JAZ Jazz Technologies,

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Commission file number: 001-32832

Jazz Technologies, Inc.

(Exact name of registrant as specified in its charter)

(949) 435-8000

Registrant’s telephone number, including area code

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No x

As of May 5, 2008, 19,031,276 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.

JAZZ TECHNOLOGIES, INC.

Table of Contents

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PART I — FINANCIAL INFORMATION

Item 1.                    Financial Statements

JAZZ TECHNOLOGIES, INC.

Unaudited Condensed Consolidated Balance Sheets

(in thousands)

See accompanying notes.

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JAZZ TECHNOLOGIES, INC.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

The amounts included in the three months ended March 30, 2007 reflect the acquisition of Jazz Semiconductor, Inc. on February 16, 2007 and the results of operations for Jazz Semiconductor, Inc. following the date of acquisition.

See accompanying notes.

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JAZZ TECHNOLOGIES, INC.

Unaudited Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)

See accompanying notes.

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JAZZ TECHNOLOGIES, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

See accompanying notes.

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Jazz Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2008

1.               ORGANIZATION

Unless specifically noted otherwise, as used throughout these notes to the unaudited condensed consolidated financial statements, “Jazz,” “Company” refers to the business of Jazz Technologies, Inc. and “Jazz Semiconductor” refers only to the business of Jazz Semiconductor, Inc.

The Company

Jazz Technologies, Inc., formerly known as Acquicor Technology Inc. (the “Company”), was incorporated in Delaware on August 12, 2005. The Company was formed to serve as a vehicle for the acquisition of one or more domestic and/or foreign operating businesses through a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination.

The Company is based in Newport Beach, California and following the acquisition of Jazz Semiconductor, Inc., is now an independent semiconductor foundry focused on specialty process technologies for the manufacture of analog intensive mixed-signal semiconductor devices. The Company’s specialty process technologies include advanced analog, radio frequency, high voltage, bipolar and silicon germanium bipolar complementary metal oxide (“SiGe”) semiconductor processes, for the manufacture of analog and mixed-signal semiconductors. Its customer’s analog and mixed-signal semiconductor devices are used in cellular phones, wireless local area networking devices, digital TVs, set-top boxes, gaming devices, switches, routers and broadband modems.

Acquisition of Jazz Semiconductor, Inc.

On February 16, 2007, the Company completed the acquisition of all of the outstanding capital stock of Jazz Semiconductor, for $262.4 million in cash, and acquired, as part of the assets of Jazz Semiconductor, $26.1 million in cash. The accompanying unaudited condensed consolidated financial statements include the results of operations for Jazz Semiconductor following the date of acquisition. The acquisition was accounted for under the purchase method of accounting in accordance with U.S. generally accepted accounting principles for accounting and financial reporting purposes. Under this method, Jazz Semiconductor was treated as the “acquired” company. In connection with the acquisition, the Company adopted Jazz Semiconductor’s fiscal year. In July 2007, the Company entered into an agreement with the former Jazz Semiconductor stockholders that reduced the purchase price by $9.3 million to $253.1 million. The reduction has been reflected in the accompanying unaudited condensed consolidated financial statements following July 2007.

Prior to March 12, 2002, Jazz Semiconductor’s business was Conexant’s Newport Beach, California semiconductor fabrication operations. Jazz Semiconductor’s business was formed upon Conexant’s contribution of those fabrication operations to its wholly-owned subsidiary, Newport Fab, LLC and Conexant’s contribution of Newport Fab, LLC to Jazz Semiconductor, together with a cash investment in Jazz Semiconductor by affiliates of The Carlyle Group. Conexant and affiliates of The Carlyle Group continued to be the largest stockholders of Jazz Semiconductor until its acquisition in February 2007. Substantially all of Jazz Semiconductor’s business operation was conducted by its wholly-owned subsidiary, Newport Fab, LLC. Since its formation in early 2002, Jazz Semiconductor has transitioned its business from a captive manufacturing facility within Conexant to an independent semiconductor foundry.

2.               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Rule 8-03 of SEC Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction of the Company’s audited consolidated financial statements and notes thereto for the year ended December 28, 2007, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2008.

The condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company’s

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consolidated financial position at March 28, 2008 and December 28, 2007, and the consolidated results of its operations and cash flows for the three months ended March 28, 2008 and March 30, 2007.

Fiscal Year

Effective with the fiscal year beginning January 1, 2007, the Company adopted a 52- or 53- week fiscal year. Each of the first three quarters of a fiscal year ends on the last Friday in each of March, June and September and the fourth quarter of a fiscal year ends on the Friday prior to December 31. As a result, each fiscal quarter consists of 13 weeks during a 52-week fiscal year. During a 53-week fiscal year, the first three quarters consist of 13 weeks and the fourth quarter consists of 14 weeks. The Company previously maintained a calendar fiscal year.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Among the significant estimates affecting the financial statements are those relating to sales return allowances, the allowance for doubtful accounts, inventories and related reserves, valuation of acquired assets and liabilities, determination of asset lives for depreciation and amortization, asset impairment assumptions, income taxes, stock compensation, post-retirement medical plan and pension plan. On an ongoing basis, management reviews its estimates based upon currently available information. Actual results could differ materially from those estimates.

