns fill orders are high, it is difficult to predict which products to build to match future demand.  We believe the current high turns fill requirements will continue indefinitely.  The high turns fill orders pattern, together with the uncertainty of product mix and pricing, makes it difficult to predict future levels of sales and profitability and may require us to carry higher levels of inventory.

Gross Margin

Gross margin represents net revenues less the cost of revenues.  Cost of revenues includes the cost of (1) purchasing semiconductor devices or wafers from our independent foundries, (2) package, assembly and test services from our independent foundries, assembly contractors and test contractors and (3) our operating costs associated with the procurement, storage, and shipment of products as allocated to production.

 

		Three Months Ended
		March 31,
		2009				2008
		in thousands
Gross profit		$	8,946			$	13,843
Gross margin			54.4	%			60.8	%

Gross margin for the three months ended March 31, 2009 decreased by 35.4% compared to the same period in 2008. The decrease was primarily due to the lower margins of the products acquired in the Oxford acquisition as well as overall product mix. The Oxford product margin was lower than expected as a result of an unplanned increase in demand of one of the Storage products.

Future gross profit and gross margin are highly dependent on the product and customer mix, provisions and recoveries of excess or obsolete inventory, the position of our products in their respective life cycles and specific manufacturing costs.  Accordingly, we are not able to predict future gross profit levels or gross margins with certainty.

Research and Development Expenses

Research and development (“R&D”) expenses consist primarily of tape-out costs at our independent foundries, salaries and related costs, including share-based compensation and expenses for outside engineering consultants.

 

		Three Months Ended
		March 31,
		2009				2008
		in thousands
R&D expenses		$	7,903			$	6,498
As a percentage of revenues			48.0	%			28.6	%

R&D expenses increased by $1.4 million or 21.6% in the three months ended March 31, 2009 compared to the same period in 2008. The increase in R&D in absolute dollars and as a percentage of revenue is due primarily to increases in R&D spending on compensation and benefit expenses of $0.8 million, engineering tools of $0.6 million and tape-out related costs of $0.4 million related to new activities assumed as a result of the acquisition of Oxford, partially offset by the decrease in share-based compensation expenses of $0.4 million.

We believe continued spending on research and development to develop new products is critical to our success. While we expect to achieve synergies after the integration of Oxford, R&D expenses in the second quarter of 2009 are expected to increase due to significant stock compensation costs related to our tender offer.  Refer to Note 2 for additional information on the tender offer.  We anticipate that R&D expenses over time will fluctuate due to the timing of projects and tape-out related activities.

 

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Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and related costs, including share-based compensation, commissions to manufactures’ representatives and professional fees, as well as trade show and other promotional expenses.

		Three Months Ended
		March 31,
		2009				2008
		in thousands
SG&A expenses		$	6,895			$	6,453
As a percentage of revenues			41.9	%			28.4	%

SG&A expenses increased by $0.4 million or 6.9% in the three months ended March 31, 2009 compared to the same period in 2008. The increase in SG&A in absolute dollars and as a percentage is due primarily to increased salaries and related costs associated to the acquisition of Oxford.

While we expect SG&A expenses in absolute dollars to decrease modestly in future periods as synergies are achieved after the integration of Oxford, SG&A expenses in the second quarter of 2009 are expected to increase due to significant stock compensation costs related to our tender offer.  Refer to Note 2 for additional information on the tender offer.

Acquisition Related Costs

 

		Three Months Ended
		March 31,
		2009				2008
		in thousands
Deal costs		$	333			$	-
Severance costs			2,020				-
Lease impairment			277				-
		$	2,630			$	-

During the three months ended March 31, 2009 we recorded $2.6 million in acquisition related costs associated with the January 2, 2009 acquisition of Oxford. Deal costs related primarily to outside legal costs. Severance costs were the result of layoffs due to the redundancy issue that arose as a result of the acquisition. In addition, we acquired a building lease in Milpitas, California which was vacated upon acquisition.  As a result, we took an impairment charge of the operating lease. See Note 10 of the condensed consolidated financial statements for additional information.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets consists of amortization expense related to developed core technology, tradename and customer base acquired as a result of the Oxford acquisition in January 2009 and the developed core technology acquired in the HiNT Corporation acquisition in May 2003 and NetChip Technology, Inc. acquisition in May 2004.

