projections about the industry in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. These forward looking statements are made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report under the section entitled "Risk Factors" in Item 1A of Part II. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. The U.S. Securities and Exchange Commission has defined critical accounting policies as those that are most important to the portrayal of our financial condition and results and also require us to make the most difficult, complex and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Based upon this definition, our most critical policies include revenue recognition, inventories, stock-based compensation, legal matters, goodwill and long-lived asset impairment and income taxes. We also have other key accounting policies that either do not generally require us to make estimates and judgments that are as difficult or as subjective or they are less likely to have a material effect on our reported results of operations for a given period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. In addition, if these estimates or their related assumptions change in the future, it could result in material expenses being recognized on the consolidated statements of operations. There have been no significant changes in our critical accounting estimates during the three months ended April 5, 2009 as compared with the critical accounting estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended January 4, 2009.

Results of Operations

                                                            Three Months Ended
                                           (a)          (b)          %          (c)          %
                                         Apr. 5,      Jan. 4,      change     Apr. 6,      change
                                           2009         2009       (a/b)        2008       (a/c)
 Net revenues                           $ 48,459     $ 52,786        (8 %)   $ 54,756       (12 %)
 Gross margin                           $ 27,674     $ 31,188       (11 %)   $ 32,018       (14 %)
 % of net revenues                            57 %         59 %                    58 %
 Research and development               $ 16,393     $ 14,851        10 %    $ 16,709        (2 %)
 % of net revenues                            34 %         28 %                    31 %
 Selling, general, and administrative   $ 13,490     $ 15,714       (14 %)   $ 16,780       (20 %)
 % of net revenues                            28 %         30 %                    31 %
 Tax provision                          $  1,187     $ 11,688       (90 %)   $    285       316 %
 % of net revenues                             2 %         22 %                     1 %

Net Revenues
Net revenues were $48.5 million for the first quarter of 2009, down 8% from the fourth quarter of 2008 and down 12% from first quarter of 2008. Net revenues decreased between the first quarter of 2009 and the fourth quarter of 2008 due to a 13% decrease in the overall average selling price (ASPs) which was partially offset by a 3% increase in the number of units shipped. Flash unit shipments increased 8%, which was more than offset by a decline of 27% in the corresponding ASP for Flash. This decrease in ASP was the result of a change in product mix with the increased unit shipments coming from lower priced commercial products. Quarterly net revenues decreased 12% from the first quarter of 2008 due to a 2% decrease in the number of units shipped coupled with a 13% decrease in overall ASPs. Unit volumes and ASP levels fluctuate principally because of changes in the mix of products sold. Sales of Flash products comprised approximately 24% of net revenues in the first quarter of 2009 compared with approximately 28% in the fourth quarter of 2008 and 23% in the first quarter of 2008.
Gross Margin
Gross margin was 57% for the first quarter of 2009 compared with 59% for the fourth quarter of 2008 and 58% for the first quarter of 2008. The decrease in gross margin in the first quarter of 2009 was primarily a result of the Company incurring net charges of $2.1 million during the quarter for excess and slow moving inventories and lower of cost or market issues, including a charge of $1.5