Revenue Recognition

The Company’s net revenues are generated principally by sales of semiconductor wafers. The Company derives the remaining balance of its net revenues from the resale of photomasks and other engineering services. The majority of the Company’s sales occur through the efforts of its direct sales force.

In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” (“SAB No. 101”), and SAB No. 104, “Revenue Recognition” (“SAB No. 104”), the Company recognizes product revenues when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured. These criteria are usually met at the time of product shipment. However, the Company does not recognize revenues until all customer acceptance requirements have been met, when applicable.

Revenues for engineering services are recognized ratably over the contract term or as services are performed. Revenues from contracts with multiple elements are recognized as each element is earned based on the relative fair value of each element and when there are no undelivered elements that are essential to the functionality of the delivered elements and when the amount is not contingent upon delivery of the undelivered elements. Advances received from customers towards future engineering services, product purchases and in some cases capacity reservation are deferred until products are shipped to the customer, services are rendered or the capacity reservation period ends.

The Company provides for sales returns and allowances relating to specified yield or quality commitments as a reduction of revenues at the time of shipment based on historical experience and specific identification of events necessitating an allowance. Actual allowances given have been within management’s expectations.

Impairment of Assets

The Company periodically reviews long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.  If an asset is considered to be impaired, the impairment loss is recognized immediately and is considered to be the amount by which the carrying amount of the asset exceeds its fair value.  The Company does not have any intangible assets with indefinite useful lives.

The Company conducted an impairment review as of March 28, 2008, due to the recent decline in the stock price. The Company used the income approach methodology of valuation that includes undiscounted cash flows to determine the fair value of its intangible assets. Significant management judgment is required in the forecasts of future operating results used for this methodology. These estimates are consistent with the plans and forecasts that the Company uses to conduct its business. As a result of this analysis, no assets were considered to be impaired and the Company had not recognized any impairment loss for any long-lived or intangible asset as of March 28, 2008.

Accounting for Income Taxes

The Company utilizes the liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Under the liability method,

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deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates.

Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The likelihood of a material change in the Company’s expected realization of these assets depends on its ability to generate sufficient future taxable income.  The Company’s ability to generate enough taxable income to utilize its deferred tax assets depends on many factors, among which is the Company’s ability to deduct tax loss carry-forwards against future taxable income, the effectiveness of the Company’s tax planning strategies and reversing deferred tax liabilities.

A substantial portion of the valuation allowance relates to deferred tax assets recorded in connection with the acquisition of Jazz Semiconductor (“acquisition deferred tax assets”). SFAS No. 109 requires the benefit from the reduction of the valuation allowance related to the acquisition deferred tax assets to first be applied to reduce goodwill and then noncurrent intangible assets to zero before the Company can apply any remaining benefit to reduce income tax expense.

Included in the deferred tax assets are approximately $26.0 million of pre-acquisition net deferred tax assets related to the acquisition of Jazz Semiconductor. To the extent these assets are recognized, the tax benefit will be applied first to reduce to zero any noncurrent intangible assets related to the acquisition, and the excess, if any, as a reduction to income tax expense.

The future utilization of the Company’s net operating loss carry forwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has had one “change in ownership” event that limits the utilization of net operating loss carry forwards. The “change in ownership” event occurred in February 2007, upon the acquisition of Jazz Semiconductor.  As a result of this “change of ownership”, the annual net operating loss utilization will be limited to $6.8 million.

The Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense.

Stock Based Compensation

The Company records equity compensation expense in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires companies to estimate the fair value of stock options on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. The Company has estimated the fair value of stock options as of the date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of the Company’s stock price. Although the Black-Scholes model meets the requirements of SFAS No. 123R and SAB No. 107, “Share-Based Payment” (“SAB No. 107”), the fair values generated by the model may not be indicative of the actual fair values of the Company’s equity awards, as it does not consider other factors important to those awards to employees, such as continued employment, periodic vesting requirements, and limited transferability. The Company estimates stock price volatility based on historical volatility of its own stock price and its peers. The Company recognizes compensation expense using the straight-line amortization method for stock-based compensation awards with graded vesting.

The key assumptions used in the Black-Scholes model in determining the fair value of options granted during the three months ended March 28, 2008 are as follows:

Net (Loss) Income Per Share

Net (loss) income per share (basic) is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period.  Net (loss) income per share (diluted) is calculated by adjusting the number of shares of common stock outstanding using the treasury stock method.  Under the treasury stock method, an increase in the fair market value of the Company’s common stock results in a greater dilutive effect from outstanding warrants, options, restricted stock awards and convertible securities (common stock equivalents). Since the Company reported a net loss for the three months ended March 28, 2008 and March 30, 2007, all common stock equivalents would be anti-dilutive and the basic and diluted weighted average shares outstanding are the same.