		Three Months Ended
		March 31,
		2009				2008
		in thousands
Amortization of acquired intangible assets		$	854			$	241
As a percentage of revenues			5.2	%			1.1	%

Amortization of acquired intangible increased by $0.6 million or 254.4% in the three months ended March 31, 2009 compared to the same period in 2008. The 2008 amortization expense related to intangibles acquired in our prior acquisitions of HiNT and NetChip. The increase is due to the developed core technology, tradename and customer base acquired as a result of the acquisition of Oxford. See Note 8 to our condensed consolidated financial statements for additional information.

 

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Interest Income and Other, Net

		Three Months Ended
		March 31,
		2009				2008
		in thousands
Interest income		$	245			$	482
Interest Expense			(252	)			-
Other income			55				6
		$	48			$	488

Interest income reflects interest earned on cash, cash equivalents and short-term and long-term investment balances. Interest income for the three months ended March 31, 2009 decreased by $0.2 million or 49.2%, compared to the same period in 2008. The decrease was primarily due to lower cash and investment balances and interest rate fluctuations.

Interest expense of $0.3 million for the three months ended March 31, 2009 primarily consisted of interest recorded on the $14.2 million note associated with the acquisition of Oxford. We did not record interest expense for the same period in 2008.

Other income includes foreign currency translation gains and losses and other miscellaneous transactions. Other income may fluctuate significantly but we do not expect it to have material impact on our consolidated statements of operations.

Loss on Fair Value Remeasurement of Contingently Convertible Note Payable

As a part of the consideration for the Oxford acquisition, we recorded a liability for the contingent consideration due which, was recorded at fair value as of the acquisition date. Under FAS 141(R), we are required to remeasure the liability to fair value until the contingency is resolved and record the change in fair value in earnings.  The fair value of the note payable was based on 3.4 million shares with a stock price of $1.82, or $6.2 million. As of March 31, 2009, the closing stock price was $2.17, or $7.4 million. The loss on the fair value of the note remeasurement is the increase in fair value of the liability of $1.2 million. See Note 7 of the condensed consolidated financial statements for additional information on the contingent consideration arrangement.

 

Provision for Income Taxes

Income tax expense of $19,000 has been recorded for the three month period ended March 31, 2009, compared to provision of $77,000 for the same period in 2008.  Income tax expense for the three months ended March 31, 2009 was a result of applying the estimated annual effective tax rate to cumulative loss before taxes adjusted for certain discrete items which are fully recognized in the period they occur.  For the same period in 2008, the income tax expense was a result of applying the estimated annual effective tax rate to cumulative income before taxes adjusted for certain discrete items which are fully recognized in the period they occur.

 

We have determined that negative evidence supports the need for a full valuation allowance against our net deferred tax assets at this time. We will maintain a full valuation allowance until sufficient positive evidence exists to support a reversal of the valuation allowance.

 

We adopted FIN 48, regarding accounting for uncertain tax benefits, at the beginning of calendar year 2007. As of March 31, 2009, we have unrecognized tax benefits of approximately $2.2 million of which none, if recognized, would result in a reduction of our effective tax rate.  There were no material changes in the amount of unrecognized tax benefits during the three months ended March 31, 2009.  Future changes in the remaining balance of unrecognized tax benefits will have no impact on the effective tax rate as they are subject to a full valuation allowance. We do not expect that the amount of our unrecognized tax benefits will significantly change within the next twelve months.

 

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We are subject to taxation in the United States and various states and foreign jurisdictions.  The tax years 1998 through 2008 remain open to examination by the federal and most state tax authorities due to certain acquired net operating loss and overall credit carryforward positions.

Liquidity and Capital Resources

In summary, our cash flows were (in thousands):

		Three Months Ended
		March 31,
		2009				2008
Net cash provided by (used in) operating activities		$	(9,385	)		$	2,168
Net cash provided by (used in) investing activities			10,100				(3,266	)
Net cash (used in) financing activities			(125	)			(3,897	)
Effect of exchange rate fluctuations on cash and cash equivalents			(12	)			(19	)

We invest excess cash predominantly in debt instruments that are highly liquid, of high-quality investment grade, and predominantly have maturities of less than one year with the intent to make such funds readily available for operating purposes. As of March 31, 2009 cash, cash equivalents, short and long-term marketable securities were $41.6 million, a decrease of $5.5 million from $47.1 million at December 31, 2008.