million associated with certain low yield wafer issues. Margins were also negatively affected by negative overhead variances largely as a result of fixed overhead costs and lower production volumes during the first quarter. This was partially offset by royalty revenue recognized during the quarter of approximately $1.0 million.
We strive to reduce costs by improving wafer yields, negotiating price reductions with suppliers, increasing the level and efficiency of our testing and packaging operations, achieving economies of scale by means of higher production levels and increasing the number of die produced per wafer, principally by shrinking the die size of our products. No assurance can be given that these efforts will be successful. Our capability to shrink the die size of our FPGAs is dependent on the availability of more advanced manufacturing processes. Due to the custom steps involved in manufacturing antifuse and (to a lesser extent) Flash FPGAs, we typically obtain access to new manufacturing processes later than our competitors using standard manufacturing processes. Research & Development (R&D)
R&D expenditures were $16.4 million, or 34% of net revenues for the first quarter of 2009 compared with $14.9 million, or 28% of net revenues for the fourth quarter of 2008 and $16.7 million, or 31% of net revenues for the first quarter of 2008. R&D spending increased in the first quarter of 2009 compared with the fourth quarter of 2008 due to increases in payroll taxes, outsourced engineering charges and a reduction in grant reimbursements. Recognition of stock-based compensation expense under SFAS 123R was $0.9 million for the three month period ended April 5, 2009, compared with $1.0 million for the fourth quarter of 2008 and $1.0 million for the first quarter of 2008. Selling, General and Administrative (SG&A) SG&A expenses were $13.5 million, or 28% of net revenues for the first quarter of 2009 compared with $15.7 million, or 30% of net revenue for the fourth quarter of 2008 and $16.8 million, or 31% of net revenues for the first quarter of 2008. SG&A expenses decreased in the first quarter of 2009 compared with fourth quarter of 2008 due to declines in bonus and commission expenses, travel, professional and outside service costs. SG&A expenses decreased 20% in the first quarter of 2009 compared with the first quarter of 2008. SG&A expenses for first quarter 2008 contained costs associated with the Company's stock option investigation and restatement of $1.6 million, including $1.0 million of compensation expenses associated with expired options. Recognition of stock-based compensation expense under SFAS 123R was $0.6 million for the three month period ended April 5, 2009, compared with $1.4 million for the fourth quarter of 2008 and $1.0 million for the first quarter of 2008. Tax Provision
The provision for income taxes was based on an annual effective tax rate calculated in compliance with SFAS 109 and APB No. 28. The annual effective rate was calculated based on our expected level of profitability and includes the usage of state tax credits. During the first quarter of fiscal 2009, the Company reported a tax provision of $1.2 million on a first quarter pre-tax loss of $1.8 million, compared with a $285,000 tax provision on pretax income of $461,000 for first quarter of fiscal 2008. The difference in the tax provisions is primarily due to a discrete item related to new California legislation in 2009 and variability in projected earnings.
For the three months ending April 5, 2009, the difference between the provision for income taxes that would be derived by applying the statutory rate to our income before tax and the income tax provision actually recorded is due primarily to the effect of non-deductible SFAS 123(R) stock-based compensation expenses, the state composite tax rate, and the recognition and derecognition of valuation allowance against certain deferred tax assets, including tax credits. To the extent our level of profitability changes during the year, the effective tax rate will be revised to reflect these changes.
For the three months ended April 6, 2008, the difference between the provision for income taxes that would be derived by applying the statutory rate to our income before tax and the income tax provision actually recorded is primarily due to the effect of non-deductible SFAS 123(R) stock-based compensation expenses which is partially offset by tax credits.
Our tax provision for 2008 was $13.8 million based on income before income taxes of $2.1 million of which an additional $11.5 million of tax provision was recorded in the fourth quarter of 2008. The difference between the effective tax rate and the statutory tax rate is primarily due to recognition of a valuation allowance of $12.7 million against a portion of the Company's deferred tax assets, non-deductible stock-based compensation partially offset by research tax credits and state tax benefits. The increase in the valuation allowance results from uncertainties surrounding the nature and timing of the taxable income required to realize certain tax credits and net operating loss carryforwards.

The "American Recovery and Reinvestment Act of 2009" (Recovery Act) was signed into law on February 17, 2009, which (among other things) extended the ability to claim additional first year depreciation, extended the ability to trade bonus and accelerated depreciation for otherwise deferred tax credits, and reduced the limitation on remuneration paid to executives to $500,000 from $1 million. We do not expect this law to affect our 2009 effective tax rate.
On February 20, 2009, California also enacted new legislation, which, among other things, provides for the election of single factor apportionment formula beginning in 2011. The effect of the new legislation resulted in the Company recording $160,000 of additional tax expense as a discrete item, increasing the effective tax rate in the first quarter of 2009.
Our net deferred tax assets were $25.1 million at April 5, 2009. We continue to assess the recoverability of the deferred tax assets on an ongoing basis. If we subsequently conclude that it is more likely than not that all or a portion of the deferred tax assets will not be recovered, an additional valuation allowance against deferred tax assets will be necessary. Our income tax expense recorded in the future will be increased to the extent of offsetting increases in our valuation allowance.
Financial Condition, Liquidity, and Capital Resources Our total assets were $340.4 million as of the end of the first quarter of 2009 compared with $343.3 million as of the end of the fourth quarter of 2008. The following table sets forth certain financial data from the condensed consolidated balance sheets expressed as the percentage change from January 4, 2009 to April 5, 2009.

                                                    As of                 As of
In thousands                                     Apr. 5, 2009          Jan. 4, 2009          $ change         % change
Cash and cash equivalents, short and long
term investments                                $    139,872          $    146,557          $ (6,685 )            (5 %)
Accounts receivable, net                        $     21,765          $     11,596          $ 10,169              88 %
Inventories                                     $     56,030          $     60,630          $ (4,600 )            (8 %)

We evaluate indicators of impairment during our review of our investment portfolio. With respect to determining an other-than-temporary impairment charge, our evaluation includes a review of:
• The length of time and extent to which the market value of the investment has been less than cost.