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Concentrations

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history, age of the balance and the customer’s current credit worthiness, as determined by a review of the customer’s current credit information. The Company monitors collections and payments from its customers and maintains an allowance for doubtful accounts based upon historical experience and any specific customer collection issues that have been identified. A considerable amount of judgment is required in assessing the ultimate realization of these receivables. Customer receivables are generally unsecured.

Accounts receivable from significant customers representing 10% or more of the net accounts receivable balance as of March 28, 2008 and December 28, 2007 consists of the following customers:

Net revenues from significant customers representing 10% or more of net revenues for the three months ended March 28, 2008 and March 30, 2007 is provided by customers as follows:

As a result of the Company’s concentration of its customer base, loss or cancellation of business from, or significant changes in scheduled deliveries of product sold to these customers or a change in their financial position could materially and adversely affect the Company’s consolidated financial position, results of operations and cash flows.

Recent Accounting Pronouncements

Effective January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement applies to all entities, including not-for-profit organizations. Most of the provisions of this Statement apply only to entities that elect the fair value option. However, the amendment to SFAS Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities with available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007 with respect to financial assets. With respect to non-financial assets, this statement is effective for the first fiscal year beginning after November 15, 2008. The adoption of SFAS No. 159 did not have any significant impact on the consolidated results of operations or financial position of the Company.

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), to eliminate the diversity in practice that exists due to the different definitions of fair value and the limited guidance for applying those definitions in GAAP that are dispersed among the many accounting pronouncements that require fair value measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. SFAS 157 is effective in fiscal years beginning after November 15, 2007 with respect to financial assets. With respect to non-financial assets, this statement is effective for the first fiscal year beginning after November 15, 2008. The adoption of SFAS No. 157 did not have any significant impact on the consolidated results of operations or financial position of the Company.

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3.               ACQUISITION OF JAZZ SEMICONDUCTOR

On February 16, 2007, pursuant to the terms of a merger agreement signed on September 26, 2006, the Company acquired all of Jazz Semiconductor’s outstanding capital stock for approximately $262.4 million, funded with existing cash resources as well as proceeds from the 8% Convertible Senior Notes due 2011 (the “Convertible Senior Notes”) that were issued in the fourth quarter of fiscal 2006. On July 1, 2007, a settlement agreement was reached with former Jazz Semiconductor’s stockholders that amended the merger agreement, released funds held in escrow and effectively reduced the purchase price by $9.3 million to $253.1 million. The purchase price reduction of $9.3 million includes a $9.0 million release of escrow funds to the Company and an additional reimbursement of $0.3 million for expenses incurred by Jazz Semiconductor and the Company relating to the merger. This reduction has been reflected in the accompanying condensed consolidated financial statements following July 2007.

For accounting purposes, the revised purchase price for the Jazz acquisition was $253.1 million and reconciles to all payments made to date as follows (in thousands):

Jazz Semiconductor’s transaction costs primarily consist of fees for financial advisors, attorneys, accountants and other advisors incurred in connection with the acquisition and Jazz Semiconductor’s terminated initial public offering. The Company’s transaction costs primarily consist of fees for financial advisors, attorneys, accountants and other advisors directly related to the acquisition of Jazz Semiconductor.

Payments made by the Company included a $4.5 million working capital payment per the merger agreement and a deduction for reimbursement of $6.5 million of transaction costs incurred by Jazz Semiconductor in connection with the acquisition and its terminated public offering. There was no change to the purchase price resulting from the calculation of the closing working capital amount, as defined in the merger agreement, which was calculated based on the closing balance sheet as of February 16, 2007. However, as discussed above, there was a $9.3 million reduction to the purchase price as a result of a settlement agreement reached in July 2007 with the former Jazz Semiconductor stockholders.

In connection with the acquisition of Jazz Semiconductor, the Company acquired an equity investment in Shanghai Hua Hong NEC Electronics Company, Ltd. (“HHNEC”). Under the merger agreement relating to the acquisition of Jazz Semiconductor, the Company is obligated to pay additional amounts to former stockholders of Jazz Semiconductor if the Company realizes proceeds in excess of $10 million from its investment in HHNEC during the three-year period following the completion of the acquisition of Jazz Semiconductor. In that event, the Company will pay to Jazz Semiconductor’s former stockholders an amount equal to 50% of the amount (if any) of the proceeds received that exceed $10 million.

Adjusted Purchase Price Allocation

The total adjusted purchase price of $253.1 million, including the Company’s transaction costs of approximately $4.1 million, and net of the recent reduction of $9.3 million in purchase price, has been allocated to tangible and intangible assets acquired and liabilities assumed, based on their fair market values as of February 16, 2007, as follows (in thousands):

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The fair values set forth above are based on a final valuation of Jazz Semiconductor’s tangible and intangible assets and liabilities performed by the Company in accordance with SFAS No. 141 “Business Combinations” (“SFAS no. 141”).