Cash provided by (used in) operating activities primarily consists of net income (loss) adjusted for certain non-cash items including depreciation, amortization, share-based compensation expense, impairments, fair value remeasurements, provisions for excess and obsolete inventories, changes in pre-acquisition deferred tax balances, other non-cash items, and the effect of changes in working capital and other activities. Cash used in operating activities for the three months ended March 31, 2009 of $9.4 million consisted primarily of net loss of $10.5 million adjusted for non-cash items of $3.2, decreases in accounts payable of $1.9 million, accrued compensation and benefits of $1.3 million and other accrued expenses and liabilities of $0.8 million and an increase in other assets of $0.8 million due to an increase in software an IP licenses, partially offset by a decreases in inventory of $2.9 million and accounts receivable of $0.4 million. Cash provided by operating activities for the three months ended March 31, 2008 of $2.2 million consisted primarily of net income of $1.1 million adjusted for non-cash items of $1.5 million partially offset by increases in accounts receivable of $0.3 million and other assets of $0.3 million.

Cash provided by investing activities for the three months ended March 31, 2009 of $10.1 million was primarily due to the sales and maturities of investments (net of purchases of investments) of $6.0 million and cash acquired through the acquisition of Oxford of $4.4 million. Cash used in investing activities for the three months ended March 31, 2008 of $3.3 million was due to purchases of marketable securities (net of sales and maturities of investments) of $2.3 million and capital expenditures of $0.9 million. Capital expenditures have generally been comprised of purchases of engineering equipment, computer hardware, software, server equipment and furniture and fixtures.

Cash used in financing activities for the three months ended March 31, 2009 of $0.1 million was due to the payments made on capital lease obligations. Cash used in financing activities for the three months ended March 31, 2008 of $3.9 million was due to common stock repurchases.

The negative effect of exchange rates on cash and cash equivalents for the three months ended March 31, 2009 and 2008 was due to the weakening of the U.S. dollar against other foreign currencies.

As of March 31, 2009, we had the following significant contractual obligations and commercial commitments (in thousands):

 

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		Payments due in
						Less than				1-3				More than
		Total				1 Year				Years				3 Years
Operating leases - facilities and equipment		$	2,785			$	469			$	1,360			$	956
Capital leases - IP			2,850				1,200				1,650				-
Software licenses			5,787				2,875				2,912				-
Inventory purchase commitments			4,778				4,778				-				-
Total cash obligations		$	16,200			$	9,322			$	5,922			$	956

As a part of the Oxford acquisition Merger Agreement, we acquired all of the outstanding shares of capital stock of Oxford in exchange for 5,600,000 shares of common stock of PLX and a promissory note in the principal amount of $14,200,000 (the “Note”) that will be satisfied by either (i) the issuance of an additional 3,400,000 shares of common stock of PLX upon approval of PLX’s stockholders, or (ii) the repayment of the principal amount of the Note if such stockholder approval is not obtained by June 30, 2009.  Interest at the rate of 6% per annum, or approximately $0.3 million, is payable in cash whether the principal balance is satisfied in cash or in shares of our common stock.

We believe that our existing resources, together with cash generated from our operations will be sufficient to meet our capital requirements for at least the next twelve months.  Our future capital requirements will depend on many factors, including the inventory levels we maintain, the level of investment we make in new technologies and improvements to existing technologies and the levels of monthly expenses required to launch new products.  From time to time, we may also evaluate potential acquisitions and equity investments complementary to our technologies and market strategies.  To the extent that existing resources and future earnings are insufficient to fund our future activities, we may need to raise additional funds through public or private financings.  Additional funds may not be available or, if available, we may not be able to obtain them on terms favorable to us and our stockholders.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the condensed consolidated financial statements and accompanying notes. The U.S. Securities and Exchange Commission (“SEC”) has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.  Based on this definition, we have identified the critical accounting policies and judgments addressed below.  We also have other key accounting policies which involve the use of estimates, judgments and assumptions that are significant to understanding our results. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information presently available.  Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.

