FORM 10-Q

1.

Basis of Presentation

The accompanying unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods indicated.

The accompanying unaudited interim financial statements have been prepared in accordance with the instructions for Form 10-Q, and, therefore, do not include all information and footnotes necessary for a complete presentation of the financial position, results of operations, and cash flows for the Company, in conformity with accounting principles generally accepted in the United States of America. The Company has filed audited financial statements that include all information and footnotes necessary for such a presentation of the financial position, results of operations, and cash flows for the fiscal years ended September 30, 2005 and 2004, with the Securities and Exchange Commission. It is suggested that the accompanying unaudited interim financial statements be read in conjunction with the aforementioned audited financial statements. In the opinion of management, the unaudited interim financial statements reflect all adjustments (consisting of normal and recurring accruals) necessary to make the results of operations for the interim periods a fair statement of such operations. The results of operations for the interim period ended March 31, 2006 are not necessarily indicative of the results to be expected for the full fiscal year to end September 30, 2006.

2.

Inventories

A summary of inventories follows:

March 31,

2006

September 30,

2005

Raw materials

$

621,600 

$

776,400 

Work-in-process

2,228,100 

2,192,100 

Finished goods

2,191,200 

2,657,900 

$

5,040,900 

$

5,626,400 

3.

Shareholders' Equity

The Company issues common stock options to its employees, certain consultants, and certain of its board members. During fiscal 2006, the Company adopted Financial Accounting Standards Board ("FASB") Statement No. 123 (revised 2004) ("FAS 123 (R)"), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments, such as stock options granted to employees. The Company elected to apply FAS 123 (R) on a modified prospective method. Under this method, the Company is required to record compensation expense for newly granted options and (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Additionally, the financial statements for the prior interim periods and fiscal year do not reflect any adjusted amounts.

Quarter

Ended

Six Months

Ended

Net loss, as reported

$  (71,600)

$  (320,100)

SFAS No. 123 expense

24,100 

24,100 

Pro forma net loss

$  (95,700)

$  (344,200)

Basic and diluted net loss per share, as reported

$  (0.01)

$  (0.05)

Basic and diluted net loss per share, pro forma

$  (0.01)

$  (0.05)

4.

Loss Per Share

Basic loss per share is calculated by dividing net loss by the weighted average common shares outstanding during the period. Diluted loss per share reflects the net incremental shares that would be issued if dilutive outstanding stock options were exercised, using the treasury stock method. In the case of a net loss, no incremental shares would be issued because they are antidilutive. Stock options with exercise prices above the average market price during the period are also antidilutive.

No stock options were included in the computation of diluted loss per share for the quarter and six months ended March 31, 2006 and 2005 because the Company incurred a net loss.

5.

Income Taxes

Future tax benefits are subject to a valuation allowance when management is unable to conclude that its deferred income tax assets will more likely than not be realized from the results of operations. The ultimate realization of deferred income tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. Based on historical taxable income and projections for future taxable income over the periods in which the deferred income tax assets become deductible, management believes it more likely than not that the Company will not realize benefits of these deductible differences as of March 31, 2006.  Management has, therefore, established a valuation allowance against its net deferred tax assets as of March 31, 2006.

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Reported financial results may not be indicative of the financial results of future periods. All non-historical information contained in the following discussion constitutes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as "anticipates, appears, expects, intends, hopes, plans, believes, seeks, estimates, may, will," and variations of these words or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and uncertainties, including but not limited to operating results, new product introductions and sales, competitive conditions, customer demand, capital expenditures and resources, manufacturing capacity utilization, and intellectual property claims and defense. Factors that could cause actual results to differ materially are included in, but not limited to, those identified in "Item 1A - Risk Factors" in the Annual Report on Form 10-K for the Company's fiscal year ended September 30, 2005 and in any Quarterly Report on Form 10-Q for a prior quarter in the Company's fiscal year ending September 30, 2006 and in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in such Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may reflect events or circumstances after the date of this report.

Liquidity and Capital Resources

Cash Flows

Although the Company had a net loss of $2,500 for the six months ended March 31, 2006, it produced net cash of $581,400 from operations during the period. The Company used $175,700 to reduce accounts payable, while it generated $335,500 from the reduction of its inventories. The Company used $91,100 for capitalized software development costs. The Company also received a property tax refund of $45,000 during the six months ended March 31, 2006.

While the Company had a net loss of $320,100 for the six months ended March 31, 2005, it produced net cash of $44,200 from operations during this period. The Company used $172,700 to increase prepaid expenses and reduce accounts payable, and it generated $388,900 from the reduction of inventories. The Company used $460,300 on capital expenditures, mainly for the production of its new products, including $305,200 on the purchase of engineering design software. The Company used $103,200 for capitalized software development costs. The Company received $11,000 from the exercise of common stock options by a director.