Inventories

Inventories consist of the following at March 28, 2008 and December 28, 2007 (in thousands):

Property, Plant and Equipment

Property, plant and equipment consist of the following at March 28, 2008 and December 28, 2007 (in thousands):

Investment

In connection with the acquisition of Jazz Semiconductor, the Company acquired an investment in HHNEC.  As of March 28, 2008, the investment represented a minority interest of approximately 10% in HHNEC.  In accordance with the purchase method of accounting, this investment was recorded at fair value on the date of acquisition.

Intangible Assets

Intangible assets consist of the following at March 28, 2008 (in thousands):

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The Company expects future amortization expense to be as follows (in thousands):

Pro Forma Results of Operations

The following unaudited information for the three months ended March 30, 2007 assumes the acquisition of Jazz Semiconductor occurred on January 1, 2007, (in thousands):

The accompanying unaudited condensed consolidated statements of operations only reflect the operating results of Jazz Semiconductor following the date of acquisition and do not reflect its operating results prior to the acquisition. The Company derived the pro forma information from the unaudited condensed consolidated financial statements of the Company for the three months ended March 30, 2007 and of Jazz Semiconductor for the period from January 1, 2007 to February 16, 2007 (the date of the acquisition). The pro forma results are not necessarily indicative of the results that may have actually occurred had the acquisition taken place on the date noted, or the future financial position or operating results of the Company or Jazz Semiconductor. The pro forma adjustments are based upon available information and assumptions that the Company believes are reasonable. The pro forma adjustments include adjustments for interest expenses (relating primarily to interest on the Convertible Senior Notes issued in December 2006) and increased depreciation and amortization expense as a result of the application of the purchase method of accounting based on the fair values set forth above. The pro forma information excludes the write-off of in-process research and development that was expensed during the three months ended March 30, 2007.

4.     LOAN AND SECURITY AGREEMENT

Borrowing availability under the facility as of March 28, 2008, was $34.0 million.  As of March 28, 2008, the Company had short-term borrowings of $10.0 million outstanding and $1.6 million of the facility supporting outstanding letters of credits.

5.               INCOME TAXES

The Company utilizes the liability method of accounting for income taxes in accordance with SFAS No. 109. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates.

Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The likelihood of a material change in the Company’s expected realization of these assets depends on its ability to generate sufficient future taxable income.  The Company’s ability to generate enough taxable income to utilize its deferred tax assets depends on many factors, among which is the Company’s ability to deduct tax loss carry-forwards against future taxable income, the effectiveness of the Company’s tax planning strategies and reversing deferred tax liabilities. A substantial portion of the valuation allowance relates to deferred tax assets recorded in connection with the acquisition of Jazz Semiconductor (“acquisition deferred tax assets”). SFAS No. 109 requires the benefit from the reduction of the valuation

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allowance related to the acquisition deferred tax assets to first be applied to reduce goodwill and then noncurrent intangible assets to zero before the Company can apply any remaining benefit to reduce income tax expense.

Included in the deferred tax assets are approximately $26.0 million of pre-acquisition net deferred tax assets related to the acquisition of Jazz Semiconductor. To the extent these assets are recognized, the tax benefit will be applied first to reduce to zero any noncurrent intangible assets related to the acquisition, and the excess, if any, as a reduction to income tax expense.

At December 28, 2007, the Company had unrecognized tax benefits of $1.0 million , of which $0.6 million of tax benefits that, if recognized at a time when the valuation allowance no longer exists, would affect the Company’s effective tax rate. The remaining $0.4 million, if recognized, would reduce the non-current intangible assets. The Company’s unrecognized tax benefits increased by $0.1 million to $1.1 million during the three months ended March 28, 2008 of which, $0.7 million of tax benefits that if recognized at a time when the valuation allowance no longer exists, would affect the Company’s effective tax rate. The Company does not expect any significant decreases to its unrecognized tax benefits within the next 12 months. The Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense.

At December 28, 2007, the Company had federal and state net operating loss (“NOL”) carryforwards of approximately $128.9 million and $105.2 million, respectively.  The federal and state tax loss carryforwards will begin to expire in 2021 and 2012, respectively, unless previously utilized. At December 28, 2007, the Company had combined federal and state alternative minimum tax credit of $0.1 million. The alternative minimum tax credits do not expire. The future utilization of the Company’s net operating loss carry forwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future. The Company had one “change in ownership” event that limits the utilization of net operating loss carry forwards. This “change in ownership” event occurred in February 2007, the date of acquisition of Jazz Semiconductor, Inc. As a result of this “change of ownership,” the annual net operating loss utilization will be limited to $6.8 million.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions.  With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years before 2004; state and local income tax examinations before 2003; and foreign income tax examinations before 2004.   However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward amount. The Company is not currently under Internal Revenue Service (“IRS”) tax examination.  The Company is not currently under examination by any other state, local or foreign jurisdictions.

6.               CONVERTIBLE SENIOR NOTES

During the first three months of 2008, the Company purchased $5.0 million in principal amount of its Convertible Senior Notes at a price of $4.1 million, including $4,444 for prepayment of interest from the date of the last interest payment to the date of purchase.  The purchase price was 82.0% of the principal amount of such notes and resulted in a net gain of $0.8 million, which is included as part of interest and other (expense) income in the statement of operations.  The gain of $0.8 million is net of the write-off of prorated deferred loan costs of $0.1 million.  As of March 28, 2008, $128.2 million in principal amount of Convertible Senior Notes remains outstanding.