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.

 

We recognize revenue in accordance with Statements of Financial Accounting Standards (“SFAS”) No. 48, Revenue Recognition When Right of Return Exists. Revenue from product sales to direct customers and distributors 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.  At the end of each reporting period, the sufficiency of allowances for doubtful accounts is assessed based on the age of the receivable and the individual customer’s creditworthiness.

In the first quarter of 2009, we terminated all Oxford distributor agreements which offered its distributors price protection and stock rotation and estimated the reserve for residual rights from these agreements. We resigned a small number of the terminated distributors under contacts substantially similar to PLX’s distributor contracts. As of March 31, 2009, we offer pricing protection to two distributors whereby the Company supports the distributor’s resale product margin on certain products held in the distributor’s inventory. In general, we analyze current requests for credit in process, also known as ship and debits and inventory at the distributor to determine the ending sales reserve required for this program.  We also offer stock rotation rights to two distributors such that they can return up to a total of 5% of products purchased every six months in exchange for other PLX products of equal value. In general, we analyze current stock rotation requests and past experience, which has historically been insignificant, to determine the ending sales reserve required for this program. In addition, we have arrangements with a small number of customers offering a rebate program on various products.  We record rebates as a reduction of revenue under the guidelines of Emerging Issues Task Force (“EITF’) 01-9, Accounting for Consideration Given to a Customer (Including a Reseller of the Vendor’s Product). Reserves are reduced directly from revenue and recorded as a reduction to accounts receivable.

 

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Inventory Valuation

We evaluate the need for potential inventory provisions by considering a combination of factors, including the life of the product, sales history, obsolescence, and sales forecasts. Any adverse changes to our future product demand may result in increased provisions, resulting in decreased gross margin.  In addition, future sales on any of our previously written down inventory may result in increased gross margin in the period of sale.

Allowance for Doubtful Accounts

We evaluate the collectibility of our accounts receivable based on length of time the receivables are past due. Generally, our customers have between thirty to forty five days to remit payment of invoices. We record reserves for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected.  Once we have exhausted collection efforts, we will reduce the related accounts receivable against the allowance established for that receivable. We have certain customers with individually large amounts due at any given balance sheet date.  Any unanticipated change in one of those customers’ creditworthiness or other matters affecting the collectibility of amounts due from such customers could have a material adverse affect on our results of operations in the period in which such changes or events occur. Historically, our write-offs have been insignificant.

Goodwill

Our methodology for allocating the purchase price related to business acquisitions is determined through established valuation techniques. Goodwill is measured as the excess of the cost of the acquisition over the amounts assigned to identifiable tangible and intangible assets acquired less assumed liabilities. We have one operating segment and business reporting unit, the sales of semiconductor devices, and we perform goodwill impairment tests annually during the fourth quarter and between annual tests if indicators of potential impairment exist.

Long-lived Assets

We review long-lived assets, principally property and equipment and identifiable intangibles, for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to estimated future net undiscounted cash flows generated by the asset.  If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Share-Based Compensation

We recognize share-based compensation expense in accordance with SFAS No. 123(R), Share-Based Payment. We estimate the value of employee stock options on the date of grant using the Black-Scholes model. The determination of fair value of share-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 the actual and projected employee stock option exercise behaviors. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior.  Historically, we calculated our expected volatility assumption required in the Black-Scholes model by using a 50/50 blend of historical volatility and market-based volatility. However, due to the recent lack of available market data to calculate implied volatility, we began using 100% historical volatility during the fourth quarter of 2008. We estimate the amount of forfeitures at the time of grant and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

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Taxes

 

We account for income taxes using the asset and liability method.  Deferred taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. As of March 31, 2009, we carried a valuation allowance for the entire deferred tax asset as a result of uncertainties regarding the realization of the asset balance. We will maintain a full valuation allowance against our deferred tax assets until sufficient positive evidence exists to support a reversal of the valuation allowance.

 

Future taxable income and/or tax planning strategies may eliminate all or a portion of the need for the valuation allowance. In the event we determine we are able to realize our deferred tax asset, an adjustment to the valuation allowance may increase income in the period such determination is made.