Working Capital

Historically, due to order scheduling by our customers, up to 80% of the Company's quarterly revenues are often shipped in the last month of the fiscal quarter, so a large portion of the shipments included in quarter-end accounts receivable are not yet due per the Company's net 30-day terms. As a result, quarter-end accounts receivable balances are often at their highest point for the respective period.

Our investment in inventories has been significant and will continue to be significant in the future. However, during the past few years, we have been able to reduce our levels of inventories as we shift from more competitive second source products to proprietary sole source products. We seek to further streamline our inventories as we continue to shift to sole source proprietary products. Although high levels of inventory impact liquidity, the Company believes these costs are a less costly alternative to owning a wafer fabrication facility.

During fiscal 2005, the Company reduced its inventory by 11%, or $810,700, and during the six months ended March 31, 2006, the Company reduced its inventory by an additional 6%, or $335,500. The Company expects to continue its efforts to reduce inventory during fiscal 2006 and in future periods. The Company establishes reserves through periodic reviews of inventory on-hand, including lower-of-cost-or-market and excess analyses. For example, if a product type has unit costs higher than the average selling price or has more on-hand than it has sold or expects to sell, the Company provides a reserve. The Company believes its current reserve (approximately 28% of total gross inventories) provides a reasonable estimate of the recoverability of inventories. The Company also takes physical inventory write-downs for obsolete and slow-moving items when deemed necessary.

Expected Future Operating and Capital Needs

The Company will continue to evaluate future debt and equity financing opportunities; however, it feels the cost reductions implemented in the past few years have resulted in sufficient cash flow generated from operations to provide an adequate base of liquidity to fund future operating and capital needs. The Company's belief is based on the fact that, as of April 21, 2006, it held approximately $1.7 million in cash and cash equivalents. The Company believes it can cover its cash operating expenses using future revenues, while saving current cash reserves for future capital expenditures, such as mask tooling for new products. At current resource levels, the Company does not anticipate being able to take advantage of all the new product development opportunities it has identified. However, as it considers product development critical to its future success, the Company anticipates its research and development expenditures will continue to be a significant portion of its operating expenses.

New Accounting Pronouncements

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

Results of Operations

Revenues

The Company's net revenues for the quarter and six-month period ended March 31, 2006 increased by $217,100 or 26% and 316,200 or 17%, respectively, compared to the same periods of fiscal 2005. This increase is due to certain customers returning to their past order quantity rates after a slowdown in fiscal 2005. Due to shortages of finished goods inventory, the Company was unable to ship approximately $330,000 of its revenue backlog as of March 31, 2006. There were no shortages in the same period of fiscal 2005.

Expenses

The cost of revenues for the quarter and six-month period ended March 31, 2006 increased by $112,200 or 31% and $48,400 or 4%, respectively, compared to the same periods of fiscal 2005. This quarterly and six-month increase was the result of the increase in revenues. The cost of revenues did not increase as much as the revenues in the six-month period because 22% of the fiscal 2006 period's revenues were from items previously written-down to zero, compared to only 13% in the same period of fiscal 2005, which was partially offset by an increase to the inventory reserve of $250,000 for slow-moving and potentially excess items.

Research and development (R&D) expenditures for the quarter ended March 31, 2006 increased by $25,500 or 14% compared to the same quarter of fiscal 2005. This increase is mainly the result of expensing software development costs that were capitalized in fiscal 2005. R&D expenditures for the six months ended March 31, 2006 decreased by $43,900 or 11% compared to the same period of fiscal 2005. The decrease is mainly due to a reduction in staffing. New product development remains the primary focus for the Company.

Selling, general, and administrative (SG&A) expenditures for the quarter ended March 31, 2006 increased by $20,500 or 6% compared to the same quarter of fiscal 2005. This increase resulted from an increase in legal fees, the recording of stock-based compensation, and increases in outside consulting. However, for the six months ended March 31, 2006, SG&A expenditures decreased by $1,900 or 0.3% compared to the same period of fiscal 2005 due to general cost cutting efforts.

As a result of the increase in the gross margin, the Company's loss from operations for the quarter and six-month period decreased $58,900 or 77% and $314,400 or 96% compared to the same periods of fiscal 2005.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company conducts all of its transactions, including those with foreign suppliers and customers, in U.S. dollars. It is therefore not directly subject to the risks of foreign currency fluctuations and does not hedge or otherwise deal in currency instruments in an attempt to minimize such risks. Demand from foreign customers and the ability or willingness of foreign suppliers to perform their obligations to the Company may be affected by the relative change in value of such customer or supplier's domestic currency to the value of the U.S. dollar. Furthermore, changes in the relative value of the U.S. dollar may change the price of the Company's prices relative to the prices of its foreign competitors. The Company also does not hold any market risk sensitive instruments that are not considered cash under accounting principles generally accepted in the United States of America.