The Company’s obligations under the Convertible Senior Notes are guaranteed by the Company’s domestic subsidiaries.  The Company has not provided condensed consolidating financial information because the Company has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several and any subsidiaries of the Company other than the subsidiary guarantors are minor. Other than the restrictions in the Wachovia Loan Agreement, there are no significant restrictions on the ability of the Company and its subsidiaries to obtain funds from their subsidiaries by loan or dividend.

7.               PENSION PLANS

The pension and other post retirement benefit plans expense for the three months ended March 28, 2008 were $0.2 million and $0.4 million, respectively. The amounts for the pension and other post retirement benefit plans expense for the corresponding periods in 2007 were $0.1 million and $0.2 million, respectively.

8.               STOCKHOLDERS’ EQUITY

Common Stock

The number of outstanding shares of common stock at March 28, 2008 was 19,031,276.

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Warrants

The number of outstanding warrants at March 28, 2008 was 33,033,013.

Stock Options

During the three months ended March 28, 2008, the Company awarded non-statutory stock options to purchase 601,811 shares of common stock that vest over a three-year period from the date of grant.  The stock option grants vest ratably over the next twelve quarters. The exercise prices of the options awarded range from $0.70 - $1.50 per share. The Company recorded $211,439 of compensation expense in the three months ended March 28, 2008 relating to the issuance of non-qualified stock options to employees. The Company had not granted any stock options during the corresponding period in 2007.

9.             FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted SFAS No. 157 for financial assets and liabilities. SFAS No. 157 defines fair value, provides guidance for measuring fair value and requires certain disclosures. SFAS No. 157 does not require any new fair value measurements in the financial statements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.

SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

·                                           Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

·                                           Level 2: Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

·                                           Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The Company’s population of financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows (in thousands):

The Company holds an equity investment in HHNEC, a non-public entity. This investment represents a minority interest of approximately 10% recorded at fair value on the date of acquisition of Jazz Semiconductor.

The Convertible Senior Notes fair value is based on an actual transaction entered into by the Company during the first quarter of 2008 (See Note 6).

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the financial statements and related notes contained elsewhere in this report.  See our Annual Report on Form 10-K and subsequent quarterly reports filed with the Securities and Exchange Commission for information regarding certain risk factors known to us that could cause reported financial information not to be necessarily indicative of future results.

FORWARD LOOKING STATEMENTS

This report on Form 10-Q may contain “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Report Act of 1995.  These statements, which represent our expectations or beliefs concerning various future events, may contain words such as “may,” “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words indicating future results.  Such statements may include but are not limited to statements concerning the following:

·                   anticipated trends in revenues;

·                   growth opportunities in domestic and international markets;

·                   new and enhanced channels of distribution;

·                   customer acceptance and satisfaction with our products;

·                   expected trends in operating and other expenses;

·                   purchase of raw materials at levels to meet forecasted demand;

·                   anticipated cash and intentions regarding usage of cash;

·                   changes in effective tax rates; and

·                   anticipated product enhancements or releases.

These forward-looking statements are subject to risks and uncertainties, including those risks and uncertainties described in our Annual Report on Form 10-K and subsequent quarterly reports filed with the Securities and Exchange Commission,  that could cause actual results to differ materially from those anticipated as of the date of this report.  We assume no obligation to update any forward-looking statements to reflect events or circumstances arising after the date of this report.

OVERVIEW

The Company

We were incorporated on August 12, 2005, for the purpose of acquiring, through a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination, one or more domestic and/or foreign operating businesses in the technology, multimedia and networking sectors, focusing specifically on businesses that develop or provide technology-based products and services in the software, semiconductor, wired and wireless networking, consumer multimedia and information technology-enabled services segments.

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We are based in Newport Beach, California and following the acquisition of Jazz Semiconductor Inc. (“Jazz Semiconductor”), we are now an independent semiconductor foundry focused on specialty process technologies for the manufacture of analog and mixed-signal semiconductor devices.  Our specialty process technologies include advanced analog, radio frequency, high voltage, bipolar and silicon germanium bipolar complementary metal oxide (“SiGe”) semiconductor processes, for the manufacture of analog and mixed-signal semiconductors.  Our customers use the analog and mixed-signal semiconductor devices in products they design that are used in cellular phones, wireless local area networking devices, digital TVs, set-top boxes, gaming devices, switches, routers and broadband modems.

Acquisition of Jazz Semiconductor

On February 16, 2007, we completed the acquisition of all the outstanding shares of capital stock of Jazz Semiconductor, Inc., a Delaware corporation for $262.4 million in cash, and acquired, as part of the assets of Jazz Semiconductor, $26.1 million in cash. The acquisition was accounted for under the purchase method of accounting in accordance with U.S. generally accepted accounting principles for accounting and financial reporting purposes. Under this method, Jazz Semiconductor was treated as the “acquired” company for financial reporting purposes. As a result, the accompanying unaudited condensed consolidated financial statements include the results of operations for Jazz Semiconductor following the date of acquisition. In July 2007, an agreement was reached with former Jazz Semiconductor stockholders that reduced the purchase price by $9.3 million to $253.1 million. This reduction has been reflected in the accompanying unaudited condensed consolidated financial statements following July 2007.