• The financial condition and near-term prospects of the issuer, including any specific events that may influence the operations of the issuer.

• Our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

In light of the bankruptcy filing by Lehman Brothers, we concluded that our investment in Lehman Brothers' corporate bonds is other-than-temporarily impaired and therefore wrote down the investment in the third quarter of 2008 to its fair market value. The impairment charge of approximately $0.9 million was included in interest income and other, net on our consolidated statement of operations for the year ended January 4, 2009. There were no impairment charges relating to investments for fiscal 2007, 2006 or the three months ended April 5, 2009.
Excluding the effect of the Lehman Brothers bond, the Company's investment portfolio reflected net unrealized losses of $1.6 million as of April 5, 2009 and $1.4 million as of January 4, 2009. Although the current credit environment continues to be extremely volatile and uncertain, we do not believe that sufficient evidence exists at this point in time to conclude that any of our remaining investments have experienced an other-than-temporary impairment as of the first quarter of 2009. We continue to monitor our investments closely to determine if additional information becomes available that may have an adverse effect on the fair value and ultimate realizability of our investments.
Accounts receivable at April 5, 2009 increased 88% compared with January 4, 2009. This increase was largely due to an unusually low accounts receivable balance as of the end of fourth quarter 2008 as a result of a two week holiday shutdown in December resulting in lower shipments. Days sales outstanding was 41 days as of the first quarter of 2009 compared with days sales outstanding of 20 days as of the fourth quarter 2008.

Our net inventories were $56.0 million as of the first quarter of 2009 compared with $60.6 million at the end of 2008. This resulted in inventory days decreasing from 256 days at the end of 2008 to 246 days at the end of the first quarter of 2009. Net inventory decreased by $4.6 million due primarily to increased shipment of the Flash related ProASIC3 product family and a concerted effort to reduce our wafer starts for Flash products to the lowest levels practicable. We will continue to restrict Flash wafer starts based on inventory levels and forecast sales of Flash products. However, in order to preserve our relationships with our foundries, the Company must continue to build certain minimum levels of Flash products during 2009 and thereafter, so an extended period of time will probably be necessary in order to draw down inventory levels closer to historical norms. We believe our Flash products are still attractive to our targeted customer base. We continue to focus our efforts on growing the Flash business and are aggressively marketing our Flash products in an effort to reduce our inventory. This may include certain promotional pricing for large volume orders (sometimes below our cost), which may negatively affect our gross margins. We are also monitoring market trends and significant events that may have an adverse effect on the carrying value of our inventory. Based on the information available during the first quarter of 2009, we incurred net charges of $2.1 million for excess and slow moving inventories and lower of cost or market issues. This includes a charge of $1.5 million associated with certain low yield wafer issues. If our business outlook changes in the future or if the current economic downturn continues or worsens, the Company may be required to establish reserves for a portion of the Flash inventory which could have a materially adverse affect on our business, financial condition, and/or results of operations.

                                                              Three Months Ended
 In thousands                                           Apr. 5, 2009     Apr. 6, 2008
 Net cash (used in) provided by operating activities    $    (6,494 )    $      3,522
 Net cash provided by (used in) investing activities    $       878      $       (700 )
 Net cash provided by (used in) financing activities    $     2,013      $    (24,114 )

Cash used in operating activities was $6.5 million for the three months ended April 5, 2009. Uses of cash included a net loss of $3.0 million, an increase in accounts receivable of $10.2 million and in prepaid expenses and other current assets of $1.0 million and a decrease in accounts payable, accrued compensation and employee benefits, and other accrued liabilities of $9.7 million. These uses of cash were partially offset by cash provided by operating activities relating to non-cash adjustments for depreciation and stock based compensation costs of approximately $5.2 million, decreases in inventories of $4.6 million, decreases in other assets of $1.2 million and an increase in deferred income on sales to distributors of $6.2 million.
Capital expenditures of $2.1 million were offset by net sales and maturities of available-for-sale securities of $2.9 million which resulted in net cash provided by investing activities of approximately $0.9 million for the three months ended April 5, 2009. Net cash provided by financing activities of $2.0 million for the three months ended April 5, 2009 relates mainly to issuance of common stock under employee stock plans net of tax withholdings.
Cash provided by operating activities was $3.5 million for the three months ended April 6, 2008. Cash was provided by net income of $0.2 million, non-cash adjustments relating to depreciation, amortization and stock based compensation costs of approximately $4.8 million, an increase in accounts payable, accrued compensation and employee benefits, and other accrued liabilities of $3.6 million and an increase in deferred income to distributors of $6.6 million. These sources of cash were partially offset by an increase in accounts receivable of $8.2 million, an increase inventory of $1.7 million and an increase in other assets of $2.7 million. Net cash used by investing activities was $0.7 million. Purchases of property and equipment of $5.4 million was partially offset by net sales and maturities of available-for-sale securities of $5.1 million. Net cash used by financing activities of $24.1 million for the first three months of fiscal 2008 relates mainly to cash used to repurchase stock of $24.8 million partially offset by issuance of common stock under employee stock plans of $1.0 million.
We currently meet all of our funding needs for ongoing operations with internally generated cash flows from operations and with existing cash and short-term and long-term investment balances. We believe that existing cash, cash equivalents, and short-term and long-term investments, together with cash generated from operations, will be sufficient to meet our cash requirements for the next four quarters. A portion of available cash may be used for investment in or acquisition of complementary businesses, products, or technologies. Wafer manufacturers have at times demanded financial support from customers in the form of equity investments and advance purchase price deposits, which in some cases have been substantial. If we require additional capacity, we may be required to incur significant expenditures to secure such capacity. Impact of Recently Issued Accounting Standards In the first quarter of 2009, we adopted SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R") as amended by FASB staff position FSP
141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies." This FSP provides additional guidance and disclosure requirements regarding the recognition and measurement

of contingent assets acquired and contingent liabilities assumed in a business combination where the fair value of the contingent assets and liabilities cannot be determined as of the acquisition date. SFAS 141R is applicable to business combinations on a prospective basis beginning in the first quarter of 2009. The effect of the adoption of SFAS 141R on our consolidated financial statements will depend on future business combination transactions, if any. We did not complete any business combinations in the first quarter of 2009.
In April 2008 the FASB issued FSP No. 142-3, "Determination of the Useful Life of Intangible Assets", ("FSP 142-3"), which amends the guidance about estimating the useful lives of recognized intangible assets and requires additional disclosures related to renewing or extending the terms of recognized intangible assets under SFAS 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). FSP 142-3 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. The adoption of FSP 142-3 did not have a material impact on our consolidated financial statements in the first quarter of 2009.
In February 2008, the FASB issued FSP 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"), which provided for a one year deferral of the effective date of SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, in the first quarter of 2009, we adopted SFAS No. 157 for non-financial assets and non-financial liabilities. The adoption of SFAS 157 for non-financial assets and non-financial liabilities did not have a significant impact on our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position No. 157-4 ("FSP 157-4"), which provides additional guidance on measuring fair value in accordance with FASB No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability has significantly decreased. FSP 157-4 shall be effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP 157-4 is not expected to have a significant impact on our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position No. 115-2 ("FSP 115-2") and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments" ("FAS 124-2"). FSP 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP 115-2 and FAS 124-2 are effective for us beginning in the second quarter of fiscal year 2009. The Company does not expect the adoption of FSP 115-2 and FAS 124-2 to have a significant impact on its financial statements.
In April 2009, the FASB issued FASB Staff Position No. 107-1 ("FSP 107-1") and APB 28-1 ("APB 28-1"), which amends SFAS 107, "Disclosures about Fair Value of Financial Instruments" and APB 28 to require disclosures about the fair value of financial instruments for interim reporting periods. FSP 107-1 and APB 28-1 does not change the accounting treatment for these financial instruments and is effective for us beginning in the second quarter of fiscal year 2009. Item 3. Quantitative and Qualitative Disclosures about Market Risk As of April 5, 2009, our investment portfolio consisted primarily of asset backed obligations, corporate bonds, floating rate notes, and federal and municipal obligations. The principal objectives of our investment activities are to preserve principal, meet liquidity needs, and maximize yields. To meet these objectives, we invest excess liquidity only in high credit quality debt securities with average maturities of less than two years. We also limit the percentage of total investments that may be invested in any one issuer. Corporate investments as a group are also limited to a maximum percentage of our investment portfolio.
Our investments are subject to interest rate risk. An increase in interest rates could subject us to a decline in the market value of our investments. These risks are mitigated by our ability to hold these investments for a period of time sufficient to recover the carrying value of the investment which may not be until maturity. A hypothetical 100 basis point increase in interest rates compared with interest rates at April 5, 2009, and January 4, 2009, would result in a reduction of approximately $1.1 million and $1.2 million in the fair value of our available-for-sale debt securities held at April 5, 2009, and January 4, 2009, respectively.
In addition to interest rate risk, we are subject to market risk on our investments. We invest excess liquidity only in securities of A, A1, or P1 grade or better at the time of initial investment. Subsequent to purchasing these securities we may, from time to time, experience a downgrade in the ratings of our securities. When securities are downgraded, we reassess the securities and . . .