Item 4.

Controls and Procedures

Based upon an evaluation as of March 31, 2006, the Company's President and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There have been no changes in the Company's internal control over financial reporting that occurred during the Company's quarter ended March 31, 2006 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Part II - OTHER INFORMATION

Item 1.

Legal Proceedings

From time to time, the Company receives demands from various parties asserting patent claims. These demands are often not based on any specific knowledge of the Company's products or operations. Because of the uncertainties inherent in litigation, the outcome of any such claim, including simply the cost of a successful defense against such a claim, could have a material adverse impact on the Company.

In June 2005, the Company was contacted by Scanner Technologies Corporation (Scanner), the owner of certain patents. Scanner accused the Company of infringing certain of their patents. Scanner has not filed suit, but has urged the Company to enter into a licensing agreement in order to avoid litigation. The Company understands a similar demand has been made upon other manufacturers of integrated circuits. Should Scanner file suit, the Company would vigorously defend itself in this matter. However, because of the inherent uncertainties of litigation, the outcome of this action could be unfavorable, in which event, the Company might be required to pay damages and other expenses, which could have a material adverse effect on the Company's financial position and results of operations. In addition, the Company could be required to alter certain of its production processes or products as a result of this matter.

Item 1A.

Risk Factors

There are no material changes to the risk factors disclosed in the Form 10-K filed for the fiscal year ended September 30, 2005.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Submission of Matters to a Vote of Security Holders

At 11:00 a.m. on March 9, 2006, the Company held its Annual Meeting of Shareholders at its headquarters, located at 395 West Java Drive, Sunnyvale, California 94089. There were 6,356,842 shares present or represented by proxy at the meeting, representing a quorum. The one item of business to be voted on during the meeting was the election of five directors.

Shareholders are permitted to vote cumulatively in the election of directors, which allows each shareholder to cast a number of votes equal to the number of directors to be elected multiplied by the number of shares owned, and to distribute such votes among the candidates in such proportion as such shareholder may determine. In order to vote cumulatively, a shareholder must give notice of this intention by proxy or at the meeting. The votes for each nominee, listed alphabetically, are as set forth in the following table:

FOR

WITHHELD

Brian P. Cardozo

6,258,324 

98,518 

Howard L. Farkas

6,256,924 

99,918 

Albert Morrison Jr.

5,477,210 

879,632 

Steven R. Settles

6,260,524 

96,318 

William J. Volz

6,259,624 

91,018 

As a result of the vote, all nominees were elected as directors at the meeting.

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits

The Index to Exhibits appears as Page 15 of this report.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LOGIC Devices Incorporated

(Registrant)

Date:    April 21, 2006     

By:    /s/  William J. Volz          

William J. Volz

President and Principal Executive Officer

Date:    April 21, 2006     

By:    /s/  Kimiko Milheim         

Kimiko Milheim

Chief Financial Officer and Principal Financial

and Accounting Officer

Exhibit No.

Description

3.1

Articles of Incorporation, as amended in 1988. [3.1] (1)

3.2

Bylaws, as amended in 1988. [3.1] (1)

10.1

Real Estate lease regarding Registrant's Sunnyvale, California facilities. [10.2] (2)

10.2

LOGIC Devices Incorporated 1996 Stock Incentive Plan. [99.1] (3)

10.3

Amended and Restated LOGIC Devices Incorporated 1998 Director Stock Incentive Plan, as amended. [10.3] (4)

10.4

Rights Agreement, dated April 30, 1997. [1] (5)

10.5

Registration Rights Agreement dated October 3, 1998 between William J. Volz, BRT Partnership, and Registrant. [10.19] (6)

31.1

Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14.

31.2

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14.

32.1

Certifications of Principal Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

[  ]

Exhibits so marked have been previously filed with the Securities and Exchange Commission (SEC) as exhibits to the filings shown below under the exhibit numbers indicated following the respective document description and are incorporated herein by reference.

(1)

Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2004, as filed with the SEC on January 26, 2005.

(2)

Annual Report on Form 10-K for the fiscal year ended September 29, 2002, as filed with the SEC on December 10, 2002.

(3)

Registration Statement on Form S-8, as filed with the SEC on August 17, 1997 [Registration No. 333-32819].

(4)

Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004, as filed with the SEC on May 12, 2004.

(5)

Registration Statement on Form 8-A, as filed with the SEC on May 5, 1997 [Registration No. 000-17187].

(6)

Annual Report on Form 10-K for the transition period from January 1, 1998 to September 30, 1998, as filed with the SEC on January 13, 1999.