Prior to March 12, 2002, Jazz Semiconductor’s business was Conexant’s Newport Beach, California semiconductor fabrication operations. Jazz Semiconductor’s business was formed upon Conexant’s contribution of those fabrication operations to its wholly-owned subsidiary, Newport Fab, LLC and Conexant’s contribution of Newport Fab, LLC to Jazz Semiconductor, together with a cash investment in Jazz Semiconductor by affiliates of The Carlyle Group. Conexant and affiliates of The Carlyle Group continued to be the largest stockholders of Jazz Semiconductor until its acquisition in February 2007. Substantially all of Jazz Semiconductor’s business operation was conducted by its wholly-owned subsidiary, Newport Fab, LLC. Since its formation in early 2002, Jazz Semiconductor has transitioned its business from a captive manufacturing facility within Conexant to an independent semiconductor foundry.

The accompanying unaudited condensed consolidated statements of operations reflect the operating results of the acquired Jazz Semiconductor following the date of acquisition.  However, in the results of operations section below we have also presented pro forma unaudited revenues, cost of revenues, gross margins and operating expenses assuming the acquisition of Jazz Semiconductor had occurred on January 1, 2007. We present the pro forma information in order to provide a more meaningful comparison of our operating results with prior periods.

Critical Accounting Policies and Estimates

Estimates

The preparation of financial statements in accordance 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 at the date of the financial statements and the reported amounts of net revenues and expenses in the reporting period. We regularly evaluate estimates and assumptions related to allowances for doubtful accounts, sales returns allowances, inventory reserves, valuation of acquired assets and liabilities, determination of asset lives for depreciation and amortization, asset impairment assumptions, income taxes, stock compensation, post-retirement medical plan and pension plan . We base our estimates and assumptions on current facts, historical experience and various other factors 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 and the accrual of costs and expenses that are not readily apparent from other sources. Accordingly, the actual results may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of our operations will be affected.

Revenue Recognition

Our net revenues are generated principally by sales of semiconductor wafers. We derive the remaining balance of our net revenues from the resale of photomasks and other engineering services. The majority of our sales occur through the efforts of our direct sales force.

In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” (“SAB No. 101”), and SAB No. 104, “Revenue Recognition” (“SAB No. 104”), the Company recognizes product revenues when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed or determinable and

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(iv) collection of the resulting receivable is reasonably assured. These criteria are usually met at the time of product shipment. However, we do not recognize revenues until all customer acceptance requirements have been met, when applicable.

Revenues for engineering services are recognized ratably over the contract term or as services are performed.  Revenues from contracts with multiple elements are recognized as each element is earned based on the relative fair value of each element and when there are no undelivered elements that are essential to the functionality of the delivered elements and when the amount is not contingent upon delivery of the undelivered elements. Advances received from customers towards future engineering services, product purchases and in some cases capacity reservation are deferred until products are shipped to the customer, services are rendered or the capacity reservation period ends.

We provide for sales returns and allowances relating to specific yield or quality commitments as a reduction of revenues at the time of shipment based on historical experience and specific identification of an event necessitating an allowance.  Actual allowances given have been within management’s expectations.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon historical experience, industry norms and specific customer collection issues that we have identified.  While our credit losses have historically been within our expectations and the allowance established, we may not continue to experience the same credit loss rates as we have in the past.  Our accounts receivable are concentrated among a relatively small number of customers.  Should there be a significant change in the liquidity or financial position of any one customer, resulting in an impairment of its ability to make payments, we may be required to increase the allowance for doubtful accounts, which could have a material adverse impact on our consolidated financial position, results of operations and cash flows.

Inventories

We initiate production of a majority of our wafers once we have received an order from a customer. We generally do not carry a significant inventory of finished goods except in response to specific customer requests or if we determine to produce wafers in excess of orders because we forecast future excess demand and capacity constraints. We seek to purchase and maintain raw materials at sufficient levels to meet lead times based on forecasted demand. If forecasted demand exceeds actual demand, we may need to provide an allowance for excess or obsolete quantities on hand. We also review our inventories for indications of obsolescence or impairment and provide reserves as deemed necessary. We scrap inventory that has been written down after it is determined that it cannot be sold. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required. We state our inventories at the lower of cost, using the first-in, first-out method, or market.

Impairment of Assets

The amounts and useful lives assigned to intangible assets acquired impact the amount and timing of future amortization. The value of our intangible assets could be impacted by future adverse changes such as: (i) future declines in our operating results, (ii) a decline in the valuation of our stock price, (iii) a significant slowdown in the semiconductor industry, (iv) any failure to meet our projected performance of future operating results. We periodically review long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If an asset is considered to be impaired, the impairment loss is recognized immediately and is considered to be the amount by which the carrying amount of the asset exceeds its fair value.  We do not have any intangible assets with indefinite useful lives.

We conducted our impairment review as of March 28, 2008, due to the recent decline in our stock price. We used the income approach methodology of valuation that includes undiscounted cash flows to determine the fair value of our intangible assets. Significant management judgment is required in the forecasts of future operating results used for this methodology. These estimates are consistent with the plans and forecasts we use to conduct our business. As a result of this analysis, no assets were considered to be impaired and we have not recognized any impairment loss for any long-lived or intangible asset as of March, 28, 2008.

Accounting for Income Taxes

Effective January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN No. 48”).   We are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions.  We believe our tax return positions are fully supported, but tax authorities may

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challenge certain positions, which may not be fully sustained.  We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances, and information available at the reporting date. For uncertain tax positions where it is more likely than not that a tax benefit will be sustained, we record the greatest amount of tax benefit that has a greater than 50 percent probability of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. For uncertain income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.  Our policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense.

We account for income taxes under the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 109, “Accounting for Income Taxes,” (“SFAS No. 109”). SFAS No. 109 requires that we recognize in our consolidated financial statements:

·                   deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our consolidated financial statements or our tax returns; and

·                   the amount of taxes payable or refundable for the current year.

The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses and gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in our financial statements. It is assumed that the reported amounts of assets and liabilities will be recovered and settled, respectively, in the future. Accordingly, a difference between the tax basis of an asset or a liability and its reported amount on the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered.

To determine the amount of taxes payable or refundable for the current year, we are required to estimate our income taxes. Our effective tax rate may be subject to fluctuations during the fiscal year as new information is obtained, which may affect the assumptions we use to estimate our annual effective tax rate, including factors such as valuation allowances against deferred tax assets, reserves for tax contingencies, utilization of tax credits and changes in or interpretation of tax laws in jurisdictions where we conduct operations

Utilization of net operating losses, credit carryforwards, and certain deductions may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. The tax benefits related to future utilization of federal and state net operating losses, tax credit carryforwards, and other deferred tax assets may be limited or lost if cumulative changes in ownership exceed 50% within any three-year period. Additional limitations on the use of these tax attributes could occur in the event of possible disputes arising in examinations from various tax authorities. We are not currently under examination.

Pension Plans

We maintain a defined benefit pension plan for our employees covered by a collective bargaining agreement. For financial reporting purposes, the calculation of net periodic pension costs is based upon a number of actuarial assumptions, including a discount rate for plan obligations, an assumed rate of return on pension plan assets and an assumed rate of compensation increase for employees covered by the plan. All of these assumptions are based upon management’s judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact future expense recognition and cash funding requirements of our retirement plans.

Stock Based Compensation

We record equity compensation expense in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires companies to estimate the fair value of stock options on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. We have estimated the fair value of stock options as of the date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of our stock price. Although the Black-Scholes model meets the requirements of SFAS No. 123R and SAB No. 107, “Share-Based Payment” (“SAB No. 107”), the fair values generated by the model may not be indicative of the actual fair values of our equity awards, as it does not consider other factors important to those awards to employees, such as continued employment, periodic vesting requirements, and limited transferability. We estimate stock

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 price volatility based on historical volatility of its own stock price and its peers. We recognize compensation expense using the straight-line amortization method for stock-based compensation awards with graded vesting.

The key assumptions used in the Black-Scholes model in determining the fair value of options granted during the three months ended March 28, 2008 are as follows:

RESULTS OF OPERATIONS

For the three months ended March 28, 2008, we had a net loss of $4.0 million compared to a net loss of $11.7 million for the corresponding period in 2007. The results for the three months ended March 30, 2007 include the results of operations for Jazz Semiconductor only from February 17, 2007 through March 30, 2007. Our primary source of income prior to the consummation of our initial business combination with Jazz Semiconductor on February 16, 2007, was interest earned on the funds held in our trust account.

Pro Forma Financial Information

The acquisition of Jazz is our first business combination and accordingly, we do not think a comparison of the results of operations and cash flows for the three months ended March 28, 2008 versus the corresponding periods in 2007 is very beneficial to our investors.  In order to assist investors in better understanding the changes in our business between the three months ended March 28, 2008 and March 30, 2007, we are presenting in the discussion below pro forma results for us and Jazz Semiconductor for the three months ended March 30, 2007, as if the acquisition of Jazz Semiconductor occurred on January 1, 2007. We derived the pro forma results from (i) the unaudited condensed consolidated financial statements of Jazz Semiconductor for the period from December 30, 2006 to February 16, 2007 (the date of the Jazz acquisition) and our unaudited condensed consolidated financial statements for the three months ended March 30, 2007.

The pro forma results are not necessarily indicative of the results that may have actually occurred had the acquisition taken place on the date noted, or the future financial position or operating results of us or Jazz Semiconductor.  The pro forma results exclude the write-off of in-process research and development that was expensed during the three months ended March 30, 2007.  The pro forma adjustments are based upon available information and assumptions that we believe are reasonable. The pro forma adjustments include adjustments for interest expenses (relating primarily to interest on the 8% Convertible Senior Notes due 2011 (the “Convertible Senior Notes”) issued in December 2006) and increased depreciation and amortization expense as a result of the application of the purchase method of accounting.

Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets acquired and liabilities assumed, based on various estimates of their respective fair values. We performed a valuation of all the assets and liabilities in accordance with SFAS No. 141. The depreciation and amortization expense adjustments reflected in the pro forma results of operations are based on the final valuation of Jazz Semiconductor’s tangible and intangible assets described in Note 3 to our unaudited condensed consolidated financial statements.

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Comparison of Three Months Ended March 28, 2008 and March 30, 2007

Revenues

Our revenues are generated principally from the sale of semiconductor wafers and in part from the sale of photomasks and other engineering services. Net revenues are net of provisions for returns and allowances.  Revenues are categorized by technology group into specialty process revenues and standard process revenues. Specialty process revenues include revenues from wafers manufactured using our specialty process technologies—advanced analog CMOS, radio frequency CMOS or RF CMOS, high voltage CMOS, bipolar CMOS or BiCMOS, SiGe BiCMOS, and bipolar CMOS double-diffused metal oxide semiconductor or BCD, processes. Standard process revenues are revenues derived from wafers employing digital CMOS and standard analog process technologies.

The following table presents net revenues for the three months ended March 28, 2008 and March 30, 2007:

Our net revenues increased by $2.7 million or 5.7% to $50.8 million for the three months ended March 28, 2008 compared to $48.1 million of pro forma revenues for the corresponding period in 2007.  This increase is the result of a $0.7 million or 1.9% increase in specialty process net revenues to $39.2 million for the three months ended March 28, 2008 from $38.5 million of pro forma specialty process revenues for the corresponding period in 2007 and a $2.0 million or 20.8% increase in standard process net revenues to $11.6 million for the three months ended March 28, 2008, from $9.6 million of pro forma standard process revenues for the corresponding period in 2007.

The increase in standard process revenues, and the change in revenue mix, can be attributed in large part to the increase in orders from a single large customer, whose purchases of our products have predominantly been standard process wafers.  Although revenues from our standard process technologies increased this quarter due to the overall semiconductor industry cycle, it has generally declined and we believe this is attributable to some of our customers transitioning new standard process designs to foundries that focus on high volume and commodity oriented technologies and pricing, demand for standard process technology from other new customers helped offset this decline.

The marginal increase in specialty process revenues can be mainly attributed in part to stronger demand from some of our larger customers and in part to changes in our customer mix for three months ended March 28, 2008 compared to the corresponding period in 2007.

Once the market strengthens, we believe we will see standard process and specialty process revenues stabilize or grow moderately quarter over quarter. However, the semiconductor market is cyclical, and we do not know when the market will begin to improve.

The change in revenues mix of 77% specialty process revenues and 23% standard process revenues for the three months ended March 28, 2008 compared to 80% and 20%, respectively, for the corresponding period in 2007, was largely the result of an increase in standard process revenues primarily attributable to a single customer. While we intend to continue to offer full service solutions to our customer base, we believe our competitive advantage is to focus on specialty process revenues.

Cost of Revenues

Cost of revenues consists primarily of purchased manufactured materials, labor, manufacturing-related overheads and engineering services.  Purchased manufactured materials consists primarily of purchase price of raw wafers and shipping costs incurred.  Cost of revenues also includes the purchase of photomasks, provision for test services and the cost of defective inventory caused by fab and manufacturing yields as incurred.  We review our inventories for indications of obsolescence or impairment and provide reserves as deemed necessary.  Royalty expenses incurred in connection with certain of our process technologies, and depreciation and amortization expense on assets used in the manufacturing process are also included within the cost of revenues.

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The following table presents cost of revenues for the three months ended March 28, 2008 and March 30, 2007:

Our cost of revenues decreased by $8.2 million or 16.0% to $43.4 million for the three months ended March 28, 2008, compared to $51.6 million of pro forma cost of revenues for the corresponding period in 2007. Cost of revenues as a percentage of revenues decreased to 85.4% for the three months ended March 28, 2008 compared to 107.3% (on a pro forma basis) for the corresponding period in 2007.

The decrease was mainly due to higher fabrication capacity utilization and to a lesser extent due to management’s continued cost-cutting efforts since 2007 resulting in lower labor and overhead costs during the three months ended March 28, 2008 as compared to the corresponding period in 2007. The higher fabrication capacity utilization resulted in a lower allocation of fixed production costs per unit to inventory resulting in decreased cost per unit sold and correspondingly, decreased cost of revenues during the three months ended March 28, 2008 compared to the corresponding period in 2007.

The amortization of acquired technology and backlog has been allocated to cost of revenues and primarily relates to the developed technology acquired from the acquisition of Jazz on February 16, 2007.

Gross Profit

The following table presents gross profit for the three months ended March 28, 2008 and March 30, 2007: