**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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FORM 10-K

**FOR ANNUAL AND TRANSITION REPORTSPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

**x**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe fiscal year ended June 30, 2005**

**or**

**o** TRANSITIONREPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from __________ to ___________**

**Commissionfile number: 1-7935**

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INTERNATIONAL RECTIFIER CORPORATION

(Exactname of registrant as specified in its charter)

| **Delaware**                    | **95-1528961**                       |
|---------------------------------|--------------------------------------|
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) |
| incorporation or organization)  |                                 |

 

**233Kansas StreetEl Segundo, CA 90245**

(Addressof principal executive offices) (zip code)

Registrant’stelephone number, including area code: **(310) 726-8000**

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Securities registeredpursuant to Section 12(b) of the Act:

| **Title  of each class**      | **Name of each exchange on which registered** |
|-------------------------------|-----------------------------------------------|
| Common Stock, par value $1.00 | The New York Stock Exchange                   |
|                          | Pacific Exchange                              |

 

Securitiesregistered pursuant to Section 12(g) of the Act: None

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes * *þ*    *No  

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.   _______

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2 of the Act). Yes  þ    No  

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes      No  þ

Theaggregate market value of the registrant’s voting Common Stock held by non-affiliatesas of the last day of the registrant’s most recently completed second fiscalquarter was $2,868,354,140 (computed using the closing price of a share ofCommon Stock on December 31, 2004, reported by New York Stock Exchange).

Therewere****70,683,479 shares of theregistrant’s Common Stock, par value $1.00 per share, outstanding on September 8, 2005.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portionsof the registrant’s definitive proxy statement for the annual meeting ofstockholders scheduled to be held on November 21, 2005, which proxystatement will be filed no later than 120 days after the close of theregistrant’s fiscal year ended June 30, 2005, are incorporated byreference in Part III of this Annual Report on Form 10-K.

 

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**TABLE OF CONTENTS**
| Item       | ** ** | ** **                                                                                      | **Page**   |
|------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **PART I**                                                                                 | ** ** | ** ** | ** ** |
| 1.         |       | Business                                                                                        |       | 1 |   |
| 2.         |       | Properties                                                                                      |       | 17 |   |
| 3.         |       | Legal  Proceedings                                                                              |       | 18 |   |
| 4.         |       | Submission  of Matters to a Vote of Security Holders                                            |       | 18 |   |
|       |       | Additional  Item. Executive Officers of the Registrant                                          |       | 19 |   |
| ** ** | ** ** | **PART II**                                                                                | ** ** | ** ** | ** ** |
| 5.         |       | Market  for the Registrants’ Common Equity and Related Stockholder Matters                 |       | 20 |   |
| 6.         |       | Selected  Financial Data                                                                        |       | 21 |   |
| 7.         |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations     |       | 24 |   |
| 7A.        |       | Quantitative  and Qualitative Disclosures About Market Risk                                     |       | 51 |   |
| 8.         |       | Financial  Statements and Supplementary Data                                                    |       | 54 |   |
| 9.         |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure           |       | 92 |   |
| 9A.        |       | Controls  and Procedures                                                                        |       | 92 |   |
| 9B.        |       | Other  Information                                                                              |       | 93 |   |
| ** ** | ** ** | **PART III**                                                                               | ** ** | ** ** | ** ** |
| 10.        |       | Directors and Executive Officers of  the Registrant                                             |       | 94 |   |
| 11.        |       | Executive Compensation                                                                          |       | 94 |   |
| 12.        |       | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters |       | 94 |   |
| 13.        |       | Certain Relationships and Related  Transactions                                                 |       | 94 |   |
| 14.        |       | Principal Accountant Fees and  Services                                                         |       | 94 |   |
| ** ** | ** ** | **PART IV**                                                                                | ** ** | ** ** | ** ** |
| 15.        |       | Exhibits  and Financial Statement Schedules                                                     |       | 95 |   |

 

 

 

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*This Annual Report on Form 10-K containsstatements that constitute forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These statements include commentsregarding the intent, belief or current expectations of the company and itsmanagement. Prospective investors are cautioned that any such forward-lookingstatements are not guarantees of future performance and involve risks anduncertainties, and that actual results may differ materially from thoseprojected in the forward-looking statements. The materials presented can beidentified by the use of forward-looking terminology such as “anticipate,”“believe,” “estimate,” “expect,” “may,” “should,” “view,” or “will” or thenegative or other variations thereof. See “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Factors That May AffectFuture Results.” Unless required by law we undertake no obligation to publiclyupdate or revise any forward-looking statements to reflect new information,future events or otherwise.*

**PART I**

**Item 1. Business**

**Introduction**

We are a leading designer, manufacturer and marketerof power management products using power semiconductors. Power semiconductorsprocess electricity into a form more usable by electrical products. Ourproducts address the two core challenges ofpower management, power performance and power conservation, byincreasing system efficiency, allowing more compact end products, improvingfeatures and functionality, increasing fuel efficiency, and extending batterylife.

We focus on thepower management requirements of specific applications and bring ourcomprehensive portfolio of products and technologies to better satisfy theneeds of that application. We concentrate on markets including computers,communications networking, consumer electronics, energy-saving appliances,lighting, satellites, launch vehicles, aircraft and automotive diesel injection,where our comprehensive portfolio of technologies enable better, morecompetitive end products.

According to iSuppli, a leading industry source formarket information, the market for power management semiconductors in calendaryear 2004 was approximately $21 billion, growing to approximately $24 billionin calendar year 2005. Our products address approximately $15 billion or over70 percent of this market. We have seen signs of recovery in our industryfrom what we believe was an inventory correction during first half of calendaryear 2005. However, overall economic conditions can be uncertain and difficultto predict.

We believe currentdemand for our products is driven largely by the following:

·       InformationTechnology demand for increased speed and functionality

·       Consumerand Industrial demand for energy-efficiency

·       Automotivedemand for increased fuel economy

·       Aerospace and Defense demand for advanced power managementtechnology

We divide ourproducts among three general product categories: Power Management ICs andAdvanced Circuit Devices, Power Components and Power Systems. As of fiscal yearended June 30, 2005, we report our results in six segments that generallyreflect the products’ end-markets and our decision making for our company aboutallocating resources, including the focus of research and developmentactivities, and in assessing performance. We also generate revenues bylicensing our intellectual property to third parties. We summarize our sixreporting segments into two groups, Focus Products and Non-Focus Products. Our FocusProduct segments are Computing and Communications, Energy-Saving Products,  

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Aerospaceand Defense, and Intellectual Property. Our Non-Focus Product segments are CommodityProducts and Non-Aligned Products.

We achieved consolidated revenues of $1.17 billion forthe fiscal year ended June 30, 2005,and increased our gross margin to 43.5 percent from 38.8 percent for the priorfiscal year ended. Revenues from our FocusProduct segments increased to 73 percent of our consolidated revenues for thefiscal year ended June 30, 2005, from 69 percent for the prior fiscal yearended. Gross profit margin for our Focus Product segments during the sameperiod grew to 50.6 percent from 46.5 percent for the prior fiscal year ended. Inour Non-Focus Product segments, revenues decreased to 27 percent of ourconsolidated revenues for the fiscal year ended June 30, 2005, from 31percent in the prior fiscal year ended, while gross profit margin during thesame period increased to 24.1 percent from 21.7 percent for the prior fiscalyear ended.

We market our products through direct sales staff,representatives and distributors. Ourcustomers include original equipment manufacturers (“OEMs”), distributors andsubcontract manufacturers. For our customers in our Focus Productsegments, we primarily use direct sales staff and representatives. In line withthis strategy, we have added a complement of field application engineers andtechnical sales support staff to better serve the customers’ needs. Forcustomers in the Commodity Product segment, we primarily sell throughdistributors, taking advantage of cross-selling opportunities with our other productfamilies. No single OEM customer,distributor or subcontract manufacturer accounted for more than ten percent ofour consolidated revenue for the fiscal year ended June 30, 2005.

We conduct research and development activities toimprove the performance and cost effectiveness of our product offerings intarget applications. Our research and development program focuses on PowerManagement ICs, Advanced Circuit Devices and Power Systems and the advancementand diversification of our HEXFET® power MOSFET and IGBT productlines within our Focus Product segments. Our program places increasing emphasison the development of chipsets and system-level solutions that improveoverall system performance and cost, and helps customers accelerate marketintroduction of their products. In the fiscal years ended June 30, 2005,2004 and 2003, we spent $104.9 million, $92.2 million and $78.9 million,respectively, on research and development activities.

We fabricate most of our chips in facilities designedto address the specific requirements of power semiconductors. We believe ourwafer fabrication costs are among the lowest in the industry. We have waferfabrication and/or assembly production facilities in California, Massachusetts,Mexico, the United Kingdom, Italy, India and China. We also use third-partyfoundries and assemblers that provide us with capacity flexibility. We havebeen ramping up our most advanced manufacturing facility in Newport, Wales(United Kingdom), acquired in fiscal 2002. We plan to utilize this fabricationcapacity almost exclusively for our Focus Products, which offers us the muchneeded capacity over the next several years to support our growth.

We are also continuingwith our plan to review products and product lines not aligned with our long-termobjectives to increase our overall gross margins over 50 percent. As of fiscalyear ended June 30, 2005, we have discontinued business opportunities ofover $100 million in annualized revenues since the beginning of fiscal year2004, across our various segments. Within our Non-Focus Products, specificallyour Non-Aligned Product segment, we have targeted an additional $110 millionfor realignment, whether by changing the model for how we participate in thebusiness, or by divestiture or other strategic transactions, such as jointventure or partnership. We plan to support our Non-Focus Products to the extentwe believe appropriate, to manage, maintain or increase their value in linewith our long-term goals for those segments. (Referto “Item 7, Management’s Discussion and Analysis of Financial Condition andResults of Operations—Fiscal 2005 Compared with Fiscal 2004” and Note 7 to ConsolidatedFinancial Statements, “Segment and Geographic Information”, for furtherdiscussions about our business segments.)

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**Product Categories and Segments**

We use ourtechnology, comprehensive experience in power management, and low-costmanufacturing platforms to offer what we believe is one of the industry’s mostadvanced and competitive lines of power management products. Our products aredivided among three general product categories. These products may be soldacross one or more reportable segments:

·       *Power Management Integrated Circuits and Advanced Circuit Devices.  *OurPower Management Integrated Circuits, or Power Management ICs, are analog,mixed signal, and digital semiconductors that integrate logic and/or powermanagement functions on the same chip to optimize system performance. AdvancedCircuit Devices are chipsets, multi-chip modules and other advanced-performancedevices that generally address power management requirements in demandingapplications, and which we do not consider to be commodity in nature. Our PowerManagement ICs and Advanced Circuit Devices provide application-specific powermanagement solutions for computers, servers and routers, consumer electronics,energy-saving appliances and other motor-control applications, aircraft andsatellites, defense electronic systems, wireless and wireline communicationdevices and certain automotive applications.

·       *Power Components.  *Power Components are discretedevices used in general power management applications. These include metaloxide semiconductor field effect transistors (MOSFETs) and insulated gatebipolar transistors (IGBTs), regulators, rectifiers, diodes, thyristors and interfaces.Power MOSFETs and IGBTs rapidly and efficiently switch electricity on and offin order to supply power in a form that can be formatted to the specificrequirements of a circuit. Our Power Components are used in virtually all ourend markets.

·       *Power Systems.  *Power Systems combine powersemiconductors with other power management components in modules that improvepower efficiency, provide a cost-effective alternative to custom analogdesigns and enable customers to introduce new products more quickly. We supplyPower Systems as modules for automotive electronics (including electric fancontrol, electric power steering and integrated starter/alternator motors),other motor control applications (including industrial refrigeration and airconditioning), and commercial and military aircraft.

We report in six segments that generally reflect ourproducts’ end-markets.   Our ChiefOperating Decision Maker (“CODM”) for financial accounting purposes is ourChief Executive Officer who reviews the revenues and gross margin results foreach of these segments in making decisions about allocating resources,including the focus of research and development activities, and assessingperformance. We do not allocate assets, sales and marketing, informationsystems, finance and administrative costs to the operating segments, as theseare not meaningful statistics to the CODM in making resource allocationdecisions or in evaluating performance of the operating segments.

We further summarize our segments into two groups,Focus Products and Non-Focus Products, to reflect our strategic goals and theallocation of our critical resources.

Our Focus Productsegments are:

·       Computingand Communications (“C&C”)—The Computing and Communication segment iscomprised of our Power Management ICs, Advanced Circuit Devices, includingiPowirTM multi-chip modules and DirectFETTM solutions, and Power Components(primarily HEXFET Power Components) that address servers and high-end desktops,notebooks, communications networking, and digitally-oriented consumer productslike game consoles. Our C&C segment products are also used in digitaltelevision, liquid crystal displays (“LCDs”), portable handheld devices andcellular phones, and are primarily used for DC-DC converter type applications.

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·       Energy-SavingProducts (“ESP”)—The Energy-Saving Product segment is comprised of our PowerManagement ICs, Advanced Circuit Devices and Power Components (primarily HEXFETand IGBT Power Components) for variable speed motion control in energy-savingappliances (such as washing machines, refrigerators and air conditioners), industrialsystems (such as fans, pumps and compressors), advanced lighting products(including fluorescent lamps, high intensity discharge (“HID”) lamps, coldcathode fluorescent (“CCFL”) tubes and light emitting diodes (“LED”) lighting),advanced automotive solutions (primarily diesel injection, electric-gasolinehybrid and electric power steering systems), and consumer applications (forexample, plasma TVs and digital-audio units).

·       Aerospaceand Defense (“A&D”)—The Aerospace and Defense segment is comprised ofadvanced power management solutions, such as radiation-hardened powermanagement modules, radiation-hardened Power Components, and otherhigh-reliability Power Components that address power management requirements insatellites, launch vehicles, aircrafts, ships, submarines and other defense andhigh-reliability applications.

·       IntellectualProperty (“IP”)—The Intellectual Property segment reports our business oflicensing our intellectual property to third parties. Our IP income has beenand is largely dependent on the continued enforceability and validity of ourlicensed MOSFET patents, which will generally reach their maturity in a fewyears. Aside from our MOSFET technologies, our intellectual property strategyhas been to use our intellectual property primarily for the design anddevelopment of value-added families of products. In our IP segment, weconcentrate our efforts on the licensing of technologies or fields of use thathave application beyond our product groups or which no longer align with ourlong-term business strategies for our product groups. We also target certaintechnologies for licensing that we believe help establish our product platformsand structures as industry standards and, thereby enhance the growth of certainproducts.

Our Non-Focus Productsegments are:

·       CommodityProducts (“CP”)—The Commodity Product segment is comprised primarily of older-generationPower Components that are sold with margins generally below our strategictargets and are typically commodity in nature. These products have widespreaduse throughout the power management products industry and are often complementaryto many of our Focus Product offerings or allow us to provide a full range ofcustomer or application offerings. We often offer these products to takeadvantage of cross-selling opportunities for our other product families. Theseproducts may help to increase our manufacturing economies of scale.

·       Non-AlignedProducts (“NAP”)—The Non-Aligned Product segment includes businesses, productlines or products we are targeting for realignment, whether by changing thebusiness model for how we participate in the business, or by divestiture orother strategic transactions, such as joint venture or partnership. We plan tosupport our Non-Focus Products to the extent we believe appropriate, to manage,maintain or increase their value in line with our long-term goals for thosesegments. Currently, product lines reported in this segment are certainmodules, rectifiers, diodes and thyristors used in automotive, industrial,welding and motor control applications.

**Industry Overview**

Power semiconductors convert power from an electricaloutlet, a battery or an alternator running off an internal combustion engineinto more efficient and useful power for a wide range of electrical andelectronic systems and equipment. The more sophisticated the end product, thegreater the need for specially-formatted, finely-regulated power.The importance of power semiconductor technology rises with the increasingcomplexity of electronic products and the proliferation of electronic featuresin information technology, industrial, consumer, aerospace and defense andautomotive products. According to iSuppli, a 

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leading industry sourcefor market information,the market for power management semiconductors incalendar year 2004 was approximately $21 billion, growing to approximately $24billion in calendar year 2005. Our Power Management ICs, Advanced CircuitDevices, Power Components and Power Systems address approximately $15 billion orover 70 percent of this market. We have seen signs of recovery from what webelieve was an inventory correction during first half of calendar year 2005. However,economic conditions can be uncertain and difficult to predict.

Historically, demandfor power semiconductors has displayed cyclical characteristics. Current demandis driven largely by the following:

·       *InformationTechnology (“IT”) Demand for Increased Speed and Functionality.  *Productdevelopment roadmaps for the IT industry call for continued increases in speedand functionality, and ever-shrinking form factors driving power density incomputers, servers, consumer electronics and a variety of leading-edgeelectronic devices and equipment. The need for greater power drives up currentlevels of processing and operating frequencies, and each new generation of ITrelies more heavily on, and places a higher value on, efficient, precise powermanagement. The development of WiMAX and the expected transition to morewideband technologies is requiring significant enhancements in power managementtechnology. As the worlds of computing, communications and consumer electronicsconverge, powerful devices and applications will emerge that will placeincreased data management requirements on servers, storage systems, routers anddatacom equipment. These changes will demand higher power performance levels.

·       *Consumer and Industrial Demand for Energy-Efficiency.  *Worldwidedemand for energy-saving appliances, industrial motors, efficient lighting andconsumer products like home entertainment displays and audio equipmentcontinues to rise. Whether the end products are sold to customers in anindustrialized nation with stringent environmental standards or a developingnation with a modest energy budget, advanced power management technologyprovides solutions to fulfill the need for energy efficient consumer andindustrial products.

·       *Automotive Demand for Increased Fuel Economy.  *Currentoil prices are driving consumer demand and regulatory mandates for increasedautomotive fuel efficiency. In many instances the need for fuel efficiency isresulting in fundamental redesigns of automotive systems, where power features,such as electric power steering, common rail diesel injection andelectric-gasoline hybrid powertrain, are used to augment or replacetraditional, less efficient systems. The need to meet increased fuel efficiencyis prompting a fundamental re-design of automotive electrical systems, which isshaped in part by advancements in power management technology.

·       *Aerospace and Defense Demand for Advanced PowerManagement Technology.  *In the aerospace and defenseindustries, power management technology is critical to meeting the rigorousspace, weight and reliability requirements of highly-demanding applications andharsh environments. A renewed commitment to security drives some of the demandin this segment through growth in defense applications. In addition, aircraftdesigns are converting from hydraulic control systems to electronic controlsystems, which use a higher content of power management products, and aerospacesystems designers are constantly striving for higher efficiency powerconversion solutions.

**Strategy**

We continue to build on our industry leadership inpower management technology to develop certain key products based on ourproprietary technology. To differentiate ourselves, we focus on the powermanagement requirements of a specific application and bring our comprehensiveportfolio of products and technologies to advance the power managementperformance of that application. Our products are diversified within the powermanagement field and serve various applications, such as computers, 

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communications networking,consumer electronics, energy-saving appliances, lighting, satellites, launchvehicles, aircraft and automotive diesel injection.

We continue our Focus Products strategy, whichinvolves developing value-added products, such as high performance PowerManagement ICs, taking advantage of cross-selling opportunities for our variousproduct families, and increasing the number of new technical salesprofessionals and field application engineers worldwide. We implement ourstrategy through the following initiatives:

*Adding Value in High Growth Markets.**  *We concentrateour efforts on power management products and believe this focus has helped usdevelop the most advanced power management products and solutions. For example,our Power Management ICs are used in power management for portable electronics,next-generation plasma HDTV displays and Intel’s and Advanced MicroDevices’ most advanced microprocessors. We are also targeting a wide range ofapplications that have not historically utilized power management technologieswith our Power Management ICs and Power Components, including washing machines,refrigerators, air conditioners and other appliances from such market leadersas Electrolux, LG, Samsung, Sanyo and Whirlpool.

*Leveraging Our Leading-Edge Technology.**  *Our leading-edge technology enables us to setperformance and architecture standards for power electronics in targetedapplications. Our research and development program focuses on Power ManagementICs, Advanced Circuit Devices and Power Systems and the advancement anddiversification of our HEXFET, power MOSFET and IGBT product lines.During the three years ended June 30, 2005, we spent $275.9 millionon research and development. We have a growing portfolio of approximately 400U.S. patents and approximately 800 patent applications pending worldwide (see “IntellectualProperty” below). We continue to commit to research and development to generatenew patents and other intellectual property and concentrate on incorporatingour technologies into our Focus Products. In the fiscal years ended June 30,2005, 2004 and 2003, licenses under our patents generated royalty income of$41.2 million, $41.9 million and $42.0 million, respectively. Our licensedMOSFET patents expire between 2005 and 2010, with the broadest remaining ineffect until 2007 and 2008.

We now report our royalties fromall intellectual property licensing under our IP segment. Our income hasbeen and is largely dependent on the continued enforceability and validity ofour licensed MOSFET patents, which will be generally reaching their maturity ina few years. Our licensed MOSFET patents expire between 2005 and 2010, with thebroadest remaining in effect until 2007 and 2008. Aside from our MOSFETtechnologies, our intellectual property strategy has been to use ourintellectual property primarily for the design and development of a value-addedfamily of products.  In our IP segment, we concentrate our efforts onthe licensing of technologies or fields of use that have applicationbeyond our product groups or which no longeralign with our long-term business strategies for our product groups. Wealso target certain technologies forlicensing that we believe help establish ourproduct platforms and structures as industry standards and, thereby, enhance thegrowth of certain products. Royalties fromour MOSFET patents have been and are largely dependent on the continuedenforceability and validity of our licensed MOSFET patents, the ability of ourcompetitors to design around our licensed MOSFET technology or to developcompeting technologies and general market conditions. The continuation of suchroyalties is subject to a number of risks (see “Item 7, Management’s Discussionand Analysis of Financial Condition—Factors that May Affect Future Results—Ourongoing protection and reliance on our intellectual property assets expose usto material risks”).

*Extending Leadership in Power Components.**  *We pioneered a fundamental technology forpower MOSFETs and estimate that the majority of the world’s power MOSFETs areproduced by us or use our patented technology. Over the last two years, weinvested aggressively to advance trench, planar and other process technologies.These investments produced what we believe are the most efficient power MOSFETcomponents in the marketplace. Our leadership position in Power Componentsprovides us with a platform for continued expansion in value-added growthmarkets.

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*Capitalizing on Relationships with Market Leaders.**  *Many industry leaders look to us for productsand programs that address their most challenging power management needs. Theserelationships put us at the forefront of developing products for new trends inthe marketplace.  Our strategy of drivingsignificant content adoption with these customers into application specificareas requires a large, well trained technical sales team. We have increasedthe number of technical product sales professionals and field applicationengineers worldwide, to offer technological design expertise and high qualitycustomer service. This comprehensive sales and engineering support includesdesign-based consulting services, Internet service applications, electronicorder entry and just-in-time delivery.

*Focusing on Manufacturing Efficiency.**  *We fabricate most of our chips in facilitiesdesigned to address the specific requirements of power semiconductors. Webelieve our wafer fabrication costs are among the lowest in the industry. Wehave wafer fabrication and/or assembly production facilities in California,Massachusetts, Mexico, the United Kingdom, Italy, India and China. We also usethird-party foundries and assemblers that provides us with capacityflexibility. We have been ramping up our most advanced manufacturing facilityin Newport, Wales (United Kingdom), acquired in fiscal 2002. We expect thisfacility to support our growth over the next several years with firstproduction wafers shipped in the fiscal quarter ended December 31, 2005.

Manufacturing Related Acquisition.   In July 2004,we acquired the specialty silicon epitaxial services business from AdvancedTechnology Materials, Inc. for $39.6 million in cash in order to lowerproduction costs and to gain certain key intellectual property for epitaxialsilicon substrate manufacturing (see Note 13, “Acquisitions” of Notes toConsolidated Financial Statements).

Restructuring Update.   Inthe second quarter of fiscal 2003, we announced certain restructuringinitiatives. Our goal was to position ourselves to better-fit marketconditions, de-emphasize our commodity business and accelerate the move to ourproprietary products, which refer to our Power Management ICs, Advanced CircuitDevices and Power Systems. The restructuring plan included consolidating andclosing several older facilities and legacy operations. We also planned tolower overhead costs across our support organizations. We have substantiallycompleted these restructuring activities as of June 30, 2005. We expect tocomplete the remaining activities, primarily the closing of a fabrication lineat El Segundo, California and an assembly line at Krefeld, Germany by fiscalyear end 2006 or sooner. As of the fourth quarter of fiscal year 2005, we haverealized annualized savings of about $80 million from our restructuringactivities (see also “Item 7, Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Fiscal 2005 Compared with Fiscal 2004—Impairmentof Assets, Restructuring and Severance Charges”).

*Focusing on Divesting or Changing Our Business Model forLower Margin Product Lines.**  *We review our business for product lines orproducts that we have determined in their current form or substance are notaligned with our long-term strategic objectives, primarily for gross marginperformance, and/or for which our fundamental business model by which we derivevalue is changing. In some instances we believe it is in our best interests todivest or discontinue the business. In other instances, we may elect toparticipate in the business with a different structure, such as joint venturesand partnerships, to allow for long-term business growth. We have discontinuedover $100 million in annualized revenues since the beginning of fiscal year2004, across our various segments. Within our Non-Focus Products, specificallyour Non-Aligned Product segment we have targeted an additional $110 million forrealignment, whether by changing the model for how we participate in thebusiness, or by divestiture or other strategic transactions, such as jointventure or partnership. We plan to support our Non-Focus Product segments tothe extent we believe appropriate, to manage, maintain or increase their valuein line with our long-term goals for those segments. (Refer to “Item 7, Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Fiscal 2005 Compared with Fiscal 2004” andNote 7 to Consolidated Financial Statements, “Segment and GeographicInformation”, for further discussions about our business segments.)

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**Products and Applications**

Our products processelectrical power into a form that is more readily usable by electric products.We believe that our full complement of power management technology represents acompetitive advantage, enabling us to provide customers with solutions thatshorten their overall product development cycle time. Our products are broadlydivided among three product categories: Power Management ICs and AdvancedCircuit Devices, Power Components and Power Systems.

***Power Management ICs and Advanced Circuit Devices***

Our Power Management ICs are semiconductors that oftenintegrate several system functions including reference, logic, control,supervision, protection and monitoring on the same chip. These devices optimizethe performance of circuits that often include power MOSFETs and IGBTs andallow our customers to simplify circuit design and assembly, improvereliability, and reduce overall system size and cost. The ability of these ICsto sense and respond to circuit conditions makes their performance superior todiscrete components. Our ICs often use our proprietary power MOSFET technology.We have obtained substantial patent protection for our ICs and have additionalpatent applications pending.

Advanced Circuit Devices are chipsets, multi-chipmodules and other advanced performance devices that address power managementrequirements in demanding applications. These products are value-added orprovided under reduced competition due to their technological content or ourcustomer relationship.

Increased complexity in computers, routers, serversand other devices require increased levels of power and more effective heatdissipation, making power management one of the most critical tasks. ITapplications are trending to lower voltages and higher current levels, whichrequire greater efficiency and more complex power management to meet speed andperformance demands. Advanced consumer electronics such as PDP televisions andgame consoles also require more efficient and complex power management.

Motors consume approximately half of the world’selectricity. New variable-speed motors equipped with our Power ManagementICs and Advanced Circuit Devices increase energy efficiency and performance ina wide range of household, commercial and industrial applications. For example,while most refrigerator motors can operate only at full speed, a refrigeratorequipped with variable-speed motor can run at the exact speed needed tomaintain the required temperature. Our Power Management ICs and AdvancedCircuit Devices designed for variable-speed motors reduce electricityconsumption, simplify product design, improve product performance and reduceoverall costs. We have achieved multiple sole-source design wins fromleading worldwide manufacturers in high-end washing machines,refrigerators and other energy-saving appliances.

We continue to invest aggressively in our PowerManagement IC technologies and key trench, planar and other processtechnologies. These investments have resulted in what we believe are the mostefficient Power Management ICs and Advance Circuit Devices. Among other attributes,we believe these product offerings set the industry standard for performanceand cost-efficiency in high-volume consumer electronics applications.

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***Power Components***

*Switching Products.**  *PowerMOSFETs and IGBTs rapidly and efficiently switch electricity on and off inorder to supply power in a form that can be formatted to the specificrequirements of a circuit.

Through our HEXFETproduct line, we are the market leader in power MOSFETs according toiSuppli market research firm. Our emphasis on quality control and reliabilityhas helped us maintain market acceptance and brand recognition of our HEXFET line of products. We pioneered thefundamental planar technology that set the industry standard for power MOSFETs.

MOSFETs are critical in a wide variety of electricproducts. Communications applications include cellular phones, telephonenetworks and modems. Computer and peripheral applications include powersupplies, disk drives and printers. Office equipment applications includecopiers and facsimile machines. Consumer electronics applications include homeentertainment*,* video cameras,household appliances and power tools. Automobile applications include anti-lockbraking systems, fuel injection systems, power accessories and air bags.Industrial applications include automated production equipment, instrumentationand test equipment. Aerospace and defense applications include communicationssatellites and satellite command-and-control systems.

IGBTs typically perform the switch function inindustrial applications that require higher current and voltage than powerMOSFETs can handle efficiently. The performance and ruggedness of these devicesenable them to replace bipolar transistors and thyristors in many high-voltage,high-current motor control and power conditioning applications. Energy-efficient,variable-speed motor controls are an emerging application, and we believehybrid and electric vehicles may require large quantities of IGBTs. Our IGBTtechnology is closely related to our power MOSFET technology. We believe ourpatents on fundamental power MOSFET technology also apply to IGBTs.

*Regulators, Rectifiers, Diodes, Thyristors andInterfaces.**  *We manufacture abroad line of regulators, rectifiers, diodes, thyristors and interfaces. Theseproducts, which also condition electrical power to make it more efficient andusable, are used in industrial end products that require power-handlingcapability from one amp to 5,000 amps and from 20 volts to 5,000 volts.Applications include motor and lighting controls, welding equipment, forklifts,machine tools, induction heating, locomotives, motor-driven productionlines, smelting equipment and power supplies.

Our Schottky diodes andfast-recovery diodes serve the output rectification function of powerconversion. A diode is a discrete device that conducts current in onedirection. A Schottky diode is an ultra-fast diode used in high-frequency,low-voltage circuits. A fast-recovery diode is a diode suited toapplications above 200 volts where high switching speed is desirable. Schottkydiodes are used with power MOSFETs in high-frequency applications such ascomputers and peripherals. Our HEXFRED® fast-recovery diodesare used with IGBTs in higher-current, lower-frequency applicationssuch as motor controls.

***Power Systems***

Power Systems combine power semiconductors with otherpower management components in specialized modules that improve powerefficiency and simplify circuit design. Our Power Systems are used in DC-DCconverters, automotive electronics and motor control. Our products provide acost-effective alternative to custom analog designs.

Tougher standards for fueleconomy, emissions and safety and the proliferation of power features inautomobiles are driving the adoption of more complex power electronics. OurPower Systems can help reconcile conflicting demands for better fuel mileageand more power features by replacing traditional hydraulic and belt-drivenapplications with electronic systems. In addition, electrically operatedautomotive 

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systemsimprove reliability and maintenance. Our Power Systems are designed intointegrated starter/alternator motors, electric power steering systems, fuelpumps, water pumps and fan controls.

**Manufacturing**

Semiconductor manufacturing involves two phases ofproduction: wafer fabrication and assembly. Wafer fabrication requires asequence of process steps that expose silicon wafers to chemicals that changetheir electrical properties. The chemicals are applied in patterns that definecells or circuits within numerous individual devices, termed “die” or “chips”,on each wafer. Assembly is the sequence of production steps that divide thewafer into individual chips and enclose the chips in structures, termed “packages”,which make them usable in a circuit. Power semiconductors generally use processtechnology and equipment already proven in the manufacturing of integratedcircuits.

We have manufacturing and/or assembly facilities inCalifornia, Massachusetts, Mexico, the United Kingdom, Italy, India and China.In addition, we have equipment at, or manufacturing supply agreements with,subcontractors located in China, the Czech Republic, Germany, Korea, Malaysia,Philippines, Taiwan, Thailand and the United States.

We have substantially completed our restructuringactivities previously announced in December 2002, to de-emphasize ourcommodity business and accelerate the move to our proprietary products, which referto our Power Management ICs, Advanced Circuit Devices and Power Systems (see “Item7, Management’s Discussion and Analysis of Financial Condition and Results ofOperations”). As part of this strategy, we are consolidating and closingcertain manufacturing sites, upgrading equipment and processes in designatedfacilities and discontinuing production in a number of others that cannotsupport more advance technology platforms or products within our Focus Productsegments. The majority of our capital spending were at our most advanced waferfabrication facility, located in Newport, Wales. This facility provides waferfabrication capacity for mixed-signal, analog and MOSFET processes. We have aMOSFET wafer fabrication facility in Temecula, California. We have ahigh-voltage Power Management IC wafer fabrication facility in El Segundo,California, which is targeted to be moved to Newport, Wales by the end offiscal year end 2006. Assembly operations for products used in the aerospaceand defense applications, which include high-reliability Power Components, arelocated in Leominster, Massachusetts, Santa Clara, California, and Tijuana,Mexico. We manufacture substantially all of our Schottky diodes, high-powerrectifiers and thyristors at our Torino, Italy facility. Plants that assemblepower MOSFETs and other products are located overseas in facilities we own orin subcontracted facilities. Our high-volume assembly lines for power MOSFETs,IGBTs and diodes are located in our facility in Tijuana, Mexico. We use productionfacilities in Swansea, Wales and Krefeld, Germany to manufacture and assembleautomotive modules. As part of our restructuring activities, we have moved mostmanufacturing activities from Krefeld, Germany to our Swansea, Wales andTijuana, Mexico facilities. In a duty-free zone in India, we have an assemblyfacility for rectifiers and thyristors. The Mesa, Arizona facility we acquiredat the beginning of this fiscal year provides specialty silicon epitaxial services. Forour manufacturing facilities by reportable segment, refer to “Item 2, Properties”below.

At fiscal year ended June 30, 2005, we operatedin the low 90s percent of our worldwide semiconductor fabrication andassembly/module manufacturing capacities, without taking into account subcontractor foundry capacity. Demand for our Focus Products contributed to the highlevels of capacity utilization. In order to continue to meet the high demandfor our Focus Products, we plan to accelerate our capital expansion plans. As aconsequence we anticipate nearly 70 percent of fiscal year 2006’s capitalexpenditures will be in the first half of the year. Included in this plan isthe ramp up of our 200mm wafer fabrication manufacturing facility in Newport,Wales facility. This facility will provide our most advanced productioncapabilities. We plan to utilize this fabrication capacity almost exclusivelyfor Focus Products. This facility offers us the much needed capacity over thenext several years to support our growth.

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We believe our fabricationcosts are among the lowest in the industry. Through our Focus Productsstrategy, including our restructuring activities as described above, we haveimproved our gross margin to 43.5 percent for the fiscal year ended June 30,2005, from 38.8 percent in the prior fiscal year. Focus Products accounted for73 percent and 69 percent of our consolidated revenues in fiscalyears ended June 30, 2005 and June 30, 2004, respectively. Grossmargin for our Focus Products increased to 50.6 percent for the fiscal yearended June 30, 2005 from 46.5 percent for the prior fiscal year ended June30, 2004.

**Marketing, Sales and Distribution**

We market our products through direct sales staff,representatives and distributors. For our customers in our Focus Productsegments, we primarily use direct sales staff and representatives. In line withthis strategy, we have added a complement of field application engineers andtechnical sales support staff to better serve the customers’ needs. Forcustomers in the Commodity Product segment, we primarily sell throughdistributors, taking advantage of cross-selling opportunities with our otherproduct families. For the fiscal years ended June 30, 2005, 2004 and 2003,direct sales to original equipment manufacturers (“OEMs”) were 72 percent, 71percent and 69 percent, respectively, of consolidated product sales, whichexclude royalty income reported under our Intellectual Property segment.

For the fiscal year ended June 30, 2005, ourproduct sales by region, based on the location of the customer, were 29 percentfrom North America, 23 percent from Europe and 48 percent****from Asia, which includes Japan and AsiaPacific. This has remained fairly consistent with the prior fiscal year ended June 30,2004, where sales by region were 28 percent, 24 percent and 48 percent forNorth America, Europe and Asia, respectively. Our domestic direct sales forceis organized into five regional sales zones. In Europe, our products are soldthrough our own sales force as well as through independent sales agents anddistributors. Our European sales and representative offices are in Austria, theCzech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Spain,Sweden, Switzerland, Russia and the United Kingdom. In Asia, we have salesrepresentative or liaison offices in China, Hong Kong, India, Japan, thePhilippines, Singapore, South Korea and Taiwan. We also have salesrepresentative or liaison offices in Australia, Mexico and New Zealand.

For financial information about the results for ourgeographic areas for each of the last three fiscal years, refer to Note 7, “Segmentand Geographic Information” of Notes to Consolidated Financial Statements. Forthe risks attendant to our foreign operations, see “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Factors that may affect Future Results—Our international operationsexpose us to material risks.’’

Because many applicationsrequire products from several product groups, we have organized our productdevelopment and marketing efforts by sector and application, rather thanproduct type. Those general sectors are now reported within our definedsegments. In addition, our staff of application engineers provides customerswith technical advice and support regarding the use of our products. We haveincreased the number of engineering offices to help support our Focus Products.We believe the depth of our power management product line enhances ourcompetitive position in the overall power semiconductor market.

**Customers**

Our devices are incorporated in subsystems and endproducts manufactured by other companies. Our customers include OEMs,distributors and subcontract manufacturers. No single OEM customer, distributoror subcontract manufacturer accounted for more than ten percent of ourconsolidated revenue for the fiscal year ended June 30, 2005. The majorityof our products in our Focus Product segments, including those in the C&C,ESP and A&D segments, are sold directly to OEM customers. However, three 

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distributors included atthe table below accounted for approximately 39 percent of our C&C revenuesfor the fiscal year ended June 30, 2005. One of these distributorsaccounted for approximately 12 percent of our CP revenues for the fiscal yearended June 30, 2005. One of the OEM customers included at the table belowaccounted for approximately 27 percent of our NAP revenues for the fiscal yearended June 30, 2005. No single OEM customer, distributor orsubcontract manufacturer accounted for more than ten percent of our otherreported segments.

Thefollowing table lists some of our major customers by revenues, by businesssegment and end-market for fiscal year 2005:
| **Business Segment(s)***  | ** ** | **End Markets**                                                                           | ** ** | **Customers**                                                                                       |
|---------------------------|------------|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
| C&C,  CP              |       | Information Technology  (Communications)                                                  |       | Alcatel,  Astec, Artesyn Technologies, Cisco, Delta, Lucent, Motorola, Nortel and  Power-One        |
| C&C, CP               |       | Information Technology  (Computing)                                                       |       | Apple,  Dell, Fujitsu, HPQ, IBM, Intel, NEC and Sony                                                |
| C&C,  ESP, CP         |       | Consumer                                                                                  |       | BSH,  Electrolux, Hitachi, JVC, Matsushita, Pioneer, Samsung, Sanyo,  Toshiba-Carrier and Whirlpool |
| ESP, CP, NAP              |       | Industrial                                                                                |       | American  Power Conversion, Danfoss, Emerson and Grundfos                                           |
| ESP,  CP, NAP             |       | Automotive                                                                                |       | Bosch,  Daimler-Chrysler, Delphi, Nagares, SiemensVDO, Temic, TRW, Valeo and Visteon                |
| A&D                   |       | Aerospace and Defense                                                                     |       | Astrium,  BAE, Boeing, Honeywell, ITT, L3 Communications, Lockheed-Martin and  Northrop-Grumman     |
| **Business Segment(s)*:** |       | **Distributors and Subcontract Manufacturers (based on revenues for  fiscal year 2005):** |
| C&C, ESP, CP, NAP     |       | Distributors                                                                              |       | Arrow  Electronics, Avnet, Future Electronics, Lintek, Weikeng and Zenitron                         |
| C&C, ESP, CP, NAP     |       | Subcontract Manufacturers                                                                 |       | Celestica, Flextronics,  Jabil, Sanmina-SCI and Solectron                                           |

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| *****  | C&C: | Computing and Communications |
|--------|----------|------------------------------|
|   | ESP:     | Energy-Saving Products       |
|   | A&D: | Aerospace and Defense        |
|   | CP:      | Commodity Products           |
|   | NAP:     | Non-Aligned Products         |

 

**Competition**

We encounter differing degrees of competition for ourvarious products, depending upon the nature of the product and the particularmarket served. Generally, the semiconductor industry is highly competitive andsubject to rapid price changes and product design changes. Several of ourcompetitors are larger companies with greater financial resources. We believethat we are differentiated from our competitors by our comprehensive line ofpower management products and our ability to combine these products intocompact, cost-effective packages and system-level solutions. Our productscompete with products manufactured by others on the basis of enablingcapability, performance, reliability, quality, price, delivery time to customerand service (including technical advice and support). Our major competitors inPower Management ICs and Advanced Circuit Devices include Intersil, LinearTechnology, Maxim Integrated Products, Semtech and Texas Instruments. Our majorcompetitors in Power Components include Fairchild Semiconductor, InfineonTechnologies, Mitsubishi, ON Semiconductor, Philips, Renesas,STMicroelectronics, Toshiba and Vishay-Siliconix. Aside from typical industrycompetitors, our Power Systems products often offer our customers an improved alternativeto their internal manufacturing systems internally.

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Ourmajor competitors by business segment are as follows:
| **Business  Segment**         | ** ** | **Competitors**                                                                                                                                                                      |
|-------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Computing and  Communications |       | Fairchild Semiconductor,  Infineon Technologies, Intersil, Linear                                                                                                                    |
|                          |       | Technology, Maxim  Integrated Products, National Semiconductor, ON Semiconductor, Philips,  Renesas, Semtech, STMicroelectronics, Texas Instruments, Vishay-Siliconix,  and Volterra |
| Energy-Saving Products        |       | Fairchild, Infineon  Technologies, Intersil, Mitsubishi, National Semiconductor, Philips, Renesas,  STMicroelectronics, Shindengen, Texas Instruments, Toshiba and  Vishay-Siliconix |
| Aerospace and Defense         |       | Babcock, Interpoint,  Microsemi, Modular Devices, MS Kennedy, Semelab, Sensitron, VPT                                                                                                |
| Commodity Products            |       | Fairchild Semiconductor,  Infineon Technologies, Matsushita, Philips, Renesas, STMicroelectronics,  Toshiba and Vishay-Siliconix                                                     |
| Non-Aligned Products          |       | Mitsubishi, STMicroelectronics and Toshiba                                                                                                                                           |

 

**Backlog**

As of June 30, 2005, our backlog of orders was$393.7 million compared to $403.3 million as of June 30, 2004. The backlogfor our C&C and CP segments declined, which was partially offset byincrease in backlog for our ESP and A&D segments. Backlog is comprised ofpurchase orders and customer forecast commitments scheduled to be shippedwithin the following twelve months. Increasingly, major customers are operatingtheir businesses with shorter lead-times and are placing their orders atshorter intervals, which tend to reduce backlog relative to future revenue. Givenadequate notice, we usually allow customers to cancel purchase orders withoutpenalty. The amount of backlog to be shipped during any period is dependent onvarious factors and can vary significantly from month to month. Accordingly,backlog is not necessarily indicative of sales for any future period.

Backlogby business segment as of fiscal years ended June 30, 2005 and 2004 is asfollows (in thousands):
| ** **                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Computing and Communications       |       | $        | 124,867    |     | $          | 145,343 |   |
| Energy-Saving  Products            |       | 115,905  |       | 101,205  |       |
| Aerospace and  Defense             |       | 51,106   |       | 42,009   |       |
| Focus Products Backlog             |       | 291,878  |       | 288,557  |       |
| Commodity Products                 |       | 58,289   |       | 74,555   |       |
| Non-Aligned  Products              |       | 43,486   |       | 40,146   |       |
| Non-Focus Products Backlog         |       | 101,775  |       | 114,701  |       |
| Total Backlog,  June 30, 2005 |       | $        | 393,653    |     | $          | 403,258 |   |

 

**Research and Development**

We conduct research and development activities toimprove the performance and cost effectiveness of our product offerings intarget applications. Our research and development program focuses on PowerManagement ICs, Advanced Circuit Devices and Power Systems and the advancementand diversification of our HEXFET® power MOSFET and IGBT productlines within our Focus Product segments. Our program places increasing emphasison the development of chipsets and system-level solutions that improveoverall system performance and cost, and helps customers accelerate marketintroduction of their products.

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In the fiscal years ended June 30, 2005, 2004 and2003, we spent $104.9 million, $92.2 million and $78.9 million,respectively, on research and development activities. We have increased ourresearch and development spending by 122 percent over the last five years, aperiod that included the steepest downturn in the history of the semiconductorindustry.

Our design centers arelocated throughout the world, including the United States, Canada, the UnitedKingdom, Denmark, Italy, France, Germany and Singapore. During fiscal year 2005,we continued to introduce advanced power management solutions that drive highperformance computing and save energy across our served markets. New productsincluded: a) our μPFC IC family of products helping computing, consumerelectronics and home appliances meet energy-efficiency standards, b) anexpansion of our iMOTION integrated design platform for energy-savingappliances, c) a series of high voltage IGBT control ICs with integratedprotection features for a range of applications from motor drive to SMPS powersupplies, d) a broadening of our iPOWIR, DirectFET, and XPhase familiescritical in high performance computing applications, e) a universal activeORing IC for redundant Power Systems common to telecommunicationsinfrastructure, and f) two new classes of radiation-hardened MOSFETplatforms, R6 and R7, and a family of efficient radiation-hardened DC-DC converterplatforms for space applications.

**Intellectual Property**

We continue to make significant investments indeveloping and protecting our intellectual property. In the past fiscal year,we added over 100 patents worldwide. We have over 400 issued unexpired U.S.patents and approximately 380 U.S. patent applications pending (includingapproximately 100 provisional applications). Our power MOSFET patents expirebetween 2005 and 2010, with the broadest remaining in effect until 2007 and2008. In addition, we have 210 issued foreign patents and approximately 460foreign patent applications pending in a number of countries (includingapplications filed under treaty). We are also licensed to use certain patentsowned by others.  We have severalregistered trademarks in the United States and abroad, including the trademarkHEXFET®. We believe that our intellectual property contributes toour competitive advantage.

We are committed to enforcing our patent rights,including litigation if necessary. Through successful enforcement of ourpatents over the past decade, we have entered into more than 20 licenseagreements, generated royalty income, and received substantial payments insettlement of litigation. Our broadest power MOSFET patents were subject to,and have successfully emerged from, reexamination by the United States Patentand Trademark Office. Our IP segment reports our revenues from licensing ourintellectual property to third parties.

We currently have license agreements with the majorityof power MOSFET manufacturers in the United States and abroad. In the fiscalyears ended June 30, 2005, 2004 and 2003, we derived $41.2 million, $41.9million and $42.0 million of royalty revenues from license agreements,respectively. Our royalty income stream is dependent on the continuedenforceability and validity of our patents, the ability of our competitors todesign around our MOSFET technology or develop competing technologies, andgeneral market conditions. The continuation of such royalties is subject to anumber of risks (see “Item 7, Management’s Discussion and Analysis of FinancialCondition—Factors that May Affect Future Results—Our ongoing protectionand reliance on our intellectual property assets expose us to risks”).

Aside from our MOSFETtechnologies, our intellectual property strategy has been to use ourintellectual property primarily for the design and development of a value-addedfamily of products, and to defend those products in the marketplace.  In our IP segment, we concentrate our effortson the licensing of technologies or fields of use that have application beyondour product groups or which no longer align with our long-term businessstrategies for our product groups. We also target certain technologies for 

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licensingthat we believe help establish our product platforms and structures as industrystandards and, thereby, enhance the growth of certain products.

**Environmental Matters**

Federal, state and local laws and regulations imposevarious restrictions and controls on the storage, use and discharge of certainmaterials, chemicals and gases used in semiconductor manufacturing processes. Wedo not believe that compliance with such laws and regulations as now in effectwill have a material adverse effect on our results of operations, financialposition or cash flows.

However, under some of these laws and regulations, wecould be held financially responsible for remedial measures if properties arecontaminated or if waste is sent to a landfill or recycling facility thatbecomes contaminated. Also, we may be subject to common law claims if itreleases substances that damage or harm third parties. We cannot makeassurances that changes in environmental laws and regulations will not requireadditional investments in capital equipment and the implementation ofadditional compliance programs in the future, which could have a materialadverse effect on our results of operations, financial position or cash flows,as could any failure by us to comply with environmental laws and regulations.

IR and Rachelle Laboratories, Inc. (“Rachelle”), aformer operating subsidiary of ours that discontinued operations in 1986, wereeach named a potentially responsible party (“PRP”) in connection with theinvestigation by the United States Environmental Protection Agency (“EPA”) ofthe disposal of allegedly hazardous substances at a major superfund site inMonterey Park, California (“OII Site”). Certain PRPs who settled certain claimswith the EPA under consent decrees filed suit in Federal Court in May 1992against a number of other PRPs, including us, for cost recovery andcontribution under the provisions of the Comprehensive Environmental Response,Compensation and Liability Act (“CERCLA”). We have settled all outstandingclaims that have arisen against us out of the OII Site.  No claims against Rachelle have beensettled.  We have taken the position thatnone of the wastes generated by Rachelle were hazardous.

Counsel for Rachellereceived a letter dated August 2001 from the U.S. Department of Justice, directedto all or substantially all PRPs for the OII Site, offering to settle claimsagainst such parties for all work performed through and including the finalremedy for the OII Site.  The offerrequired a payment from Rachelle in the amount of approximately $9.3 million inorder to take advantage of the settlement. Rachelle did not accept the offer.

It remains the position ofRachelle that the wastes were not hazardous. Our insurer has not accepted liability, although it has made paymentsfor defense costs for the lawsuit against us. We have made no accrual for potential loss, if any; however, an adverseoutcome could have a material adverse effect on our results of operations orcash flows.

We received a letter in June 2001from a law firm representing UDT Sensors, Inc. relating to environmentalcontamination (chlorinated solvents such as trichlorethene) assertedly found inUDT’s properties in Hawthorne, California. The letter alleges that we operateda manufacturing business at that location in the 1970’s and/or 1980’s and thatwe may have liability in connection with the claimed contamination. We havemade no accrual for any potential losses since there has been no assertion ofspecific facts on which to form the basis for determination of liability.

**Employees**

As of August 31,2005, we employed approximately 6,000 people, of whom approximately 4,000 wereemployed in North America, 1,300 in Europe and 700 in Asia Pacific and Japan.The only collective bargaining agreements to which we are subject apply to ouremployees in Italy. We have approximately 300 employees in Italy.  We consider our relations with our employeesto be good.

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**AvailableInformation**

We file, with theSecurities and Exchange Commission (“SEC”) pursuant to Section 13(a) or15(d) of the Exchange Act, annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-Kand amendments to those reports filed or furnished. These reports may beaccessed at the SEC’s Public Reference Room at 100 F Street, N.E.,Washington, D.C. 20549. Information on the operation of the Public Reference Room isavailable by calling the SEC at 1-800-SEC-0330. The SECmaintains an Internet site that contains reports, proxy and informationstatements, and other information about us. The SEC’s Internet address ishttp://www.sec.gov.

Our Internet address ishttp://www.irf.com. We make available free of charge through our Internet websiteour annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, proxy statements and amendments tothose reports, as soon as reasonably practicable after we electronically filesuch material with, or furnish it to, the SEC.

We also make available,free of charge, through our corporate governance website, our corporate charter,bylaws, Corporate Governance Guidelines, charters of the committees of ourboard of directors, code of ethics and other information and material, includinginformation about how to contact our board of directors, its committees andtheir members. To find this information and materials, visit our corporategovernance section of our website at www.irf.com.

**Section303A.12 of New York Stock Exchange Listed Company Manual Disclosure**

Pursuant to Rule 303A.12(A) of the NewYork Stock Exchange (“NYSE”) Listed Company Manual, we submitted to the NYSElast year a Section 303A.12(a) Chief Executive Officer (“CEO”) Certification asrequired by such rule.  We also filedwith the Securities and Exchange Commission the CEO and Chief Financial Officercertifications required under Section 302 of the Sarbanes-Oxley Act of 2002 asexhibits to both this Form 10-K with respect to our 2005 fiscal year and ourForm 10-K filed last year with respect to our 2004 fiscal year. All of theabove certifications were provided without qualification.

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**Item 2. Properties**

Wemaintain manufacturing and office facilities around the world. Our majorfacilities, as of September 15, 2005, are in the following locations andused by the following segments:
| **Location**                         | ** ** | ** ** | ** ** | **Owned** | ** ** | **Leased** | ** ** | **Semiconductor  Fabrication** | ** ** | **Assembly/  Module  Manufacturing** | ** ** | **Design  Center** | ** ** | **Business  Office** | ** ** | **Business  Segment(s)*** | ** ** |
|--------------------------------------|------------|------------|------------|-----------|------------|------------|------------|--------------------------------|------------|--------------------------------------|------------|--------------------|------------|----------------------|------------|---------------------------|------------|
| El Segundo, California (U.S.A.)      |       |       | X          |      |       |       | X          |                           |       |                                 | X          |               |       |                 |       |                      |       |   | X |   |   |   | X |   |   | C&C,  ESP, A&D, IP, CP |   |
| Temecula, California (U.S.A)         |       |       | X          |      |       |       |       |                           |       |                                 | X          |               |       |                 |       |                      |       |   |   |   |   |   | X |   |   | C&C, ESP, A&D, CP |   |
| Santa Clara, California (U.S.A)      |       |       |       |      |       |       | X          |                           |       |                                 |       |               |       |                 | X          |                      |       |   | X |   |   |   |   |   |   | A&D |   |
| Irvine, California  (U.S.A)          |       |       |       |      |       |       | X          |                           |       |                                 |       |               |       |                 |       |                      |       |   | X |   |   |   |   |   |   | C&C, ESP |   |
| Mesa, Arizona (U.S.A)                |       |       | X          |      |       |       |       |                           |       |                                 | X          |               |       |                 |       |                      |       |   |   |   |   |   |   |   |   | C&C, ESP, A&D, CP |   |
| Cary, North Carolina (U.S.A)         |       |       |       |      |       |       | X          |                           |       |                                 |       |               |       |                 |       |                      |       |   | X |   |   |   |   |   |   | C&C, ESP |   |
| Leominster, Massachusetts  (U.S.A)   |       |       | X          |      |       |       | X          |                           |       |                                 |       |               |       |                 | X          |                      |       |   | X |   |   |   |   |   |   | A&D |   |
| North Kingston, Rhode Island (U.S.A) |       |       |       |      |       |       | X          |                           |       |                                 |       |               |       |                 |       |                      |       |   | X |   |   |   |   |   |   | C&C, ESP |   |
| Halifax, Canada                      |       |       |       |      |       |       | X          |                           |       |                                 |       |               |       |                 |       |                      |       |   | X |   |   |   |   |   |   | C&C, ESP |   |
| Tijuana, Mexico                      |       |       | X          |      |       |       |       |                           |       |                                 |       |               |       |                 | X          |                      |       |   |   |   |   |   | X |   |   | C&C, ESP, A&D, CP |   |
| Oxted, England (U.K.)                |       |       | X          |      |       |       | X          |                           |       |                                 |       |               |       |                 |       |                      |       |   | X |   |   |   |   |   |   | C&C, ESP |   |
| Whyteleafe, England (U.K.)           |       |       |       |      |       |       | X          |                           |       |                                 |       |               |       |                 |       |                      |       |   |   |   |   |   | X |   |   | C&C, ESP |   |
| Swansea, Wales (U.K.)                |       |       | X          |      |       |       |       |                           |       |                                 |       |               |       |                 | X          |                      |       |   |   |   |   |   |   |   |   | ESP, NAP |   |
| Newport, Wales (U.K.)                |       |       | X          |      |       |       |       |                           |       |                                 | X          |               |       |                 |       |                      |       |   |   |   |   |   |   |   |   | C&C, ESP |   |
| Skovlunde, Denmark                   |       |       |       |      |       |       | X          |                           |       |                                 |       |               |       |                 |       |                      |       |   | X |   |   |   |   |   |   | A&D |   |
| Provence, France                     |       |       |       |      |       |       | X          |                           |       |                                 |       |               |       |                 |       |                      |       |   | X |   |   |   |   |   |   | C&C, ESP |   |
| Torino, Italy                        |       |       | X          |      |       |       | X          |                           |       |                                 | X          |               |       |                 | X          |                      |       |   | X |   |   |   | X |   |   | NAP, CP |   |
| Pavia, Italy                         |       |       |       |      |       |       | X          |                           |       |                                 |       |               |       |                 |       |                      |       |   | X |   |   |   |   |   |   | C&C, ESP |   |
| Krefeld, Germany                     |       |       |       |      |       |       | X          |                           |       |                                 |       |               |       |                 |       |                      |       |   | X |   |   |   |   |   |   | ESP, NAP |   |
| Singapore                            |       |       |       |      |       |       | X          |                           |       |                                 |       |               |       |                 |       |                      |       |   | X |   |   |   | X |   |   | C&C, ESP, CP |   |
| Shanghai, China                      |       |       | X          |      |       |       | X          |                           |       |                                 |       |               |       |                 |       |                      |       |   |   |   |   |   | X |   |   | C&C, ESP |   |
| Xian, China                          |       |       | X          |      |       |       | X          |                           |       |                                 |       |               |       |                 | X          |                      |       |   | X |   |   |   | X |   |   | C&C, ESP |   |
| Mumbai, India                        |       |       |       |      |       |       | X          |                           |       |                                 |       |               |       |                 | X          |                      |       |   |   |   |   |   |   |   |   | CP , NAP |   |

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| *      | C&C: | Computing and Communications |
|--------|----------|------------------------------|
|   | ESP:     | Energy-Saving Products       |
|   | A&D: | Aerospace and Defense        |
|   | IP:      | Intellectual Property        |
|   | CP:      | Commodity Products           |
|   | NAP:     | Non-Aligned Products         |

 

We believe our facilities are adequate for current andanticipated near-term operating needs. At fiscal year ended June 30, 2005,we operated in the low 90s percent of our worldwide semiconductor fabricationand assembly/module manufacturing capacities, without taking into accountsubcontract or foundry capacity. Demand for our Focus Products contributed tothe high levels of capacity utilization. In order to 

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continue to meet the highdemand for our Focus Products, we plan to accelerate our capital expansionplans. As a consequence we anticipate nearly 70 percent of capital expendituresfor fiscal year 2006 will be in the first half of the year. Included in thisplan is the ramp up of our 200mm wafer fabrication manufacturing facility inNewport, Wales that will provide our most advanced production capabilities. Wealso plan to increase manufacturing efficiencies for our Non-Focus Productsegments by consolidating certain facilities as part of our restructuringactivities (see “Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andNote 6, “Impairment of Assets, Restructuring and Severance Charges” toConsolidated Financial Statements).

In addition to thefacilities listed above, we have sales or technical support offices located inAustralia, Canada, China, the Czech Republic, Denmark, Finland, France,Germany, Hong Kong, Hungary, India, Italy, Japan, Mexico, New Zealand, thePhilippines, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan,the United Kingdom and the United States.

**Item 3. Legal Proceedings**

In June 2000, wefiled suit in Federal District Court in Los Angeles, California against IXYSCorporation, alleging infringement of our key U.S. patents 4,959,699; 5,008,725and 5,130,767. The suit sought damages and other relief customary in suchmatters. The Federal District Court entered a permanent injunction, effectiveon June 5, 2002, barring IXYS from making, using, offering to sell orselling in, or importing into the United States, MOSFETs (including IGBTs)covered by our U.S. patents 4,959,699; 5,008,725 and/or 5,130,767. In August 2002,the Court of Appeals for the Federal Circuit stayed that injunction, pendingappeal on the merits. In that same year, following trial on damages issues, aFederal District Court jury awarded us $9.1 million in compensatory damages. TheFederal District Court subsequently tripled the damages, increasing the awardfrom $9.1 million to approximately $27.2 million, and ruled that we are entitledto an additional award of reasonable attorney’s fees for a total monetaryjudgment of about $29.5 million. In March 2004, the U.S. Court of Appealsfor the Federal Circuit reversed the summary judgment granted to us by theFederal District Court in Los Angeles of infringement by IXYS of our U.S.patents 4,959,699; 5,008,725 and 5,130,767. The Federal Circuit reversed inpart and vacated in part infringement findings of the District Court, grantedIXYS the right to present certain affirmative defenses, and vacated theinjunction against IXYS entered by the District Court. The ruling by theFederal Circuit had the effect of vacating the damages judgment obtainedagainst IXYS. The Federal Circuit affirmed the District Court’s rulings in ourfavor regarding the validity and enforceability of the three IR patents. Followingremand, a federal court jury in Los Angeles, California held on September 15,2005, that IXYS elongated octagonal MOSFETs and IGBTs infringed our 4,959,699patent but did not infringe our 5,008,725 and 5,130,767 patents. The jury willreturn on October 4, 2005 to hear our claim for damages for infringement of the4,959,699 patent. In addition, we will continue to pursue our other availableremedies.

**Item4. Submission of Matters to a Vote of Security Holders**

Notapplicable.

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**AdditionalItem. Executive Officers of the Registrant**

Our executive officers serve at the discretion of theBoard of Directors. Mr. Eric Lidow’s employment with IR is subject to theprovisions of an executive employment agreement with IR dated May 15,1991, and subsequently amended on April 12, 1995, June 22, 1998 and August 5,1998.

Theexecutive officers of IR are:
| Eric Lidow        |   | 92 |   | Chairman of the Board                                            |
|-------------------|--------|----|--------|------------------------------------------------------------------|
| Alexander Lidow   |   | 50 |   | Chief Executive Officer                                          |
| Michael P. McGee  |   | 46 |   | Executive Vice President  and Chief  Financial Officer           |
| Robert Grant      |   | 42 |   | Executive Vice  President, Global Sales  and Corporate Marketing |
| Walter Lifsey     |   | 47 |   | Executive Vice  President, Operations                            |
| Michael A. Briere |   | 43 |   | Executive Vice  President, Research and Development              |
| Donald R. Dancer  |   | 54 |   | Vice President, General Counsel and  Secretary                   |

 

Eric Lidow, the founder of the Company, has been adirector since our inception in 1947 and was Chief Executive Officer until March 1995.Mr. Lidow continues as Chairman of the Board.

Alexander Lidow, Ph.D., has been employed by us since1977. He was elected a director in September 1994 and Chief ExecutiveOfficer in March 1995. Dr. Lidow serves on the Board of Trustees ofthe California Institute of Technology. Dr. Lidow is a son of Eric Lidow.

Michael P. McGee joined us in 1990. He became VicePresident and Chief Financial Officer in 1993. In November 1998, Mr. McGeewas elected Executive Vice President.  From June 2000 to June 2005, he wasalso Chairman of Nihon Inter Electronics Corporation, a publicly-held Japanesecorporation. From June 2000 to June 2003, he was also Co-ChiefExecutive Officer of that company.

Robert Grant joined us in 1992 as Director, WorldwideCustomer Operations. In October 1998, Mr. Grant became Senior VicePresident, Customer Service and Sales Systems, and in October 1999 becameSenior Vice President, Marketing Communications and eCommerce. In July 2000,Mr. Grant was elected Executive Vice President. He was promoted toExecutive Vice President, Global Sales and Corporate Marketing in November 2001.

Walter Lifsey has been employed by us since 1999. Hismost recent assignment was as Senior Vice President, Corporate Developmentbefore being appointed Executive Vice President, Operations in April 2002.Prior to joining us, he held senior management positions at AMP, Inc. andTRW Inc.

Michael A. Briere, Ph.D., joined us in 2003 as theVice President of Integrated Circuit Development, before his election in January 2005to Executive Vice President, Research and Development. Prior to joining IR, Dr. Briereheld technical and leadership roles at IBM, Cherry Semiconductor, ONSemiconductor and Vicor, where he led a start-up IC subsidiary, Picor.

Donald R. Dancer joined us in August 2002. Hemost recently was General Counsel for GE Industrial Systems Solutions andserved 22 years in various senior legal positions with the General ElectricCompany.

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**PART II**

**Item5. Market for the Registrants’ Common Equity and Related Stockholder Matters**

**Price Range ofCommon Stock**

**(Closing Prices inDollars)**
| ** **           | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|----------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| **Fiscal Year** | ** ** | ** **             | ** ** | **High**                | ** ** | **Low**                | ** ** | **High**                | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| 2005                 |       | 39.20                  |       | 31.39                   |       | 44.98                  |       | 34.23                   |       | 47.30 |   | 35.29 |   | 49.64 |   | 40.34 |   |
| 2004                 |       | 43.98                  |       | 28.00                   |       | 56.25                  |       | 41.00                   |       | 54.50 |   | 41.59 |   | 49.11 |   | 37.66 |   |
|                      |            |                        |            |                         |            |                        |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

Our common stock is tradedon The New York Stock Exchange and The Pacific Exchange under the symbol “IRF.”There were 1,763 holders of record of our common stock as of September 9,2005. On September 9, 2005, the closing sale price of the common stock onThe New York Stock Exchange was $49.75. Shareholders are urged to obtaincurrent market quotations for the common stock. No cash dividends have beendeclared to stockholders during the past two years, and we do not expect todeclare cash dividends in the foreseeable future. The payment of dividends iswithin the discretion of our Board of Directors, and will depend upon, amongother things, our earnings, financial condition, capital requirements, andgeneral business conditions. In addition, our bank credit agreement currentlyincludes covenants putting limitations on certain dividend payments.

Thequoted market prices are as reported on The New York Stock Exchange Composite. Stockholdersare urged to obtain current market quotations for the common stock.

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**Item 6. Selected Financial Data**

The selected consolidatedfinancial data as of June 30, 2005 and 2004 and for the fiscal years endedJune 30, 2005, 2004 and 2003, are derived from our audited consolidatedfinancial statements and should be read in conjunction with our auditedconsolidated financial statements and notes beginning on page 53. Theselected consolidated financial data as of June 30, 2003, 2002 and 2001,and for the fiscal years ended June 30, 2002 and 2001, are derived fromour audited consolidated financial statements which are not included in this document.
| ** **                                                                      | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Statement of Operations Data (1) (In thousands  except per share data)** | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                        |       | $                                                   | 1,174,424  |   | $ | 1,060,500 |   | $ | 864,443 |   | $ | 720,229 |   | $ | 978,585 |   |
| Gross profit (2)                                                                |       | 510,523                                             |       | 411,094 |   | 287,810 |   | 256,859 |   | 356,191 |   |
| Gross profit  margin (2)                                                        |       | 43.5                                                | %          | 38.8 | % | 33.3 | % | 35.7 | % | 36.4 | % |
| Selling and administrative expense                                              |       | 173,037                                             |       | 164,723 |   | 142,499 |   | 125,578 |   | 137,662 |   |
| Selling and  administrative as a percent of revenues                            |       | 14.7                                                | %          | 15.5 | % | 16.5 | % | 17.4 | % | 14.1 | % |
| Research and development expense                                                |       | 104,876                                             |       | 92,156 |   | 78,904 |   | 69,775 |   | 69,648 |   |
| Research and  development as a percent of revenues                              |       | 8.9                                                 | %          | 8.7 | % | 9.1 | % | 9.7 | % | 7.1 | % |
| Impairment of assets, restructuring and severance  charges (3)                  |       | 33,952                                              |       | 33,534 |   | 187,890 |   | — |   | 47,992 |   |
| Income (loss) before income taxes (4)                                           |       | 184,068                                             |       | 118,284 |   | (126,198 | ) | 65,811 |   | 118,381 |   |
| Provision for (benefit from) income taxes                                       |       | 46,608                                              |       | 28,514 |   | (36,559 | ) | 17,111 |   | 30,732 |   |
| Tax rate  (benefit)                                                             |       | 25.3                                                | %          | 24.1 | % | (29.0 | )% | 26.0 | % | 26.0 | % |
| Income (loss) from continuing operations                                   |       | 137,460                                             |       | 89,770 |   | (89,639 | ) | 48,700 |   | 87,649 |   |
| Net income (loss) per common share:                                             |       |                                                |       |   |   |   |   |   |   |   |   |
| Basic (5)                                                                       |       | $                                                   | 2.03       |   | $ | 1.37 |   | $ | (1.40 | ) | $ | 0.77 |   | $ | 1.41 |   |
| Diluted (5)(6)                                                                  |       | $                                                   | 1.91       |   | $ | 1.31 |   | $ | (1.40 | ) | $ | 0.75 |   | $ | 1.35 |   |

 
| ** **                                   | ** ** | **At June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------|------------|
| ** **                                   | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Balance  Sheet Data (In thousands)**       | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  investments                   |       | $                         | 940,720    |   | $ | 836,209 |   | $ | 721,492 |   | $ | 671,312 |   | $ | 851,361 |   |
| Total assets                                 |       | 2,223,544                 |       | 2,017,006 |   | 1,821,852 |   | 1,813,182 |   | 1,746,462 |   |
| Long-term  debt, less current   maturities   |       | 547,259                   |       | 560,019 |   | 579,379 |   | 566,841 |   | 552,751 |   |
| **Cash Flows Data (In thousands) (1)**  | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash provided by  operating activities       |       | $                         | 220,925    |   | $ | 162,973 |   | $ | 129,491 |   | $ | 43,353 |   | $ | 221,803 |   |
| Cash used in  investing activities (7)       |       | (277,035                  | )          | (79,899 | ) | (68,236 | ) | (212,899 | ) | (590,763 | ) |
| Cash provided by  financing   activities (8) |       | 76,405                    |       | 43,365 |   | 2,635 |   | 14,201 |   | 569,401 |   |

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(1)          Certain reclassifications have been made to previously reported amountsto conform to the current year presentation. Certain reclassificationshave been made to June 30, 2004 and 2003 cash used in investing activities.Previously, our investments in auction rate preferred securities were recordedin cash and cash equivalents rather than short-term cash investments. Wereclassified auction rate 

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preferred securities fromcash and cash equivalents to short-term investments because the underlyinginstruments have contractual maturity dates exceeding ninety days. As a resultof the reclassifications, our net cash used in investing activities increasedby $33.4 million and decreased by $48.3 million for the fiscal years ended June 30,2004 and 2003, respectively. The reclassifications had no impact on our totalcurrent assets, stockholders’ equity, cash flows provided by operatingactivities or total consolidated results reported in any period presented. Asof June 30, 2005, we do not invest in auction rate securities.

(2)          Gross profit for the fiscal years ended June 30,2003 and 2001 includes pretax charges for inventory written down by $6.0million and $38.4 million, respectively, which negatively impacted gross profitmargin by (0.7%) and (3.9%) for fiscal years 2003 and 2001, respectively. The$6.0 million charge in fiscal 2003 reflects certain raw material andwork-in-process inventories that were impaired as a result of our restructuringinitiatives, including products that could not be completed in otherfacilities, materials that were not compatible with the processes used in the alternativefacilities, and materials such as gases and chemicals that could not readily betransferred. The $38.4 million charge in fiscal 2001 reflects excess inventorywritten down to net realizable value as a result of semiconductor industrydownturn and weak demand in our end markets.

(3)          Impairment of assets, restructuring andseverance charges of $34.0 million, $33.5 million and $187.9 million forthe fiscal years ended June 30, 2005, 2004 and 2003, respectively, arecomprised of: (1) impairment of assets, plant closure and other charges of$25.3 million, $15.2 million and $169.7 million for fiscal years 2005,2004 and 2003, respectively, and (2) severance-related charges of $8.7million, $18.3 million and $18.2 million in fiscal years 2005, 2004 and 2003,respectively. Fiscal 2003 through 2005 charges were associated with ourrestructuring initiatives announced in the quarter ended December 31,2002, which included asset impairment, plant closure costs and severancecharges related to the elimination of manufacturing, operating and company-wideadministrative personnel. Impairment of assets, restructuring and severancecharges of $48.0 million for the fiscal year ended June 30, 2001, arecomprised of: (1) impairment of assets and other charges of $45.2 millionand (2) severance-related charges of $2.8 million. Fiscal year 2001charges include asset impairment and severance charges associated with theelimination of company-wide administrative and operating personnel at ourfacilities in the United Kingdom.

(4)          Income before incometaxes for the fiscal year ended June 30, 2005 includesrestructuring-related charges as noted at Note (3) above and one-time $6.0million charge associated with the accelerated vesting of stock options. Incomebefore income taxes for the fiscal year ended June 30, 2004 includes therestructuring-related charges as indicated at note (3) above and one-time$5.9 million Hitachi net settlement gain related to patent infringement. Income(loss) before income taxes for the fiscal years ended June 30, 2003 and2002, includes restructuring-related charges as indicated at note (3) aboveand $2.4 million and $7.4 million, respectively, of non-recurring net gainsrecorded as a result of insurance settlement related to certain damagedfabrication equipment. Fiscal year 2002 net insurance gain was partially offsetby non-recurring litigation and claims settlements of $3.7 million.

(5)          Net income(loss) per common share, basic and diluted, for fiscal years ended June 30,2005, 2004, 2003 and 2001, includes impairment of assets, restructuring andseverance charges outlined in Notes (2) and (3) above of ($0.38),($0.39), ($2.16) and ($1.03), respectively. Additionally, net income per commonshare, basic and diluted includes ($0.07) charge from the accelerated vestingof stock options for fiscal year 2005, and $0.07 income from the one-timeHitachi settlement gain related to patent infringement for fiscal year 2004.Net income (loss) per common share, basic and diluted, for fiscal years 2003and 2002 includes $0.03 and $0.09, respectively, income from the one-time netinsurance gains as indicated at Note (4) above. Fiscal 2002 also includes($0.04) charge from litigation and claims settlement.

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(6)          Net income per commonshare, diluted for the fiscal year ended June 30, 2005 includes thedilutive effect from the conversion of our outstanding convertible subordinatednotes into 7,439,000 shares of common stock (the “Effect”) of ($0.06). Prioryears’ net income (loss) per common share, diluted did not include the Effect,as the Effect would have been anti-dilutive. Additionally, 859,000 shares ofthe Company’s stock options for the fiscal year ended June 30, 2003 wereexcluded from the “net loss per common share—diluted” calculation, sinceincluding those shares would have been anti-dilutive.

(7)          Cash flows used ininvesting activities primarily reflect net cash used to purchase cashinvestments and capital expenditures for all years presented. Cash flows usedin investing activities in fiscal years ended June 30, 2005, 2002 and2001, include acquisitions of certain assets, net of cash, of $51.1 million,$169.6 million and $74.7 million, respectively.

(8)          Cash flows provided byfinancing activities for the fiscal years ended June 30, 2005, 2004, 2003,2002 and 2001 reflect $75.8 million, $44.2 million, $8.1 million, $11.2 millionand $51.2 million, respectively, for the exercise of stock options and fromsales of stock under our employee stock purchase plan. Cash flows provided byfinancing activities in fiscal 2001 included the issuance of $550 million of4.25 percent convertible subordinated notes due 2007.

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**Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

The following discussionof our financial condition and results of operations should be read togetherwith the consolidated financial statements and notes to consolidated financialstatements included elsewhere in this Form 10-K. Except for historicinformation contained herein, the matters addressed in this Item 7 constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933,as amended, and Section 21E of the Securities Exchange Act of 1934, asamended. Such forward-looking statements are subject to a variety of risks anduncertainties, including those discussed under the heading “CautionaryStatement for Purposes of the ‘Safe Harbor’ Provision of Private SecuritiesLitigation Reform Act of 1995”, “Factors That May Affect Future Results”and elsewhere in this Annual Report on From 10-K, that could cause actualresults to differ materially from those anticipated by us. We undertake noobligation to update these forward-looking statements to reflect events orcircumstances after the date of this Annual Report or to reflect actualoutcomes. 

**Overview**

This section presentssummary information regarding our industry, markets, products and operatingtrends only. For further information regarding our financial condition andresults of operation, please read our “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in its entirety, of which thisis a part. 

**Company andIndustry**

We are a leading designer, manufacturer and marketerof power management products using power semiconductors. Power semiconductorsprocess electricity into a form more usable by electrical products. Ourproducts address the two core challenges ofpower management, power performance and power conservation, byincreasing system efficiency, allowing more compact end products, improvingfeatures and functionality, increasing fuel efficiency and extending batterylife. 

We focus on the power management requirements of specificapplications and bring our comprehensive portfolio of products and technologiesto better satisfy the needs of that application. We concentrate on markets includingcomputers, communications networking, consumer electronics, energy-saving appliances,lighting, satellites, launch vehicles, aircraft and automotive diesel injection,where our comprehensive portfolio of technologies enable better, morecompetitive end products.

According to iSuppli, a leading industry source ofmarket information, the market for power management semiconductors in calendaryear 2004 was approximately $21 billion, growing to approximately $24 billionin calendar year 2005. Our Power Management ICs, Advanced Circuit Devices,Power Components and Power Systems address approximately $15 billion or over 70percent of this market. We have seen signs of recovery from what we believe wasan inventory correction in the first half of calendar year 2005. However,overall economic conditions can be uncertain and difficult to predict. 

We believe currentdemand for our products is driven largely by the following: 

·       InformationTechnology demand for increased speed and functionality 

·       Consumerand Industrial demand for energy-efficiency

·       Automotivedemand for increased fuel economy

·       Aerospace and Defense demand for advanced power managementtechnology

We divide our products among three general productcategories: Power Management ICs and Advanced Circuit Devices, Power Componentsand Power Systems. We report our results in six segments that generally reflectthe products’ end-markets and our decision-making for our company aboutallocating 

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resources, including thefocus of research and development activities, and in assessing performance. Wealso generate revenues by licensing our intellectual property to third parties.

We summarize our segments into two groups, FocusProducts and Non-Focus Products. Our Focus Product segments are: Computing andCommunications (“C&C”), Energy-Saving Products (“ESP”), Aerospace andDefense (“A&D”), and Intellectual Property (“IP”). Our Non-Focus Productsegments are: Commodity Products (“CP”) and Non-Aligned Products (“NAP”). Tofacilitate the comparison of current year segment results to that of prioryears, segment disclosures for fiscal 2004 and 2003 have been restated toreflect these changes. (See also Note 7 to the Consolidated FinancialStatements, “Segment and Geographic Information” for further details about oursegments.)

We market our products through direct sales staff,representatives and distributors. Ourcustomers include original equipment manufacturers (“OEMs”), distributors andsubcontract manufacturers. For our customers in our Focus Productsegments, we primarily use direct sales staff and representatives. In line withthis strategy, we have added a complement of field application engineers andtechnical sales support staff to better serve the customers’ needs. Forcustomers in the Commodity Product segment, we primarily sell throughdistributors, taking advantage of cross-selling opportunities with our otherproduct families. No single OEM customer,distributor or subcontract manufacturer accounted for more than ten percent ofour consolidated revenue for the fiscal year ended June 30, 2005. 

We conduct research and development activities toimprove the performance and cost effectiveness of our product offerings intarget applications. Our research and development program focuses on PowerManagement ICs, Advanced Circuit Devices and Power Systems and the advancementand diversification of our HEXFET® power MOSFET and IGBT productlines within our Focus Product segments. Our program places increasing emphasison the development of chipsets and system-level solutions that improveoverall system performance and cost, and helps customers accelerate marketintroduction of their products. In the fiscal years ended June 30, 2005,2004 and 2003, we spent $104.9 million, $92.2 million and $78.9 million,respectively, on research and development activities. 

We fabricate most of ourchips in facilities designed to address the specific requirements of powersemiconductors. We believe our wafer fabrication costs are among the lowest inthe industry. We have wafer fabrication and/or assembly production facilitiesin California, Massachusetts, Mexico, the United Kingdom, Italy, India andChina. We also use third-party foundries and assemblers that provides uswith capacity flexibility. We have been ramping up our most advancedmanufacturing facility in Newport, Wales (United Kingdom) acquired in fiscal2002. We plan to utilize this fabrication capacity almost exclusively for ourFocus Products which offers us the much needed capacity over the next severalyears to support our growth. 

**Overview of FiscalYear 2005 Results**

Our revenues increased by 11 percent to $1.17 billionfor the fiscal year ended June 30, 2005, compared to $1.06 billion for theprior fiscal year ended June 30, 2004, reflecting the growth in sales ofour Focus Products and the overall improved industry and economic conditions. Grossprofit margin during the same period grew to 43.5 percent of revenues for thefiscal year ended June 30, 2005, compared to 38.8 percent in the prioryear. This improvement reflected the sale of a higher margin mix of our FocusProducts, greater manufacturing efficiency from increased capacity utilization,and manufacturing cost savings across all segments. The revenue increase fromour Focus Product segments was partially offset by decrease from sales of ourNon-Focus Product segments. Royalties contributed $41.2 million to fiscal year 2005revenues, compared to $41.9 million in fiscal year 2004. 

Revenues as a percentage of total product revenuesbased on sales location were approximately 32 percent, 45 percent and 23percent for North America, Asia and Europe, respectively, for the fiscal yearended June 30, 2005. Revenues as a percentage of total product revenueswere approximately 30 percent, 

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46 percent and 24 percentfor North America, Asia and Europe, respectively, for the fiscal year ended June 30,2004.

Revenues from our Focus Product segments increased by18 percent to $857.6 million for the fiscal year ended June 30, 2005compared to $729.6 million in the prior fiscal year. These revenues comprised73 percent of total revenues for fiscal year 2005, compared to 69 percent forfiscal year 2004. Gross margin for our Focus Product segments increased to 50.6percent for the fiscal year ended June 30, 2005, compared to 46.5 percentin the prior fiscal year ended. We refer to the products we sell within ourFocus Product segments as our “Focus Products”.

Revenues from our Non-Focus Product segments decreasedby four percent to $316.8 million in fiscal 2005 from $330.9 million in fiscal2004. Gross margin for our Non-Focus Product segments increased to 24.1 percentfor the fiscal year ended June 30, 2005, compared to 21.7 percent in theprior fiscal year ended. In our Non-Focus Product segments, the market forthese low-margin commodity products faced a serious inventory correction,sharply reduced lead-times and increased price pressures during fiscal year2005. However, the commodity market conditions appear to be improving and weexpect the improvement to continue through fiscal year 2006. 

For the twelve months ended June 30, 2005,selling and administrative expense was $173.0 million (14.7 percent ofrevenues), compared to $164.7 million (15.5 percent of revenues) in the twelvemonths ended June 30, 2004. 

For the twelve months ended June 30, 2005 and2004, research and development expense was $104.9 million and $92.2million (8.9 percent and 8.7 percent of revenues, respectively). 

As of fiscal year ended June 30, 2005, we havesubstantially completed our restructuring activities previously announced incalendar years 2001 and 2002, which included reorganizing certain businessunits in the fourth quarter of fiscal 2005, based on the products’ end-marketsor strategic application. 

We are also continuing with our plan to review productlines and products not aligned with our long-term objectives to increase ouroverall gross margins to over 50 percent. We have discontinued businessopportunities of over $100 million in annualized revenues since the beginningof fiscal year 2004, across various segments. Within our Non-Aligned Productsegment, we have targeted an additional $110 million for realignment, whetherby changing the model for how we participate in the business, or by divestitureor other transaction, such as a joint venture or strategic partnership. We planto support our Non-Focus Product segments to the extent we believe appropriate,in order to manage, maintain or increase their value in line with our long-termgoals for those segments. (Refer to “Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Fiscal 2005 Compared with Fiscal 2004” and Note 7 to ConsolidatedFinancial Statements, “Segment and Geographic Information,” for furtherdiscussions about our business segments.) 

As of fiscal year ended June 30, 2005, weoperated in the low 90s percent of our worldwide semiconductor fabrication andassembly/module manufacturing capacities, without taking into accountsubcontract or foundry capacity. Demand for our Focus Products contributed tothe high levels of capacity utilization and we continue to invest significantlyin our most advanced manufacturing facility in Newport, Wales, to provideadditional capacity to support our Focus Products. We advanced our capitalexpansion plans in the last quarter of the fiscal year 2005, to address marketconditions and capacity requirements for our Focus Products. We investedstrategically in our core technologies including acquiring the specialtyepitaxial services business from Advanced Technology Materials, Inc. atthe beginning of fiscal year 2005. This acquisition enhances our ability toproduce future generations of innovative power technologies. 

We are committed to attracting and retaining theindustry’s best qualified technical, sales, marketing and managerial personnel.With the issuance of FASB Statement No. 123R, “Share-Based Payment” (“SFASNo. 123R”) that becomes effective for us in the first quarter of fiscalyear 2006, we will reduce the 

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number of employees whowill receive stock options. We have established a new profit sharing plan to bein place for the new fiscal year 2006, to offset the impact of the option grantreduction and offer eligible employees long-term rewards. For fiscal year 2006,we anticipate that 10 percent of our net income before the profit sharing planexpense will be paid to certain eligible employees. In April 2005, weaccelerated the vesting of all then outstanding equity awards, includingemployee stock options and restricted stock units, in anticipation of theadoption of SFAS No. 123R. We will avoid approximately $108 million infuture compensation expense associated with our equity awards, of whichapproximately $60 million would have been in fiscal year 2006. (Refer to Note 5to Consolidated Financial Statements, “Capital Stock” for further details aboutour stock option plans.)

At June 30, 2005, wehad cash and cash equivalent balances of $360.0 million and cash investments inmarketable debt securities of $580.7 million. Our cash, cash equivalents, cashinvestments in marketable debt securities and unused credit facilities of$132.1 million, totaled $1.07 billion. During the fiscal year ended June 30,2005, operating activities generated cash flow of $220.9 million compared to$163.0 million in the prior fiscal year. Our cash, cash equivalents and cashinvestments totaled $940.7 million at fiscal year ended June 30, 2005, toposition us for continued strong growth in fiscal year 2006.

**Results of Operations**

Thefollowing table sets forth certain items included in selected financial data asa percentage of revenues (in millions except percentages): 
| ** **                                                 | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                                                   |       | $                                    | 1,174.4    |   | 100.0 | % | $ | 1,060.5 |   | 100.0 | % | $ | 864.4 |   | 100.0 | % |
| Cost of sales                                              |       | 663.9                                |       | 56.5 |   | 649.4 |   | 61.2 |   | 576.6 |   | 66.7 |   |
| Gross profit                                               |       | 510.5                                |       | 43.5 |   | 411.1 |   | 38.8 |   | 287.8 |   | 33.3 |   |
| Selling and  administrative expense                        |       | 173.0                                |       | 14.7 |   | 164.7 |   | 15.5 |   | 142.5 |   | 16.5 |   |
| Research and  development expense                          |       | 104.9                                |       | 8.9 |   | 92.2 |   | 8.7 |   | 78.9 |   | 9.1 |   |
| Amortization of  acquisition-related intangible assets     |       | 5.9                                  |       | 0.5 |   | 5.6 |   | 0.5 |   | 5.4 |   | 0.6 |   |
| Impairment of  assets, restructuring and severance charges |       | 33.9                                 |       | 2.9 |   | 33.5 |   | 3.2 |   | 187.9 |   | 21.7 |   |
| Other expense  (income), net                               |       | 7.4                                  |       | 0.7 |   | (5.0 | ) | (0.5 | ) | 0.0 |   | 0.0 |   |
| Interest expense  (income), net                            |       | 1.3                                  |       | 0.1 |   | 1.8 |   | 0.2 |   | (0.7 | ) | 0.0 |   |
| Income (loss) before income taxes                          |       | 184.1                                |       | 15.7 |   | 118.3 |   | 11.2 |   | (126.2 | ) | (14.6 | ) |
| Provision for  (benefit from) income taxes                 |       | 46.6                                 |       | 4.0 |   | 28.5 |   | 2.7 |   | (36.6 | ) | (4.2 | ) |
| Net income (loss)                                          |       | $                                    | 137.5      |   | 11.7 | % | $ | 89.8 |   | 8.5 | % | $ | (89.6 | ) | (10.4 | )% |

 

**Fiscal 2005Compared with Fiscal 2004**

*Revenues and GrossMargin*

Revenues increased by 11 percent to $1.17 billion forthe fiscal year ended June 30, 2005, compared to $1.06 billion for theprior fiscal year ended June 30, 2004. The increase reflected the growthin sales of our Focus Products and the overall improved industry and economicconditions. Royalties contributed $41.2 million to fiscal year 2005 revenues,compared to $41.9 million in fiscal year 2004. 

Revenues from our Focus Products increased by 18percent to $857.6 million for the fiscal year ended June 30, 2005,compared to $729.6 million in the prior fiscal year. These revenues comprised73 percent of total revenues for fiscal year 2005, compared to 69 percent forfiscal year 2004. Our Focus Products include our valued-added Power ManagementICs, Advanced Circuit Devices and Power Systems, and Power 

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Components that are soldinto our C&C, ESP and A&D segments, as well as revenues from our IPsegment. The revenue increase from our Focus Products was partially offset bydecrease from sales of our Non-Focus Products (which includes our CP and NAPsegments). Non-Focus Products revenues decreased by four percent to $316.8million in fiscal 2005 from $330.9 million in fiscal 2004. 

Revenues as a percentage of total product revenuesbased on sales location were approximately 32 percent, 45 percent and 23percent for North America, Asia and Europe, respectively, for the fiscal yearended June 30, 2005. Revenues as a percentage of total product revenueswere approximately 30 percent, 46 percent and 24 percent for North America,Asia and Europe, respectively, for the fiscal year ended June 30, 2004.

For the fiscal year ended June 30, 2005 and 2004,gross profit was $510.5 million and $411.1 million (43.5 percent and 38.8percent of revenues), respectively. The gross profit margin improvementreflected the sale of a higher margin mix of our Focus Products, greatermanufacturing efficiency from increased capacity utilization, and manufacturingcost savings across all segments. Average product selling price sold across allour segments declined by approximately four percent. We have discontinued over$100 million of business opportunities since the beginning of fiscal year 2004 tohelp address the price pressures faced by the commodity components contained inour Focus Product and Non-Focus Product segments.

As of June 30, 2005, our backlog of orders was$393.7 million compared to $403.3 million as of June 30, 2004. The backlogfor our C&C and CP segments declined, which was partially offset byincrease in backlog for our ESP and A&D segments. 

Revenuesand gross margin by business segments are as follows (in thousands exceptpercentages):
| ** **                                          | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Business Segment**                           | ** ** | ** **                  | ** ** | **Revenues**                | ** ** | **Percentage  of Total** | ** ** | **Gross  Margin** | ** ** | **Revenues** | ** ** | **Percentage  of Total** | ** ** | **Gross  Margin** | ** ** |
| Computing and  Communications (“C&C”) |       | $                           | 386,662    |                        |       | 32.9 | % |   |   | 44.6 | % |   | $ | 328,330 |   |   | 31.0 | % |   |   | 40.6 | % |   |
| Energy-Saving  Products (“ESP”)           |       | 300,521                     |       |                        | 25.6       |   |   |   | 55.0 |   |   | 250,763 |   |   | 23.6 |   |   |   | 49.2 |   |   |
| Aerospace and  Defense (“A&D”)        |       | 129,295                     |       |                        | 11.0       |   |   |   | 42.8 |   |   | 108,610 |   |   | 10.2 |   |   |   | 37.4 |   |   |
| Intellectual  Property (“IP”)             |       | 41,160                      |       |                        | 3.5        |   |   |   | 100.0 |   |   | 41,927 |   |   | 4.0 |   |   |   | 100.0 |   |   |
| Subtotal Focus Products                             |       | 857,638                     |       |                        | 73.0       |   |   |   | 50.6 |   |   | 729,630 |   |   | 68.8 |   |   |   | 46.5 |   |   |
| Commodity Products (“CP”)                 |       | 206,226                     |       |                        | 17.6       |   |   |   | 28.6 |   |   | 217,856 |   |   | 20.5 |   |   |   | 25.7 |   |   |
| Non-Aligned  Products (“NAP”)             |       | 110,560                     |       |                        | 9.4        |   |   |   | 15.9 |   |   | 113,014 |   |   | 10.7 |   |   |   | 14.1 |   |   |
| Subtotal Non-Focus Products                         |       | 316,786                     |       |                        | 27.0       |   |   |   | 24.1 |   |   | 330,870 |   |   | 31.2 |   |   |   | 21.7 |   |   |
| Consolidated  Total                                 |       | $                           | 1,174,424  |                        |       | 100.0 | % |   |   | 43.5 | % |   | $ | 1,060,500 |   |   | 100.0 | % |   |   | 38.8 | % |   |
|                                                     |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Computing andCommunications*

Our Computing and Communications segment is comprisedof our Power Management ICs, Advanced Circuit Devices, including iPowirTMmulti-chip modules and DirectFETTM solutions, and Power Components(primarily HEXFET Power Components) that address servers and high-end desktops,notebooks, communications networking, and digitally-oriented consumer productslike game consoles. Our C&C segment products are also used in digitaltelevision, portable handheld devices and cellular phones, and are primarilyused for DC-DC converter type applications. C&C segment revenues increasedby 18 percent compared to the prior fiscal year, reflecting more unitssold as a result of increasing demands for greater computing power and improvedcommunications. We believe we will continue to grow our server market share andwe expect an increase in our communications and networking business, whoseorders for the fiscal quarter ended June 30, 2005, were up 28 percent,compared to the fiscal quarter ended March 31, 2005.

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Gross margin for theC&C segment improved to 44.6 percent for the fiscal year ended June 30,2005, from 40.6 percent for the prior fiscal year, reflecting revenue growth asindicated above, sales from higher margin product lines, such as DirectFETHEXFET Power MOSFETS, greater manufacturing efficiency from increased capacityutilization, and restructuring cost savings.

*Energy-SavingProducts*

Our Energy-Saving Product segment is comprised of ourPower Management ICs, Advanced Circuit Devices and Power Components (primarilyHEXFET and IGBT Power Components) for variable speed motion control inenergy-saving appliances (such as washing machines, refrigerators and airconditioners), industrial systems (such as fans, pumps and compressors),advanced lighting products (including fluorescent lamps, high intensitydischarge (“HID”) lamps, cold cathode fluorescent (“CCFL”) tubes and lightemitting diodes (“LED”) lighting), advanced automotive solutions (primarilydiesel injection, electric-gasoline hybrid and electric power steeringsystems), and consumer applications (for example, plasma TVs and digital-audiounits). ESP segment revenues increased by 20 percent, which is attributed tomore units sold as a result of energy shortages driving demand for greaterefficiency across various end-market applications. The strong housing industryworldwide is increasing demand for our energy-saving appliance business. At thesame time, developing economies such as China and India are contributing to thegrowth in our lighting business. Our appliance and lighting revenues increasedby 41 percent during the fiscal year ended June 30, 2005 compared to theprior fiscal year.

Gross margin for the ESPsegment improved to 55.0 percent for the fiscal year ended June 30, 2005,from 49.2 percent in the prior fiscal year, reflecting revenue growth asindicated above, sales of higher margin product lines, such as our energy-savingappliance modules, greater manufacturing efficiency from increased capacityutilization, and restructuring cost savings.

*Aerospace andDefense*

The Aerospace and Defense segment is comprised ofadvanced power management solutions, such as radiation-hardened powermanagement modules, radiation-hardened Power Components, and otherhigh-reliability Power Components that address power management requirements insatellites, launch vehicles, aircrafts, ships, submarines and other defense andhigh-reliability applications. Revenues for the fiscal year ended June 30,2005 increased by 19 percent from the fiscal year ended June 30, 2004.Sales of new logic level radiation-hardened MOSFET products, additional salesinto customer in-house DC-DC markets, and increased market share for moreefficient and intelligent power management solutions contributed to this growth.

Gross margin for theA&D segment improved to 42.8 percent for the fiscal year ended June 30,2005, from 37.4 percent in the prior fiscal year, reflecting revenue growth asindicated above, sales of higher margin product lines, such as theradiation-hardened power management modules, higher average selling price forcertain products and restructuring cost savings.

*Intellectual Property*

The Intellectual Propertysegment reports our royalty income from licensing our intellectual property tothird parties, which may include claims settlement from successful defense ofour licenses. IP revenues for the fiscal year ended June 30, 2005 werefairly consistent with the prior fiscal year at $41.2 million for the fiscalyear ended June 30, 2005 compared to $41.9 million for the prior fiscalyear ended. Our licensed MOSFET patents expire between 2005 and 2010, with thebroadest remaining in effect until 2007 and 2008. We continue to commit toresearch and development to generate new patents and other intellectualproperty and concentrate on incorporating our technologies into our FocusProducts. We have a growing portfolio of over 400 U.S. patents, approximately210 foreign patents and approximately 840 applications 

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pendingworldwide. In the past fiscal year, we added over approximately 100 patentsworldwide. We expect royalties in fiscal year 2006 to be consistent with fiscalyear 2005.

*Commodity Products*

The Commodity Product segment is comprised primarilyof older-generation Power Components that are sold with margins generally belowour strategic targets and are typically commodity in nature. These productshave widespread use throughout the power management products industry and areoften complementary to many of our Focus Products offerings or allow us toprovide a full range of customer or application offerings. We often offer theseproducts to take advantage of cross-selling opportunities for our other productfamilies. These products may help to increase our manufacturing economies ofscale. For the fiscal year ended June 30, 2005, revenues were $206.2million, down five percent from $217.9 million in the fiscal year ended June 30,2004, as we continued to discontinue certain low margin business opportunitiesin fiscal year 2005.

Gross margin for our CPsegment improved to 28.6 percent for the fiscal year ended June 30, 2005,from 25.7 percent in the prior fiscal year, reflecting greater manufacturingefficiency from increased capacity utilization and restructuring cost savings.

*Non-AlignedProducts*

The Non-Aligned Product segment includes businesses,product lines or products we are targeting for realignment, whether by changingthe business model for how we participate in the business, or by divestiture orother strategic transactions, such as joint venture or partnership. We plan tosupport our Non-Focus Products to the extent we believe appropriate, to manage,maintain or increase their value in line with our long-term goals for thosesegments. Currently, product lines reported in this segment include certainmodules, rectifiers, diodes and thyristors used in the automotive, industrial,welding and motor control applications. Revenues for the fiscal year ended June 30,2005 were $110.6 million, decreasing two percent from $113.0 million in thefiscal year ended June 30, 2004.

Gross margin for our NAPsegment improved to 15.9 percent for the fiscal year ended June 30, 2005,from 14.1 percent in the prior fiscal year, reflecting greater manufacturingefficiency from increased capacity utilization and restructuring cost savings.

*Selling andAdministrative Expense*

For the fiscal year ended June 30,2005, selling and administrative expense was $173.0 million (14.7 percent ofrevenues), compared to $164.7 million (15.5 percent of revenues) for the twelvemonths ended June 30, 2004. The decline in the selling and administrativeexpense ratio primarily reflected a higher revenue base in the current yearcompared to the prior year and our cost containment efforts. The absoluteselling and administrative expense increase primarily reflected salescommissions and other variable costs paid on a higher revenue base.

*Research andDevelopment Expense*

For the fiscal year ended June 30,2005 and 2004, research and development expense was $104.9 million and$92.2 million (8.9 percent and 8.7 percent of revenues, respectively). Researchand development expenditures increased reflecting continued development effortson our Focus Products across our C&C, ESP and A&D segments. Approximately 90 percent of the fiscal year2005 spending was related to new technology and product development for ourFocus Products

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*Impairment ofAssets, Restructuring and Severance Charges*

During fiscal 2003 second quarter ended December 31,2002, we announced our restructuring initiatives. Under our restructuringinitiatives, our goal was to reposition us to better fit the market conditions,de-emphasize the commodity business and accelerate the move to what wecategorize as our proprietary products,which refer to our Power Management ICs, Advanced Circuit Devices and PowerSystems. Our restructuring plan included consolidating and closingcertain manufacturing sites, upgrading equipment and processes in designatedfacilities and discontinuing production in a number of others that cannotsupport more advanced technology platforms or products. We also planned tolower overhead costs across our support organizations. We have substantiallycompleted these restructuring activities as of June 30, 2005. We expect tocomplete the remaining activities, primarily the closing of a fabrication lineat El Segundo, California and an assembly line at Krefeld, Germany by fiscalyear end 2006 or sooner.

We estimate that charges associated with therestructuring will be approximately $280 million. These charges will consist ofapproximately $220 million for asset impairment, plant closure costs and othercharges, $6 million of raw material and work-in-process inventory, andapproximately $54 million for severance. Of the $280 million in total charges,we expect cash charges to be approximately $110 million. For the fiscal yearended June 30, 2005, we realized savings of approximately $80 million fromthe restructuring activities, with approximately 70 percent of that savingsaffecting cost of goods sold.

For the fiscal year ended June 30, 2005, werecorded $34.0 million in total restructuring-related charges, consisting of:$25.3 million for asset impairment, plant closure costs and other charges and$8.7 million for severance-related costs. For the fiscal year ended June 30,2004, we recorded $33.5 million in total restructuring-related charges,consisting of: $15.2 million for asset impairment, plant closure costs andother charges and $18.3 million for severance-related costs.Restructuring-related costs were measured in accordance with SFAS No. 146,“Accounting for the Costs Associated with Exit or Disposal Activities”. Assetimpairments were calculated in accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”. In determining the assetgroups, we grouped assets at the lowest level for which independentidentifiable cash flows information was available. In determining whether anasset was impaired we evaluated undiscounted future cash flows and otherfactors such as changes in strategy and technology. The undiscounted cash flowsfrom our initial analyses were less than the carrying amount for certain of theasset groups, indicating impairment losses. Based on this, we determined thefair value of these asset groups using the present value technique, by applyinga discount rate to the estimated future cash flows that is consistent with therate used when analyzing potential acquisitions.

As of June 30,2005, we had recorded $261.4 million in total charges, consisting of: $210.2million for asset impairment, plant closure costs and other charges, $6.0million for raw material and work-in-process inventory charges, and $45.2million for severance-related costs. Components of the $210.1 million assetimpairment, plant closure and other charges included the following items:

·       Aswe emphasize more advanced generation planar products, we expect the futurerevenue stream from our less advanced facilities in Temecula, California todecrease significantly. These facilities had a net book value of $138.3 millionand were written down by $77.7 million. It is expected that these facilitieswill continue in use until approximately December 2007 and the remainingbasis is being depreciated over units of production during this period. It isassumed that salvage value will equal disposition costs.

·       Aswe emphasize more advanced generation trench products, we expect the future revenuestream from our less advanced facility in El Segundo, California to decreasesignificantly. This facility had a net book value of $59.5 million and waswritten down by $57.2 million. This facility had significantly reducedproduction as of fiscal year ended June 30, 2003, and is being usedprimarily for research and development activities.

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·       Aswe emphasize more advanced generation Schottky products, we expect the futurerevenue stream from our less advanced facility in Borgaro, Italy to decrease significantly.This facility had a net book value of $20.5 million and was written down by$13.5 million. It is expected that this facility will continue in use untilapproximately December 2007 and the remaining basis is being depreciatedover units of production during this period. It is assumed that salvage valuewill equal disposition costs.

·       Weare restructuring our manufacturing activities in Europe. Based on a review ofour Swansea, Wales facility, a general-purpose module facility, we determinedthat this facility would be better suited to focus only on automotiveapplications. The general-purpose assembly assets in this facility, with a netbook value of $13.6 million, were written down by $8.2 million. In addition, wehave substantially completed the move of our manufacturing activities at ourautomotive facility in Krefeld, Germany to our Swansea, Wales and Tijuana,Mexico facilities as of June 30, 2005. We have also moved the productionfrom our Venaria, Italy facility to our Borgaro, Italy and Mumbia, Indiafacilities, which was completed as of December 31, 2003. We stoppedmanufacturing activities in our Oxted, England facility as of September 30,2003.

·       Wehave eliminated the manufacturing of our non-space military products in ourSanta Clara, California facility as of July 31, 2004. Currently,subcontractors handle our non-space qualified products formerly manufactured inthis facility. We are also transitioning the assembly and test of non-spacePower Components from our Leominster, Massachusetts facility to our Tijuana,Mexico facility, and expect to complete this activity by calendar year end 2005.Associated with this reduction in manufacturing activities, certain assets witha net book value of $4.0 million were written down by $2.0 million.

·       $51.5million in other miscellaneous items were charged, including $42.9 million inrelocation costs and other impaired asset charges and $8.6 million in contracttermination and settlement costs.

As a result of the restructuring initiatives, certainraw material and work-in-process inventories were impaired, including productsthat could not be completed in other facilities, materials that were notcompatible with the processes used in the alternative facilities, and materialssuch as gases and chemicals that could not readily be transferred. Based onthese factors we wrote down these inventories, with a carrying value of $98.2million, by $6.0 million. For the fiscal years ended June 30, 2005, 2004and 2003, we had disposed of $1.8 million, $0.4 million and $2.6 million,respectively, of these inventories, which did not have a material impact ongross margin for the fiscal years then ended. As of June 30, 2005, $1.2million of these inventories remained to be disposed.

Ourrestructuring activities are expected to result in severance charges ofapproximately $54 million through June 2006. Below is a table ofapproximate severance charges by major activity and location:
| **Location**                                           | ** ** | **Activity**                                                  | ** ** | **Amount** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------|------------|------------|------------|
| El Segundo, California                                 |       | Close  manufacturing facilities                               |       | $          | 15 million |   |
| Santa Clara, California  and Leominster, Massachusetts |       | Eliminate  certain manufacturing activities                   |       | 4 million  |       |
| Oxted, England                                         |       | Close  manufacturing facility                                 |       | 4 million  |       |
| Veneria, Italy                                         |       | Move manufacturing to India and discontinue certain  products |       | 11 million |       |
| Company-wide                                           |       | Realign  business processes                                   |       | 20 million |       |
| Total                                                  |       |                                                          |       | $          | 54 million |   |

 

To date, of the $54 million noted above, we haverecorded $45.2 million in severance-related charges: $40.1 million in severancetermination costs related to approximately 1,200 administrative, operating and 

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manufacturing positions,and $5.1 million in pension termination costs at our manufacturing facility inOxted, England. For the fiscal years ended June 30, 2005 and 2004, werecorded $8.5 million and $15.5 million, respectively, in severancetermination costs and $0 and $2.8 million, respectively, in pension terminationcosts. The severance charges associated with the elimination of positions,which included the 1,200 persons notified to date, had been and will continueto be recognized ratably over the future service period, as applicable, inaccordance with SFAS No. 146, “Accounting for the Costs Associated withExit or Disposal Activities”. We measured the total termination benefits at thecommunication date based on the fair value of the liability as of thetermination date. A change resulting from a revision to either the timing orthe amount of estimated cash over the future service period will be measuredusing the credit-adjusted risk-free rate that was used to initially measure theliability. The cumulative effect of the change will be recognized as anadjustment to the liability in the period of the change.

In fiscal 2003, we had recorded an estimated $5.1million in severance costs associated with the acquisition of TechnoFusion GmbHin Krefeld, Germany. In fiscal 2004, we finalized our plan and determined thattotal severance would be approximately $10 million, and accordingly, weadjusted purchased goodwill by $4.8 million. We communicated the plan and theelimination of approximately 250 positions primarily in manufacturing to itsaffected employees at that time. The associated severance is expected be paidby calendar year end 2005.

Thefollowing summarizes our severance accrued related to the June 2001restructuring, the TechnoFusion acquisition and the December 2002restructuring plan for the fiscal years ended June 30, 2005, 2004 and 2003.Severance activity related to the elimination of 29 administrative andoperating personnel as part of the previously reported restructuring in thefiscal quarter ended June 30, 2001, is also disclosed. The remaining June 2001severance relates primarily to certain legal accruals associated with thatrestructuring, which will be paid or released as the outcome is determined (inthousands):
| ** **                                                                                          | ** ** | **June  2001  Restructuring** | ** ** | **December  2002  Restructuring** | ** ** | **TechnoFusion  Severance  Liability** | ** ** | **Total  Severance  Liability** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| Accrued  severance, June 30, 2002                                                              |       |                          | $          | 1,454                             |       |                                   |       | $                               | —     |   |   |   | $ | 5,480 |   |   | $ | 6,934 |   |
| Costs incurred or  charged to “impairment of assets, restructuring and severance charges” |       |                          | —     |                              |       |                                   | 15,991     |                            |       |   | — |   |   | 15,991 |   |
| Purchase price  adjustment                                                                          |       |                          | —     |                              |       |                                   | —     |                            |       |   | 4,823 |   |   | 4,823 |   |
| Costs paid                                                                                          |       |                          | (424       | )                                 |       |                                   | (10,058    | )                               |       |   | — |   |   | (10,482 | ) |
| Foreign exchange  impact                                                                            |       |                          | —     |                              |       |                                   | (299       | )                               |       |   | (427 | ) |   | (726 | ) |
| Accrued severance, June 30, 2003                                                               |       |                          | $          | 1,030                             |       |                                   |       | $                               | 5,634      |   |   |   | $ | 9,876 |   |   | $ | 16,540 |   |
| Costs incurred or  charged to “impairment of assets, restructuring and severance charges” |       |                          | —     |                              |       |                                   | 15,450     |                            |       |   | — |   |   | 15,450 |   |
| Costs paid                                                                                          |       |                          | (333       | )                                 |       |                                   | (13,935    | )                               |       |   | (4,390 | ) |   | (18,658 | ) |
| Foreign exchange  impact                                                                            |       |                          | —     |                              |       |                                   | 31         |                            |       |   | 581 |   |   | 612 |   |
| Accrued severance, June 30, 2004                                                               |       |                          | $          | 697                               |       |                                   |       | $                               | 7,180      |   |   |   | $ | 6,067 |   |   | $ | 13,944 |   |
| Costs incurred or  charged to “impairment of assets, restructuring and severance charges” |       |                          | —     |                              |       |                                   | 8,677      |                            |       |   | — |   |   | 8,677 |   |
| Costs paid                                                                                          |       |                          | (326       | )                                 |       |                                   | (7,810     | )                               |       |   | (3,770 | ) |   | (11,906 | ) |
| Foreign exchange  impact                                                                            |       |                          | —     |                              |       |                                   | 77         |                            |       |   | (190 | ) |   | (113 | ) |
| Accrued  severance, June 30, 2005                                                              |       |                          | $          | 371                               |       |                                   |       | $                               | 8,124      |   |   |   | $ | 2,107 |   |   | $ | 10,602 |   |

 

*Other Income andExpense*

Other (expense) income was($7.4) million and $5.0 million for the fiscal years ended June 30, 2005and 2004, respectively. For the fiscal year ended June 30, 2005, werecorded one-time $6.0 million charge 

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associatedwith the accelerated vesting of stock options in order to avoid approximately$108 million of future compensation expense associated with our previouslyissued stock options and restricted stock units, as a result of the adoption ofSFAS No. 123R. Forthe fiscal year ended June 30, 2004, we recognized $5.9 million inone-time pretax gains from the Hitachi settlement, net of legal costs andrelated expenses.

*Interest Income andExpense*

Interest income was $18.0 million and $14.2 millionfor the twelve months ended June 30, 2005 and 2004, respectively. Theincrease in income reflected higher prevailing interest rates and higheraverage cash and cash investment balance in the current year.

Interest expense was $19.2million and $16.0 million for the twelve months ended June 30, 2005 and2004, respectively. The increase in current period expense primarily reflectedhigher effective interest rate payable on our $550 million convertiblesubordinated notes outstanding (see Note 4 of the Notes to the ConsolidatedFinancial Statements, “Bank Loans and Long-Term Debt” regarding themodification of the effective interest payable on our convertible notes).

*Income Taxes*

Our effective taxprovision for the twelve months ended June 30, 2005 and 2004, was 25.3percent and 24.1 percent, respectively, rather than the expected U.S. federalstatutory tax provision of 35 percent, as a result of lower statutory tax ratesin certain foreign jurisdictions, the benefit of foreign tax credits andresearch and development credits; partially offset by state taxes and certainforeign losses without foreign tax benefit.

**Fiscal2004 Compared with Fiscal 2003**

*Revenues and GrossMargin*

Revenues for fiscal 2004 were $1.06 billion comparedto $864.4 million in fiscal 2003. Fiscal 2004 revenues reflected the growth insales of what we categorize as our Focus Products and the upturn in the semiconductorindustry. Our Focus Product sales increased by 25 percent from the prior yearand our Non-Focus Products sales increased by 18 percent. For the twelve monthsended June 30, 2004, Semiconductor Industry Association data showed a 22percent growth in semiconductor industry revenues for the business in which weoperate, while our total revenues increased by 23 percent during this period. Royaltiescontributed $41.9 million to revenues, compared to $42.0 million in fiscal2003.

Revenues from our Focus Products increased by 25percent compared to the prior fiscal year. These revenues comprised 69 percentof total revenues for the fiscal year ended June 30, 2004, compared to 68 percentfor fiscal year 2003.

Revenues as of percentage of total product revenuesbased on sales locations, were approximately 30 percent, 46 percent and 24percent for North America, Asia and Europe, respectively, for the fiscal yearended June 30, 2004. Revenues as a percentage of total product revenueswere approximately 34 percent, 42 percent and 24 percent for North America,Asia and Europe, respectively, for the fiscal year ended June 30, 2003.

For the twelve months ended June 30, 2004 and2003, gross profit was $411.1 million and $287.8 million (38.8 percent and33.3 percent of revenues), respectively. The gross profit margin improvementreflected the sale of a higher margin mix of our Focus Products andmanufacturing cost savings, including reduced material costs, increased yieldand labor and overhead efficiencies. Gross margin in the prior year ended June 30,2003, included a $6.0 million inventory charge to write-down raw material andwork-in-process inventories impaired as a result of planned plant closures,which negatively impacted gross margin by 0.7 percent for that period.

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Revenuesand gross margin by reportable business segments for fiscal years ended June 30,2004 and 2003 have been restated to conform with fiscal 2005 presentation ofreportable segments, as follows (in thousands except percentages):
| ** **                                          | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Business Segment**                           | ** ** | ** **                  | ** ** | **Revenues**                | ** ** | **Percentage  of Total** | ** ** | **Gross  Margin** | ** ** | **Revenues** | ** ** | **Percentage  of Total** | ** ** | **Gross  Margin** | ** ** |
| Computing and  Communications (“C&C”) |       | $                           | 328,330    |                        |       | 31.0 | % |   |   | 40.6 | % |   | $ | 222,276 |   |   | 25.7 | % |   |   | 34.0 | % |   |
| Energy-Saving  Products (“ESP”)           |       | 250,763                     |       |                        | 23.6       |   |   |   | 49.2 |   |   | 208,775 |   |   | 24.2 |   |   |   | 45.9 |   |   |
| Aerospace and  Defense (“A&D”)        |       | 108,610                     |       |                        | 10.2       |   |   |   | 37.4 |   |   | 110,979 |   |   | 12.8 |   |   |   | 37.5 |   |   |
| Intellectual  Property (“IP”)             |       | 41,927                      |       |                        | 4.0        |   |   |   | 100.0 |   |   | 41,988 |   |   | 4.9 |   |   |   | 100.0 |   |   |
| Subtotal Focus Products                             |       | 729,630                     |       |                        | 68.8       |   |   |   | 46.5 |   |   | 584,018 |   |   | 67.6 |   |   |   | 43.7 |   |   |
| Commodity Products (“CP”)                 |       | 217,856                     |       |                        | 20.5       |   |   |   | 25.7 |   |   | 179,318 |   |   | 20.7 |   |   |   | 11.8 |   |   |
| Non-Aligned  Products (“NAP”)             |       | 113,014                     |       |                        | 10.7       |   |   |   | 14.1 |   |   | 101,107 |   |   | 11.7 |   |   |   | 11.4 |   |   |
| Subtotal Non-Focus Products                         |       | 330,870                     |       |                        | 31.2       |   |   |   | 21.7 |   |   | 280,425 |   |   | 32.4 |   |   |   | 11.7 |   |   |
| Consolidated  Total                                 |       | $                           | 1,060,500  |                        |       | 100.0 | % |   |   | 38.8 | % |   | $ | 864,443 |   |   | 100.0 | % |   |   | 33.3 | % |   |
|                                                     |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Computing andCommunications*

Our C&C segment is comprised of our PowerManagement ICs, including iPowirTM multi-chip modules, Advanced Circuit Devicesand Power Components (primarily HEXFET Power Components), that address serversand high-end desktops, notebooks, communications networking, anddigitally-oriented consumer products like game consoles. C&C segmentrevenues increased by 48 percent compared to the prior year, reflectingmore units sold as a result of primarily significantly improved economicconditions and increased demands for greater computing power and improvedcommunications.

Gross margin for ourC&C segment improved to 40.6 percent for the fiscal year ended June 30,2004, from 34.0 percent in the prior year, reflecting revenue growth asindicated above, sales of higher margin product lines, greater manufacturingefficiency from increased capacity utilization, and restructuring cost savings.

*Energy-SavingProducts*

Our ESP segment is comprised of our Power ManagementICs, Advanced Circuit Devices and Power Components (primarily HEXFET and IGBTPower Components), that provide solutions for variable speed motion control inappliances and industrial systems; advanced lighting products; advancedautomotive solutions; and consumer applications like plasma TVs. ESP segmentrevenues increased 20 percent, which is attributed to more units sold as aresult of energy shortages driving demand for greater efficiency across variousend-market applications. The strong housing industry worldwide is increasingdemand for our energy-saving appliance business.

Gross margin for our ESPsegment improved to 49.2 percent for the fiscal year ended June 30, 2004,from 45.9 percent in the prior year, reflecting revenue growth as indicatedabove, sales of higher margin product lines, greater manufacturing efficiencyfrom increased capacity utilization, and restructuring cost savings.

*Aerospace andDefense*

The A&D segment is comprised of ourhigh-reliability multi-chip power modules of advanced power managementsolutions, such as radiation-hardened power management modules,radiation-hardened Power Components, and other high-reliability PowerComponents that address power 

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management requirements insatellites, launch vehicles, aircrafts, ships, submarines, and other defenseand high-reliability applications. Revenues for the fiscal year ended June 30,2004 decreased two percent from the fiscal year ended June 30, 2003,reflecting similar demand during 2004 as compared to 2003 for defense andhigh-reliability applications. 

Gross margin for ourA&D segment was fairly consistent with prior year at 37.4 percent for thefiscal year ended June 30, 2004, compared to 37.5 percent in the prioryear. We continue our restructuring activities to consolidate and close certainfacilities to increase our manufacturing efficiency. 

*IntellectualProperty*

The IP segment iscomprised of royalty income from licensing our intellectual property to thirdparties, which may include claims settlement from successful defense of ourlicenses. IP revenues for the fiscal year ended June 30, 2004 were $41.9million compared to $42.0 million in the prior fiscal year.

*Commodity Products*

The CP segment is comprised primarily ofolder-generation Power Components that are sold with margins generally belowour strategic targets and are typically commodity in nature. We offer theseproducts to take advantage of cross-selling opportunities for our other productfamilies and/or increase our economies of scale. For the fiscal year ended June 30,2004, revenues were $217.9 million, up 21 percent from $179.3 million inthe fiscal year ended June 30, 2003, reflecting more units sold as aresult of improved economic conditions.

Gross margin for the CPsegment improved to 25.7 percent for the fiscal year ended June 30, 2004,from 11.8 percent in the prior year, reflecting revenue growth as indicatedabove and greater manufacturing efficiency from increased capacity utilizationand restructuring cost savings.

*Non-AlignedProducts*

The Non-Aligned Product segment includes businesses,product lines or products we are targeting for realignment, whether by changingthe business model for how we participate in the business, or by divestiture orother strategic transactions, such as joint venture or partnership. We plan tosupport our Non-Focus Products to the extent we believe appropriate, to manage,maintain or increase their value in line with our long-term goals for thosesegments. Product lines included in this segment are certain modules,rectifies, diodes and thyristors used in automotive, industrial, welding andmotor control applications. Revenues for the fiscal year ended June 30,2004 were $113.0 million, increasing 12 percent from $101.1 million in thefiscal year ended June 30, 2003, reflecting more units sold as a result ofimproved economic conditions.

Gross margin for the NAPsegment improved to 14.1 percent for the fiscal year ended June 30, 2004,from 11.4 percent in the prior year reflecting revenue growth as indicatedabove and greater manufacturing efficiency from increased capacity utilizationand restructuring cost savings.

*Selling andAdministrative Expense*

For the twelve monthsended June 30, 2004, selling and administrative expense was $164.7 million(15.5 percent of revenues), compared to $142.5 million (16.5 percent ofrevenues) in the twelve months ended June 30, 2003. The decline in theselling and administrative expense ratio primarily reflected a higher revenuebase in the fiscal year 2004 compared to the fiscal year 2003 and our costcontainment 

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efforts.The absolute selling and administrative expense increase primarily reflectedsales commissions and other variable costs paid on a higher revenue base*.*

*Research andDevelopment Expense*

For the twelve monthsended June 30, 2004 and 2003, research and development expense was $92.2 millionand $78.9 million (8.7 percent and 9.1 percent of revenues, respectively). Researchand development expenditures increased reflecting continued development effortson our Focus Products across our C&C, ESP and A&D segments.

*Impairment ofAssets, Restructuring and Severance Charges*

During fiscal 2003 second quarter ended December 31,2002, we announced our restructuring initiatives. Under our restructuringinitiatives, our goal was to reposition us to better fit the market conditions,de-emphasize the commodity business and accelerate the move to what wecategorize as our proprietary products. Our restructuring plan includedconsolidating and closing certain manufacturing sites, upgrading equipment andprocesses in designated facilities and discontinuing production in a number ofothers that cannot support more advanced technology platforms or products. Wealso planned to lower overhead costs across our support organizations.

For the fiscal year ended June 30, 2004, werecorded $33.5 million in total charges, consisting of: $15.2 millionfor asset impairment, plant closure costs and other charges and $18.3 millionfor severance-related costs. For the fiscal year ended June 30,2003, we recorded $193.9 million in total restructuring-related charges,consisting of: $169.7 million for asset impairment, plant closure costs andother charges, $6.0 million for raw material and work-in-process inventorycharges, and $18.2 million for severance-related costs. Restructuring-relatedcosts were charged in accordance with SFAS No. 146, “Accounting for theCosts Associated with Exit or Disposal Activities”. Asset impairments werecalculated in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”. Indetermining the asset groups, we grouped assets at the lowest level for whichindependent identifiable cash flows information was available. In determiningwhether an asset was impaired we evaluated undiscounted future cash flows andother factors such as changes in strategy and technology. The undiscounted cashflows from our initial analyses were less than the carrying amount for certainof the asset groups, indicating impairment losses. Based on this, we determinedthe fair value of these asset groups using the present value technique, byapplying a discount rate to the estimated future cash flows that is consistentwith the rate used when analyzing potential acquisitions.

For additional informationabout our restructuring charges, refer to “Fiscal 2005 Compared with Fiscal2004—*Impairment of Assets, Restructuring andSeverance Charges*”above.

*Other Income andExpense*

Other income (expense) was$5.0 million and $(0.02) million for the twelve months ended June 30, 2004and 2003, respectively. For the twelve months ended June 30, 2004, werecognized $5.9 million in one-time pretax gains from the Hitachi settlement,net of legal costs and related expenses, partially offset by $1.3 million inlitigation accruals (see Note 13 of the Notes to the Consolidated FinancialStatements, “Litigation”).

*Interest Income andExpense*

Interest income was $14.2 million and $20.4 millionfor the twelve months ended June 30, 2004 and 2003, respectively. Thedecrease in income reflected lower prevailing interest rates in the fiscal year2004 compared to fiscal year 2003.

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Interest expense was $16.0million and $19.7 million for the twelve months ended June 30, 2004 and2003, respectively. The decrease in current period expense primarily reflectedlower effective interest rate payable on our $550 million convertible debt (the“debt”) outstanding. In December 2002 of fiscal 2003, we modified thefixed rate payable on the debt from 4.25 percent to a variable LIBOR rate for$412.5 million of the balance outstanding. In April 2004, we modifiedthe fixed rate payable on the remaining $137.5 million to a variable LIBOR rate(see Note 3 ofthe Notes to Consolidated Financial Statements, “Derivative FinancialInstruments”).

*Income Taxes*

Our effective taxprovision (benefit) for the twelve months ended June 30, 2004 and 2003,was 24.1 percent and (29.0) percent, respectively, rather than theexpected U.S. federal statutory tax provision of 35 percent, as a resultof lower statutory tax rates in certain foreign jurisdictions, the benefit offoreign tax credits and research and development credits; partially offset bystate taxes and certain foreign losses without foreign tax benefit.

**Liquidity and Capital Resources**

At June 30, 2005, we had cash and cash equivalentbalances of $360.0 million and cash investments in marketable debt securitiesof $580.7 million. Our cash, cash equivalents, cash investments in marketabledebt securities and unused credit facilities of $132.1 million, totaled $1.07billion. Our investment portfolio consists of available-for-sale fixed income,investment-grade securities as of June 30, 2005.

During the fiscal year ended June 30, 2005,operating activities generated cash flow of $220.9 million compared to $163.0million in the prior year. Cash flow from operations included $76.3 million ofdepreciation and amortization and $18.6 million of tax benefit from optionsexercised for the twelve months ended. Changes in operating assets andliabilities decreased cash by $16.0 million. The increase in working capitalwas primarily attributable to an increase in inventory as we prepare for astronger second half of calendar 2005, partially offset by increase in accountspayable and accrued taxes due to timing of cash payments.

During the fiscal year ended June 30, 2005, cashused in investing activities totaled $277.0 million. Proceeds from sales ormaturities of cash investments were $387.5 million, while purchases were $471.0 millionfor the twelve months ended June 30, 2005. Certain prior years’ amountshave been reclassified to conform to the current-year presentation. Auctionrate securities are now classified as available-for-sale securities andreported as short-term cash investments instead of cash and cash equivalents,for all periods presented. The auction rate securities were $0 and $100.6million at June 30, 2005 and 2004, respectively. We invested $135.1million in capital expenditures. As of fiscal year ended June 30, 2005, weoperated in the low 90s percent of our worldwide semiconductor fabrication andassembly/module manufacturing capacities, without taking into accountsubcontract or foundry capacity. Demand for our Focus Products contributed tothe high levels of capacity utilization and we continue to invest significantlyin our most advanced manufacturing facility in Newport, Wales, to provideadditional capacity to support our Focus Products. We advanced our capitalexpansion plans in the last quarter of the fiscal year 2005, to address marketconditions and capacity requirements for our Focus Products. As a consequencewe anticipate that nearly 70 percent of capital expenditures for fiscal year2006 will be in the first half of the year. During fiscal year 2005, we haveinvested strategically in our core technologies including acquiring thespecialty epitaxial services business from Advanced Technology Materials, Inc.for $39.6 million and certain other technologies for $11.5 million. Theseacquisitions will enhance our ability to produce future generations ofinnovative power technologies,.

At June 30, 2005, we had purchase commitments forcapital expenditures of approximately $24.2 million, the majority of whichis at our Newport facility. We intend to fund capital expenditures and 

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working capital requirementsthrough cash and cash equivalents on hand, anticipated cash flow fromoperations and available credit facilities.

Financing activities during the fiscal year ended June 30,2005 generated $76.4 million. Proceeds from issuance of common stock and exerciseof stock options contributed $75.8 million. As of June 30, 2005, we hadrevolving, equipment and foreign credit facilities of $166.6 million, againstwhich $34.5 million had been used. As discussed in Note 3, “DerivativeFinancial Instruments”, we are required to obtain irrevocable standby lettersof credit in favor of JP Morgan Chase Bank, for $7.5 million plus thecollateral requirement for the December 2002 and April 2004 interestrate swap transactions, as determined periodically. At June 30, 2005,$12.0 million in letters of credit were outstanding related to thesetransactions. The collateral requirement of the transactions may be adverselyaffected by an increase in the five-year LIBOR curve, a decrease in our stockprice, or both. We cannot predict what the collateral requirement of thetransactions and the letter of credit requirement will be over time. Toillustrate the potential impact, had a 10 percent increase in the five-yearLIBOR curve and a 10 percent decrease in our stock price occurred at the closeof the fiscal quarter ended June 30, 2005, our letter of credit commitmentwould have increased by $4.5 million to $16.6 million.

We donot have any off balance sheet arrangements as of June 30, 2005. As of June 30,2005, the following lists our contractual obligations for the next five years:
| ** **                              | ** ** | ** ** | ** ** | **Payments due by period** | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**        | ** ** | ** ** | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1 - 2  years** | ** ** | **2 - 3  years** | ** ** | **3 - 4  years** | ** ** | **4 - 5  years** | ** ** | **5 years &  thereafter** | ** ** |
| Long-term debt                          |       | $          | 568,949    |                                      |       | $ | 18,215 |   |   | $ | 49 |   | $ | 550,050 |   | $ | 51 |   | $ | 52 |   |   | $ | 532 |   |   |
| Interest payable  on convertible notes  |       | 63,599     |       |                                      | 22,974     |   |   | 27,158 |   | 13,467 |   | — |   | — |   |   | — |   |   |
| Operating leases                        |       | 16,759     |       |                                      | 4,399      |   |   | 3,553 |   | 2,359 |   | 2,203 |   | 2,445 |   |   | 1,800 |   |   |
| Capital equipment  purchase commitments |       | 24,249     |       |                                      | 24,249     |   |   | — |   | — |   | — |   | — |   |   | — |   |   |
| Total                                   |       | $          | 673,556    |                                      |       | $ | 69,837 |   |   | $ | 30,760 |   | $ | 565,876 |   | $ | 2,254 |   | $ | 2,497 |   |   | $ | 2,332 |   |   |
|                                         |            |            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We believe that ourcurrent cash and cash investment balances, cash flows from operations andborrowing capacity, including unused amounts under the $150 million CreditFacility with BNP Paribas (see Note 4 of the Notes to the ConsolidatedFinancial Statements, “Bank Loans and Long-Term Debt”), will be sufficient tomeet our currently foreseeable operating cash requirements and to takeadvantage of strategic opportunities as they occur in the next twelve months. Althoughwe believe that our current financial resources will be sufficient for normaloperating activities, we may also consider the use of funds from other externalsources, including, but not limited to, public or private offerings of debt orequity. Our $550 million convertible subordinated notes are due in July 2007.We anticipate that this debt will be refinanced through public or privateofferings of debt or equity.

**Recent Accounting Pronouncements**

In May 2005, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 154, “Accounting Changes and ErrorCorrections” (“SFAS No. 154”). SFAS No. 154, which replaces APBOpinion No. 20, “Accounting Changes”, and SFAS No. 3, “ReportingAccounting Changes in Interim Financial Statements”, requires that a voluntarychange in accounting principle be applied retrospectively to all prior periodfinancial statements presented, unless it is impracticable to do so. SFAS No. 154also provides that a change in method of depreciating or amortizing along-lived non-financial asset be accounted for as a change in estimateeffected by a change in accounting principle, and also provides that correctionof errors in previously issued financial statements should be termed a “restatement.”SFAS 

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No. 154 is effectivefor fiscal years beginning after December 15, 2005. We do not believe theadoption of SFAS No. 154 will have a material impact on our financialstatements.

In December 2004, the FASB issued SFAS No. 123R,“Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires allshare-based payments to employees, including grants of employee stock optionsand purchases under employee stock purchase plans, to be recognized as anoperating expense in the income statement. The cost is recognized over therequisite service period based on fair values measured on grant dates, and thenew standard may be adopted using either the modified prospective transitionmethod or the modified retrospective transition method. In April 2005, theSEC approved a change in the effective date of SFAS No. 123R for publiccompanies to be effective in the annual, rather than interim, periods beginningafter June 15, 2005. SFAS No. 123R will be effective for us beginningin the September 2005 quarter of fiscal year 2006. In March 2005, theSecurities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107(“SAB No. 107”) “Share-Based Payment”*,*whichexpresses views of the Staff regarding the interaction between SFAS No. 123Rand certain SEC rules and regulations. SAB No. 107 also provides theStaff’s views regarding the valuation of share-based payment arrangements forpublic companies. We have evaluated the requirements of SAB No. 107 in connectionwith our adoption of SFAS No. 123R and expect that these newpronouncements will have a material impact on our results of operations forfuture employee stock options granted. The new guidance will not have an impacton our options outstanding as of April 18, 2005, as we have acceleratedthe vesting of these options.

In December 2004, the FASB issued FASB StaffPosition No. FAS 109-1 “Application of FASB Statement No. 109, ‘Accountingfor Income Taxes’, to the Tax Deduction on Qualified Production Activities bythe American Jobs Creation Act of 2004” (“FSP FAS No. 109-1”). TheAmerican Jobs Creation Act of 2004 (“AJCA”), subject to certain limitations, asphased-in introduces a special nine percent tax deduction on qualified productionactivities. FSP FAS No. 109-1 clarifies that this tax deductionshould be accounted for as a special tax deduction in accordance with SFAS No. 109,“Accounting for Income Taxes”, rather than as a tax rate reduction. We are assessing the potential impact of thisnew legislation based on the fact that additional guidance is still beingissued, but currently do not believe the adoption of FSP FAS 109-1will have a material impact on our consolidated financial position, results ofoperations or cash flows.

In December 2004, theFASB issued FASB Staff Position No. 109-2, “Accounting andDisclosure Guidance for the Foreign Earnings Repatriation Provision within theAmerican Jobs Creations Act of 2004” (“FSP FAS No. 109-2”),which introduces a limited time 85 percent dividends received deduction on therepatriation of certain foreign earnings to a U.S. tax payer (repatriationprovision), provided certain criteria are met. We are currently evaluatingthe impact of FSP FAS No. 109-2, and expect to substantiallycomplete our analysis by the third quarter of fiscal year 2006.

**Critical Accounting Estimates**

*Revenue Recognitionand Allowances*

In accordance with StaffAccounting Bulletin No. 101, “Revenue Recognition”, we recognize revenuewhen the evidence of an arrangement exists, pricing is fixed and determinable,collection is reasonably assured, and delivery or performance of service hasoccurred. We recognize the majority of revenues upon shipment for product salesto all customers, including distributors, with provisions for estimated returnsand allowances recorded at the time of shipment. Certain customers have limitedrights of returns and price protection programs. We continuously monitorproduct returns and potential price adjustments and record a provision forthese based on notification we receive of pending credits and historicalexperience. While such credits have historically been within our expectationsand the provisions established, we cannot guarantee that we will continue toexperience the same rate of returns and allowances. If the historical data 

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andestimates we used to calculate these provisions do not properly reflect futureactivity, our net sales, gross profit, net income and earnings per share couldbe impacted.

Certain of our customers’contracts contain substantive acceptance provisions. In such circumstances, werecognize revenue in accordance with specific contract acceptance provisions,in most instances upon customer inspection or upon delivery of proof of conformanceto customer specifications. We also maintain allowances for doubtful accountsfor estimated losses resulting from the inability of our customers to makerequired payments. If the financial condition of our customers was todeteriorate, resulting in an impairment of their ability to make payments,additional allowances might be required.

*Inventories*

Inventories are stated atthe lower of cost (principally first-in, first-out) or market. Inventories arereviewed for excess and obsolescence based upon demand forecasts within aspecific time horizon and reserves are established accordingly. If actualmarket demand differs from our forecasts, our financial position, results ofoperations and cash flows may be materially impacted.

*Income Taxes*****

Deferred income taxes aredetermined based on the difference between the financial reporting and taxbases of assets and liabilities using enacted rates in effect during the yearin which the differences are expected to reverse. Realization of deferred taxassets is dependent upon generating sufficient taxable income. Valuationallowances are established for the deferred tax assets for which we believe donot meet the “more likely than not” criteria established by SFAS No. 109. Judgmentsregarding future taxable income may be revised due to changes in marketconditions, tax laws, or other factors. If our assumptions and estimates changein the future, then the valuation allowances established may be increased,resulting in increased income tax expense. Conversely, if we are ultimatelyable to use all or a portion of the deferred tax assets for which a valuationallowance has been established, then the related portion of the valuationallowance will be released to income as a credit to income tax expense. Income tax expense is the tax payable for theperiod and the change during the period in deferred tax assets and liabilities.

Werecognize certain tax liabilities for anticipated tax audit findings in theU.S. and other tax jurisdictions based on our estimate of whether, and theextent to which additional taxes would be due, in accordance with SFAS No. 5,“Accounting for Contingencies”. If the audit findings result in actual taxesowed more or less than what we had anticipated, our income tax expense would beincreased or decreased, accordingly, in the period of the determination.

U.S. income taxes have notbeen provided on approximately $279.2 million of undistributed earnings offoreign subsidiaries since we consider these earnings to be investedindefinitely or offset by foreign tax credits. It is not practical to estimatethe amount of unrecognized deferred U.S. taxes on these undistributed earnings.

*Loss Contingencies*

The outcomes of legalproceedings and claims brought against us are subject to significantuncertainty. SFAS No. 5, “Accounting for Contingencies”, requires that weprovide an allowance for the estimated loss from a loss contingency such as alegal proceeding or claim, if it is probable that an asset has been impaired ora liability has been incurred and the amount of the loss can be reasonablyestimated. SFAS No. 5 requires that we disclose material loss contingencyif there is at least a reasonable possibility that a loss has been incurred. Indetermining whether a loss should be accrued, we evaluate, among other factors,the degree of probability of an unfavorable outcome and whether we canreasonably estimate the amount of the loss. We regularly evaluate currentinformation available to us to assess whether such accruals should be adjusted.If the actual outcome of the legal proceeding or claim differs from ourassessment, our financial position, results of operations or cash flows couldbe materially impacted.

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**Statement ofCaution Under the Private Securities Litigation Reform Act of 1995**

This Annual Report on Form 10-Kincludes some statements and other information that are not historical factsbut are “forward-looking statements” as that term is defined in the PrivateSecurities Litigation Reform Act of 1995. The materials presented can beidentified by the use of forward-looking terminology such as “anticipate,” “believe,”“estimate,” “expect,” “may,” “should,” “view,” or “will” or the negative orother variations thereof. We caution that such statements are subject to anumber of uncertainties, and actual results may differ materially. Factors thatcould affect our actual results include those set forth below under “Factorsthat May Affect Future Results” and other uncertainties disclosed in ourreports filed from time to time with the Securities and Exchange Commission.Unless required by law, we undertake no obligation to publicly update or reviseany forward-looking statements to reflect new information, future events orotherwise.

**Factors That May AffectFuture Results**

***Downturns in the highly cyclical semiconductorindustry or changes in end market demand could affect our operating results andthe value of our business.***

The semiconductor industry is highly cyclical and thevalue of our business may decline during the down portion of these cycles. Wehave experienced these conditions in our business in the recent past and wecannot predict when we may experience such downturns in the future. Future downturnsin the semiconductor industry, or any failure of the industry to recover fullyfrom its recent downturns could seriously impact our revenues and harm ourbusiness, financial condition and results of operations. Although markets forour semiconductors appear stable, we cannot assure you that they will continueto be stable or that our markets will not experience renewed, possibly moresevere and prolonged, downturns in the future.

In addition, we may experience significant changes inour profitability as a result of variations in sales, seasonality, changes inproduct mix, price competition for orders and the costs associated with theintroduction of new products and start-up of new facilities. The markets forour products depend on continued demand in the information technology,consumer, industrial, aerospace and defense and automotive markets, and theseend markets may experience changes in demand that could adversely affect ouroperating results and financial condition.

***Consumer and/or corporate spending for the end marketapplications which incorporate our products may be reduced due to increased oilprices or otherwise.***

Our revenues and gross margin guidance is dependent oncertain level of consumer and/or corporate spending. If our projections of theseexpenditures fail to materialize, due to reduced consumer or corporate spendingfrom increased oil prices or otherwise, our revenues and gross margin could beadversely impacted.

***We maintain backlog of customer orders that is subjectto cancellation, reduction or delay in delivery schedules, which may result inlower than expected revenues.***

With certain exceptions related to products within ourAerospace and Defense and Non-Aligned Product segments, we manufactureprimarily pursuant to purchase orders for current delivery or to forecast,rather than pursuant to long-term supply contracts. The semiconductor industryis subject to rapid changes in customer outlooks or unexpected build ups ofinventory in the supply channel as a result of shifts in end market demand. Accordingly,many of these purchase orders or forecasts may be revised or canceled withoutpenalty. As a result, we must commit resources to the manufacturing of productswithout any advance purchase commitments from customers. Our inability to sellproducts after we devote significant resources to them could have a materialadverse effect on both our levels of inventory and revenues.

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***The semiconductorbusiness is highly competitive and increased competition could reduce the valueof an investment in our company.***

The semiconductor industry, including the sector inwhich we do business, is highly competitive. Competition is based on price,product performance, product availability, quality, reliability and customer service.Price pressures may emerge as competitors attempt to gain a greater marketshare by lowering prices. We compete in various markets with companies ofvarious sizes, many of which are larger and have greater financial and otherresources than we have, and thus they may be better able to pursue acquisitioncandidates and to withstand adverse economic or market conditions. In addition,companies not currently in direct competition with us may introduce competingproducts in the future.

***If we are unable to implement our business strategy,our revenues and profitability may be adversely affected.***

Our future financial performance and success arelargely dependent on our ability to implement our business strategysuccessfully of transforming our business to one led by our Focus Products andsucceeding on our plans to restructure our company. We cannot assure you thatwe will continue to successfully implement our business strategy or thatimplementing our strategy will sustain or improve our results of operations.

***The failure to execute on our plans to divest ordiscontinue that are not consistent with our business objectives, and replacethose revenues with higher-margin product sales could adversely affect ouroperating results.***

We have announced the divestiture, discontinuation orchange in business model of certain of our Non-Focus Products that are notconsistent with our business objectives or margin targets. Our plan is toreplace the divested or discontinued revenues with (or change the businessmodel to achieve) higher-margin product sales and target gross margin ofgreater 50 percent. We cannot assure you that we will complete our plans orachieve our target gross margin. The activities involved with the divestiture,discontinuation and re-alignment of product sales could involve changes tovarious aspects of our business which could adversely affect our profitabilityto an extent we have not anticipated. Even if we fully execute and implementour plans, there may be unforeseen factors that could adversely impact ouroperating results.

***The failure to implement, as well as the completionand impact of our restructuring programs and cost reductions could adverselyaffect our business.***

In December 2002, we announced a number ofrestructuring initiatives. Our goal was to reposition our company to better fitthe market conditions, de-emphasize our commodity business and accelerate themove to what we categorize as our proprietary products, which refer to ourPower Management ICs, Advanced Circuit Devices, and Power Systems. Therestructuring includes consolidating and closing certain manufacturing sites,upgrading equipment and processes in designated facilities and discontinuingproduction in a number of others that cannot support more advanced technologyplatforms or products. The restructuring also includes lowering overhead costsacross our support organization. We cannot assure you that these restructuringinitiatives will achieve their goals, accomplish the cost reductions planned orbe  accomplished within our expectationsas to the amount of charges to be taken in connection with that activity. Additionally,because our restructuring activities involve changes to many aspects of ourbusiness, the costs reductions could adversely affect productivity and sales toan extent we have not anticipated. Even if we fully execute and implement theserestructuring activities, and they generate the anticipated cost savings, theremay be other unforeseen factors that could result in the amount of charges tobe taken in connection with our restructuring activities or otherwise adverselyimpact our profitability and business.

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***Failure to timelycomplete our expansion plans for our wafer fabrication facility could adverselyaffect our revenue growth and ability to achieve our margin targets.***

We have announced that we are operating in the low 90spercent of our worldwide semiconductor fabrication and assembly/modulemanufacturing capacities, without taking into account subcontract or foundrycapacity, and that we are advancing our expansion plans for our most advancedwafer fabrication facility in Newport, Wales to provide additional capacity tosupport our growth of our Focus Products. If we fail to timely execute on thoseplans in advance of demand for our products, that failure could adversely affectour revenue growth and ability to achieve our margin targets. We cannot assureyou that we will complete our plans timely, that the ramp-up of the expandedfacilities will occur effectively and without error or delay, or thatsufficient third party sources would be available to satisfy our ability tomeet customer demand. Even if we fully execute and implement our plans, theremay be unforeseen factors that could adversely impact our operating results.

***Delays in initiation of production at new facilities,implementing new production techniques or resolving problems associated withtechnical equipment malfunctions could adversely affect our manufacturingefficiencies.***

Our manufacturing efficiency has been and will be animportant factor in our future profitability, and we may not be able tomaintain or increase our manufacturing efficiency. Our manufacturing andtesting processes are complex, require advanced and costly equipment and arecontinually being modified in our efforts to improve yields and productperformance. Difficulties in the manufacturing process can lower yields. Technicalor other problems could lead to production delays, order cancellations and lostrevenue. In addition, any problems in achieving acceptable yields, constructiondelays, or other problems in upgrading or expanding existing facilities,building new facilities, problems in bringing other new manufacturing capacityto full production or changing our process technologies, could also result incapacity constraints, production delays and a loss of future revenues andcustomers. Our operating results also could be adversely affected by anyincrease in fixed costs and operating expenses related to increases inproduction capacity if net sales do not increase proportionately, or in theevent of a decline in demand for our products.

***If some original equipment manufacturers (“OEMs”) donot design our products into their equipment, a portion of our revenue may beadversely affected.***

A design win from a customer does not guarantee futuresales to that customer. We may be unable to achieve these “design wins”.Without design wins from OEMs, we would only be able to sell our products tothese OEMs as a second source, if at all. Once an OEM designs another supplier’ssemiconductor into one of its product platforms, it is more difficult for us toachieve future design wins with that OEM’s product platform because changingsuppliers involves significant cost, time, effort and risk. Achieving a designwin with a customer does not ensure that we will receive is significant revenuefrom that customer and we may be unable to convert design into actual sales.

***Corporateinvestment and expenditures in the Information Technology sector and inInformation Technology purchases may not materialize as we have planned.***

Our revenues and gross margin guidance is dependent ona certain level of corporate investment and expenditures in the InformationTechnology sector and in Information Technology purchases. If our projections ofthese expenditures fail to materialize (whether due to increased oil prices orotherwise), our revenues and gross margin could be adversely impacted.

***New technologies could result in the development ofnew products and a decrease in demand for our products, and we may not be ableto develop new products to satisfy changes in demand.***

Our failure to develop new technologies or react tochanges in existing technologies could materially delay our development of newproducts, which could result in decreased revenues and a loss of market 

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share to our competitors.Rapidly changing technologies and industry standards, along with frequent newproduct introductions, characterize the semiconductor industry. As a result, wemust devote significant resources to research and development. Our financialperformance depends on our ability to design, develop, manufacture, assemble,test, market and support new products and enhancements on a timely andcost-effective basis. We cannot assure you that we will successfully identifynew product opportunities and develop and bring new products to market in atimely and cost-effective manner, or that products or technologies developed byothers will not render our products or technologies obsolete or noncompetitive.A fundamental shift in technologies in our product markets could have amaterial adverse effect on our competitive position within the industry. Inaddition, to remain competitive, we must continue to reduce die sizes andimprove manufacturing yields. We cannot assure you that we can accomplish thesegoals.

***Our failure to obtain or maintain the right to usecertain technologies may negatively affect our financial results.***

Our future success and competitive position may dependin part upon our ability to obtain or maintain certain proprietary technologiesused in our principal products, which is achieved in part by defending andmaintaining the validity of our patents and defending claims by our competitorsof intellectual property infringement. We license certain patents owned byothers. We have also been notified that certain of our products may infringethe patents of third parties. Although licenses are generally offered in suchsituations, we cannot eliminate the risk of litigation alleging patentinfringement. We are currently a defendant in intellectual property claims andwe could become subject to other lawsuits in which it is alleged that we haveinfringed upon the intellectual property rights of others.

Our involvement in existing and future intellectualproperty litigation could result in significant expense, adversely affect salesof the challenged product or technologies and divert the efforts of ourtechnical and management personnel, whether or not such litigation is resolvedin our favor. If any such infringements exist, arise or are claimed in thefuture, we may be exposed to substantial liability for damages and may need toobtain licenses from the patent owners, discontinue or change our processes orproducts or expend significant resources to develop or acquire non-infringingtechnologies. We cannot assure you that we would be successful in such effortsor that such licenses would be available under reasonable terms. Our failure todevelop or acquire non-infringing technologies or to obtain licenses on acceptableterms or the occurrence of related litigation itself could have a materialadverse effect on our operating results and financial condition.

***Our ongoing protection and reliance on ourintellectual property assets expose us to risks.***

We have traditionally relied on our patents andproprietary technologies. Patent litigation settlements and royalty incomesubstantially contribute to our financial results. Enforcement of ourintellectual property rights is costly, risky and time-consuming. We cannotassure you that we can successfully continue to protect our intellectualproperty rights, especially in foreign markets. Our key MOSFET patents expirebetween 2005 and 2010, although our broadest MOSFET patents expire in 2007 and2008. Our royalty income is largely dependent on the following factors: theremaining terms of our MOSFET patents; the continuing introduction andacceptance of products that are not covered by our patents; remaining coveredunder unexpired MOSFET patents; the defensibility and enforceability of ourpatents; changes in our licensees’ unit sales, prices or die sizes; and theterms, if any, upon which expiring license agreements are renegotiated. Marketconditions and mix of licensee products, as well as sales of non-infringingdevices can significantly affect royalty income. As a consequence, we cannotguarantee that our royalty income will continue at levels consistent with priorperiods. Any decrease in our royalty income could have a material adverseeffect on our operating results and financial condition.

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***Our internationaloperations expose us to material risks.***

We expect revenues from foreign markets to continue torepresent a significant portion of total revenues. We maintain or contract withsignificant operations in foreign countries. Among others, the following risksare inherent in doing business internationally: changes in, or impositions of,legislative or regulatory requirements, including tax laws in the United Statesand in the countries in which we manufacture or sell our products; traderestrictions; transportation delays; work stoppages; economic and politicalinstability; and foreign currency fluctuations.

In addition, certain of our operations and productsare subject to restrictions or licensing under U.S. export laws. If such lawsor the implementation of these restrictions change, or if in the course ofoperating under such laws we become subject to claims, we cannot assure youthat such factors would not have a material adverse effect on our financialcondition and operating results.

In addition, it is more difficult in some foreigncountries to protect our products or intellectual property rights to the sameextent as is possible in the United States. Therefore, the risk of piracy ormisuse of our technology and products may be greater in these foreigncountries. Although we have not experienced any material adverse effect on ouroperating results as a result of these and other factors, we cannot assure youthat such factors will not have a material adverse effect on our financialcondition and operating results in the future.

***Delays in initiation of production at new facilities,implementing new production techniques or resolving problems associated withtechnical equipment malfunctions could adversely affect our manufacturingefficiencies.***

Our manufacturing efficiency will be an importantfactor in our future profitability, and we cannot assure you that we will beable to maintain or increase our manufacturing efficiency to the same extent asour competitors. Our manufacturing processes are highly complex, requireadvanced and costly equipment and are continuously being modified in an effortto improve yields and product performance. Impurities, defects or otherdifficulties in the manufacturing process can lower yields.

In addition, as is common in the semiconductorindustry, we have from time to time experienced difficulty in beginningproduction at new facilities or in effecting transitions to new manufacturingprocesses. As a consequence, we have experienced delays in product deliveriesand reduced yields. We may experience manufacturing problems in achievingacceptable yields or experience product delivery delays in the future as aresult of, among other things, capacity constraints, construction delays,upgrading or expanding existing facilities or changing our processtechnologies, any of which could result in a loss of future revenues. Ouroperating results could also be adversely affected by the increase in fixedcosts and operating expenses related to increases in production capacity ifrevenues do not increase proportionately.

We are transferring manufacturing from our Krefeld,Germany to our Swansea, Wales and Tijuana, Mexico facilities. We are ramping upour Newport, Wales facility, and anticipate to transfer our El Segundomanufacturing to the Newport, Wales facility by fiscal year end June 2005.We have experienced some delays and/or technical problems in moving our variousfacilities. Continued delays and/or technical problems in completing the remainingtransfers could lead to increased costs, reduced yields, delays in productdeliveries, order cancellations and/or lost revenue.

***Interruptions, delays or cost increases affecting ourmaterials, parts or equipment may impair our competitive position and ouroperations.***

Our manufacturing operations depend upon obtainingadequate supplies of materials, parts and equipment, including silicon, moldcompounds and leadframes, on a timely basis from third parties. Our results ofoperations could be adversely affected if we were unable to obtain adequatesupplies of materials, parts and equipment in a timely manner or if the costsof materials, parts or equipment increase significantly. From time to time,suppliers may extend lead times, limit supplies or increase prices due to 

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capacity constraints orother factors. We have a limited number of suppliers for some materials, partsand equipment, and any interruption could materially impair our operations.

We manufacture a substantial portion of our waferproduct at our Temecula, California and Newport, Wales facilities. Anydisruption of operations at those facilities could have a material adverseeffect on our business, financial condition and results of operations.

Also, some of our products are assembled and tested bythird party subcontractors. We do not have any long-term assembly agreementswith these subcontractors. As a result, we do not have immediate control overour product delivery schedules or product quality. Due to the amount of timeoften required to qualify assemblers and testers and the high cost ofqualifying multiple parties for the same products, we could experience delaysin the shipment of our products if we are forced to find alternative thirdparties to assemble or test them. Any product delivery delays in the futurecould have a material adverse effect on our operating results and financialcondition. Our operations and ability to satisfy customer obligations could beadversely affected if our relationships with these subcontractors were disruptedor terminated.

***We must commit resources to product manufacturingprior to receipt of purchase commitments and could lose some or all of theassociated investment.***

We sell products primarily pursuant to purchase ordersfor current delivery or to forecast, rather than pursuant to long-term supplycontracts. Many of these purchase orders or forecasts may be revised orcanceled without penalty. As a result, we must commit resources to themanufacturing of products without any advance purchase commitments fromcustomers. Our inability to sell products after we devote significant resourcesto them could have a material adverse effect on our levels of inventory and ourbusiness, financial condition and results of operations.

***We receive a significant portion of our revenues froma small number of customers and distributors.***

Historically, a significant portion of our revenueshas come from a relatively small number of customers and distributors. The lossor financial failure of any significant customer or distributor, any reductionin orders by any of our significant customers or distributors, or thecancellation of a significant order, could materially and adversely affect ourbusiness.

***If we fail to maintain an effective system of internalcontrols or discover material weaknesses in our internal controls overfinancial reporting, we may not be able to report our financial resultsaccurately or detect fraud, which could harm our business and the trading priceof our stock.***

Effective internal controls are necessary for us toproduce reliable financial reports and are important in our effort to preventfinancial fraud. We are required to periodically evaluate the effectiveness ofthe design and operation of our internal controls. These evaluations may resultin the conclusion that enhancements, modifications or changes to our internalcontrols are necessary or desirable. While management evaluates theeffectiveness of our internal controls on a regular basis, we cannot provideabsolute assurance that these controls will always be effective. There areinherent limitations on the effectiveness of internal controls includingcollusion, management override, and failure of human judgment. Because of this,control procedures are designed to reduce rather than eliminate business risks.If we fail to maintain an effective system of internal controls or ifmanagement or our independent registered public accounting firm were todiscover material weakness in our internal controls, we may be unable toproduce reliable financial reports or prevent fraud and it could harm ourfinancial condition and results of operations and result in loss of investorconfidence and a decline in our stock price.

***If OEMs do not design our products into theirequipment, a portion of our revenue may be adversely affected.***

A design win from acustomer does not guarantee future sales to that customer. We may be unable toachieve these “design wins.” Without design wins from OEMs, we would only beable to sell our products to these OEMs as a second source. Once an OEM designsanother supplier’s semiconductors into one of 

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its product platforms, itis more difficult for us to achieve future design wins with that OEM’s productplatform because changing suppliers involves significant cost, time, effort andrisk. Achieving a design win with a customer does not ensure that we will receiveis significant revenues from that customer and we may be unable to convertdesign into actual sales. Even after a design win, the customer is notobligated to purchase our products and can choose at any time to stop using ourproduct, if, for example, its own products are not commercially successful.

***We may fail to attract or retain the qualifiedtechnical, sales, marketing and managerial personnel required to operate ourbusiness successfully.***

Our future success depends, in part, upon our abilityto attract and retain highly qualified technical, sales, marketing andmanagerial personnel. Personnel with the necessary semiconductor expertise arescarce and competition for personnel with these skills is intense. We cannotassure you that we will be able to retain existing key technical, sales,marketing and managerial employees or that we will be successful in attracting,assimilating or retaining other highly qualified technical, sales, marketingand managerial personnel in the future. If we are unable to retain existing keyemployees or are unsuccessful in attracting new highly qualified employees, ourbusiness, financial condition and results of operations could be materially andadversely affected.

***We are acquiringand may continue to acquire other companies and may be unable to successfullyintegrate such companies with our operations.***

We have acquired several companies over the past threeyears. We may continue to expand and diversify our operations with additionalacquisitions. If we are unsuccessful in integrating these companies with ouroperations, or if integration is more difficult than anticipated, we mayexperience disruptions that could have a material adverse effect on ourbusiness, financial condition and results of operations.

***The price of ourcommon stock has fluctuated widely in the past and may fluctuate widely in thefuture.***

Our common stock, which is traded on The New YorkStock Exchange, has experienced and may continue to experience significantprice and volume fluctuations that could adversely affect the market price ofour common stock without regard to our operating performance. In addition, webelieve that factors such as quarterly fluctuations in financial results,earnings below analysts’ estimates and financial performance and otheractivities of other publicly traded companies in the semiconductor industrycould cause the price of our common stock to fluctuate substantially. Inaddition, in recent periods, our common stock, the stock market in general andthe market for shares of semiconductor industry-related stocks in particularhave experienced extreme price fluctuations which have often been unrelated tothe operating performance of the affected companies. Any similar fluctuationsin the future could adversely affect the market price of our common stock.

***Our investments incertain securities expose us to market risks.***

We invest excess cash in marketable securitiesconsisting primarily of commercial paper, corporate notes, corporate bonds andgovernmental securities. We also hold as strategic investments the common stockof two publicly-traded Japanese companies, one of which is Nihon InterElectronics Corporation. The value of these investments is subject to marketfluctuations, which if adverse, could have a material adverse effect on ouroperating results and financial condition.

***Our products may be found to be defective and, as aresult, product liability claims may be asserted against us which may harm ourbusiness and our reputation with our customers.***

Our products aretypically sold at prices that are significantly lower than the cost of theequipment or other goods in which they are incorporated. Although we maintainrigorous quality control systems, we shipped individual semiconductor devicesin 2004 to customers around the world, and in the ordinary course of ourbusiness we receive warranty claims for some of these products that aredefective, or that do 

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not perform to publishedspecifications. Since a defect or failure in our products could give rise tofailures in the end products that incorporate them (and consequential claimsfor damages against our customers from their customers depending on applicablelaw and contract), we may face claims for damages that are disproportionate tothe revenues and profits we receive from the products involved. In addition,our ability to reduce such liabilities may be limited by the laws or thecustomary business practices of the countries where we do business. Even incases where we do not believe we have legal liability for such claims, we maychoose to pay for them to retain a customer’s business or goodwill or to settleclaims to avoid protracted litigation. Our results of operations and businesscould be adversely affected as a result of a significant quality or performanceissue in our products, if we are required to choose to pay for the damages thatresult. Although we currently have product liability insurance, we may not havesufficient insurance coverage, and we may not have sufficient resources, tosatisfy all possible product liability claims. In addition, any perception thatour products are defective would likely result in reduced sales of ourproducts, loss of customers and harm to our business and reputation.

***If we fail to maintain an effective system of internalcontrols or discover material weaknesses in our internal controls overfinancial reporting, we may not be able to report our financial resultsaccurately or detect fraud, which could harm our business and the trading priceof our stock.***

Effective internal controls are necessary for us toproduce reliable financial reports and are important in our effort to preventfinancial fraud. We are required to periodically evaluate the effectiveness of thedesign and operation of our internal controls. These evaluations may result inthe conclusion that enhancements, modifications or changes to our internalcontrols are necessary or desirable. While management evaluates theeffectiveness of our internal controls on a regular basis, we cannot provideabsolute assurance that these controls will always be effective. There areinherent limitations on the effectiveness of internal controls includingcollusion, management override, and failure of human judgment. Because of this,control procedures are designed to reduce rather than eliminate business risks.If we fail to maintain an effective system of internal controls or ifmanagement or our independent registered public accounting firm were todiscover material weaknesses in our internal controls, we may be unable toproduce reliable financial reports or prevent fraud and it could harm ourfinancial condition and results of operations and result in loss of investorconfidence and a decline in our stock price.

***Large potentialenvironmental liabilities, including those relating to a former operatingsubsidiary, may adversely impact our financial position.***

Federal, state, foreign and local laws and regulationsimpose various restrictions and controls on the discharge of materials,chemicals and gases used in our semiconductor manufacturing processes. Inaddition, under some laws and regulations, we could be held financiallyresponsible for remedial measures if our properties are contaminated or if wesend waste to a landfill or recycling facility that becomes contaminated, evenif we did not cause the contamination. Also, we may be subject to common law claimsif we release substances that damage or harm third parties. Further, we cannotassure you that changes in environmental laws or regulations will not requireadditional investments in capital equipment or the implementation of additionalcompliance programs in the future. Any failure to comply with environmentallaws or regulations could subject us to serious liabilities and could have amaterial adverse effect on our operating results and financial condition.

***Some of ourfacilities are located near major earthquake fault lines.***

Our corporate headquarters, one of our manufacturingfacility, one of our research facility and certain other critical businessoperations are located near major earthquake fault lines. We could bematerially and adversely affected in the event of a major earthquake. Althoughwe maintain earthquake insurance, we can give you no assurance that we haveobtained or will maintain sufficient insurance coverage.

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***There can be noassurance that we will have sufficient capital resources to make necessaryinvestments in manufacturing technology and equipment.***

The semiconductor industry is capital intensive.Semiconductor manufacturing requires a constant upgrading of process technologyto remain competitive, as new and enhanced semiconductor processes aredeveloped which permit smaller, more efficient and more powerful semiconductordevices. We maintain certain of our own manufacturing, assembly and testfacilities, which have required and will continue to require significantinvestments in manufacturing technology and equipment. There can be noassurance that we will have sufficient capital resources to make necessaryinvestments in manufacturing technology and equipment. Although we believe thatanticipated cash flows from operations, existing cash reserves and other equityor debt financings that we may obtain will be sufficient to satisfy our futurecapital expenditure requirements, there can be no assurance that this will bethe case or that alternative sources of capital will be available to us onfavorable terms or at all.

***Unforeseen changesin market conditions, tax laws and other factors could impact our judgmentabout the realizability of our deferred tax assets.***

We have made certain judgments regarding therealizability of our deferred tax assets. In accordance with SFAS No. 109,“Accounting for Income Taxes”, the carrying value of the net deferred taxassets is based on the belief that it is more likely than not that we willgenerate sufficient future taxable income in certain jurisdictions to realizethese deferred tax assets, after considering all available positive andnegative evidence. If our assumptions and estimates change in the future givenunforeseen changes in market conditions, tax laws or other factors, then thevaluation allowances established may be increased, resulting in increasedincome tax expense. Conversely, if we are ultimately able to use all or aportion of the deferred tax assets for which a valuation allowance has beenestablished, then the related portion of the valuation allowance will bereleased to income as a credit to income tax expense.

***Final outcomes fromthe various tax authorities’ audits are difficult to predict and an unfavorablefinding may negatively impact our financial results.***

As is common with corporations of our size, we arefrom time to time under audit by various taxing authorities. It is oftendifficult to predict the final outcome or the timing of resolution of anyparticular tax matter. We have provided certain tax reserves which have beenincluded in the determination of our financial results. However, unpredictedunfavorable settlement may require additional use of cash and negatively impactour financial position or results of operations.

***Terrorist attacks,such as those that took place on September 11, 2001, or threats oroccurrences of other terrorist activities whether in the United States orinternationally may affect the markets in which our common stock trades, themarkets in which we operate and our profitability.***

Terrorist attacks, such as those that took place on September 11,2001, or threats or occurrences of other terrorist or related activities,whether in the United States or internationally, may affect the markets inwhich our common stock trades, the markets in which we operate and ourprofitability. Future terrorist or related activities could affect our domesticand international sales, disrupt our supply chains and impair our ability toproduce and deliver our products. Such activities could affect our physicalfacilities or those of our suppliers or customers, and make transportation ofour supplies and products more difficult or cost prohibitive. Due to the broadand uncertain effects that terrorist attacks have had on financial and economicmarkets generally, we cannot provide any estimate of how these activities mightaffect our future results.

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***Natural disasters,like those related to Hurricane Katrina, or occurrences of other natural disasterswhether in the United States or internationally may affect the markets in whichour common stock trades, the markets in which we operate and our profitability.***

Moreover, naturaldisasters, like those related to Hurricane Katrina, or threats or occurrencesof other similar events, whether in the United States or internationally, mayaffect the markets in which our common stock trades, the markets in which weoperate and our profitability. Such events could affect our domestic andinternational sales, disrupt our supply chains, primarily for raw materials andprocess chemicals and gases, and impair our ability to produce and deliver ourproducts. While we do not have facilities located near the affected areas, suchactivities could affect physical facilities of our suppliers or customers, andmake transportation of our supplies and products more difficult or costprohibitive. Due to the broad and uncertain effects that natural events havehad on financial and economic markets generally, we cannot provide any estimateof how these activities might affect our future results.

**Item 7A. Quantitative and Qualitative Disclosuresabout Market Risk**

We are exposed to variousrisks, including fluctuations in interest and foreign currency rates. In thenormal course of business, we also face risks that are either non-financial ornon-quantifiable. Such risks principally include country risk, credit risk andlegal risk and are not discussed or quantified in the following analyses, aswell as risks set forth under the heading “Factors that May Affect FutureResults”.

*Interest Rate Risk*

Our financial assets and liabilities subject tointerest rate risk are cash investments, convertible debt, credit facilitiesand interest rate swaps. Our primary objective is to preserve principal whilemaximizing net investment yield without significantly increasing risk. At June 30,2005, we evaluated the effect that near-term changes in interest rates wouldhave had on these transactions. A change of as much as ten percent in theLondon InterBank Offered Rate (“LIBOR”) would have had an annualized favorableimpact of approximately $1.2 million on net interest income/expense since theinterest income on our cash and cash investments would have outweighedadditional interest expense on our outstanding debt. For our interest ratecontract with Lehman Brothers, an increase of ten percent in interest rateswould have had a favorable impact of $0.3 million, and a decrease of tenpercent in interest rates would have had an adverse impact of $(0.1) million,on net interest income/expense. These changes would not have had a materialimpact on our results of operations, financial position or cash flows.

In December 2001, we entered into an interestrate swap transaction (the “Transaction”) with JP Morgan Chase Bank (the “Bank”),to modify our effective interest payable with respect to $412.5 million of our$550 million outstanding convertible debt (the “Debt”) (see Notes 3, “DerivativeFinancial Instruments,” and 4, “Bank Loans and Long-Term Debt”). At theinception of the Transaction, interest rates were lower than that of the Debtand we believed that interest rates would remain lower for an extended periodof time. In April 2004,we entered into an interest rate swap transaction (the “April 2004Transaction”) with the Bank to modify the effective interest payable withrespect to the remaining $137.5 million of the Debt. The variableinterest rate we have paid since the inception of the swap has averaged 2.47percent, compared to a coupon of 4.25 percent on the Debt. During the fiscalyears ended June 30, 2005, 2004 and 2003, these arrangements reducedinterest expense by $8.0 million, $12.9 million and $10.4 million,respectively.

Accounted for as fair value hedges under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”, themark-to-market adjustments of the two Transactions were offset by themark-to-market adjustments on the Debt, resulting in no material impact toearnings. To measure the effectiveness of the hedge relationship, we use aregression analysis. To evaluate the relationship of the fair value of theTransaction and the changes in fair value of the Debt attributable to changesin the benchmark rate, we 

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discount the estimatedcash flows by the LIBOR swap rate that corresponds to the Debt’s expectedmaturity date. In addition, our ability to call the Debt was considered inassessing the effectiveness of the hedging relationship. For those years thatwere projected to include at least a portion of redemption of the convertibledebentures, we employed a valuation model known as a Monte Carlo simulation. Thissimulation allows us to project probability-weighted contractual cash flowsdiscounted at the LIBOR swap rate that corresponded to the Debt’s expectedmaturity date. The market value of the December 2001 Transaction was a$0.3 million liability and a $13.1 million asset at June 30, 2005 and2004, respectively. The market value of the April 2004 Transaction was a$3.4 million liability and a $1.3 million liability at June 30, 2005 and2004, respectively.

In April 2002, weentered into an interest rate contract (the “Contract”) with an investmentbank, Lehman Brothers (“Lehman”), to reduce the variable interest rate risk ofthe Transaction. The notional amount of the Contract is $412.0 million,representing approximately 75 percent of the Debt. Under the terms of theContract, we have the option to receive a payout from Lehman covering ourexposure to LIBOR fluctuations between 5.5 percent and 7.5 percent for any fourdesignated quarters. The market value of the Contract at June 30, 2005 and2004, was $0.1 million and $0.9 million, respectively, and was included inother long-term assets. Interest expense was increased by mark-to-market lossesof $0.8 million, $0.5 million and $3.1 million, for the fiscal years ended June 30,2005, 2004 and 2003, respectively.

*Foreign CurrencyRisk*

We conduct business on a global basis in severalforeign currencies, and at various times, we have currency exposure related tothe British Pound Sterling, the Euro and the Japanese Yen. Our risk to theEuropean currencies is partially offset by the natural hedge of manufacturingand selling goods in both U.S. dollars and the European currencies. Consideringour specific foreign currency exposures, we have the greatest exposure to theJapanese Yen, since we have significant yen-based revenues without theyen-based manufacturing costs. We have established a foreign-currency hedgingprogram using foreign exchange forward contracts, including the ForwardContract described below, to hedge certain foreign currency transactionexposures. To protect against reductions in value and volatility of future cashflows caused by changes in currency exchange rates, we have establishedrevenue, expense and balance sheet hedging programs. Currency forward contractsand local Yen and Euro borrowings are used in these hedging programs. Ourhedging programs reduce, but do not always eliminate, the impact of currencyexchange rate movements. We considered an adverse near-term change in exchangerates of ten percent for the British Pound Sterling, the Euro and the JapaneseYen. Such an adverse change, after taking into account our derivative financialinstruments and offsetting positions, would have resulted in an annualizedadverse impact on income before taxes of less than $1 million for the fiscalyears ended June 30, 2005, 2004 and 2003.

In March 2001, we entered into a five-yearforeign exchange forward contract (the “Forward Contract”) for the purpose ofreducing the effect of exchange rate fluctuations on forecasted intercompany purchasesby our subsidiary in Japan. We have designated the Forward Contract as a cashflow hedge under which mark-to-market adjustments are recorded in accumulatedother comprehensive income, a separate component of stockholders’ equity, untilthe forecasted transactions are recorded in earnings. Under the terms of theForward Contract, we are required to exchange 1.2 billion yen for $11.0 millionon a quarterly basis from June 2001 to March 2006. At June 30,2005, three quarterly payments of 1.2 billion yen remained to be swapped at aforward exchange rate of 109.32 yen per U.S. dollar. The market value of theForward Contract was a $0.1 million asset and a ($2.2) million liability at June 30,2005 and 2004, respectively. The mark-to-market gains (losses), net of tax, of$0.7 million, ($4.0) million and $4.0 million for the fiscal years ended June 30,2005, 2004 and 2003, respectively, was included in other comprehensive income. Basedon effectiveness tests comparing forecasted transactions through the ForwardContract 

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expiration date to itscash flow requirements, we do not expect to incur a material charge to incomeduring the next twelve months as a result of the Forward Contract.

We had approximately $75.9 million and $62.4 millionin notional amounts of forward contracts which were not designated asaccounting hedges under SFAS No. 133 at June 30, 2005 and 2004,respectively. Net realized and unrealizedforeign-currency gains recognized in earnings were $1.4 million for the fiscalyear ended June 30, 2005 and less than $1 million for the fiscal yearsended June 30, 2005, 2004 and 2003.

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**Item8. Financial Statements and Supplementary Data**

**Indexto Consolidated Financial Statements and Financial Statement Schedule**
| ** **                                                                                                                                              | ** ** | Page   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------|------------|
| Report of Independent  Registered Public Accounting Firm                                                                                                |       | 55     |       |
| Financial Statements                                                                                                                                    |       |   |       |
| Consolidated  Statement of Operations for the Fiscal Years Ended June 30, 2005, 2004  and 2003                                                     |       | 57     |       |
| Consolidated  Balance Sheet as of June 30, 2005 and 2004                                                                                           |       | 58     |       |
| Consolidated  Statement of Stockholders’ Equity and Comprehensive Income (Loss) for the  Fiscal Years Ended June 30, 2005, 2004 and 2003 |       | 59     |       |
| Consolidated  Statement of Cash Flows for the Fiscal Years Ended June 30, 2005, 2004  and 2003                                                     |       | 60     |       |
| Notes to Consolidated  Financial Statements                                                                                                             |       | 61     |       |

 

SupportingFinancial Statement Schedule:
| **Schedule No.**                                                                                                | ** ** | ** ** | ** ** | **Page** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| II Valuation and Qualifying Accounts and Reserves  for the Fiscal Years Ended June 30, 2005, 2004 and 2003 |       | 101        |       |

 

Schedules other than those listed above have beenomitted since they are either not required, are not applicable, or the requiredinformation is shown in the Consolidated Financial Statements or related Notes.

 

54

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Shareholders ofInternational Rectifier Corporation

We have completed anintegrated audit of International Rectifier Corporation’s 2005 consolidatedfinancial statements and of its internal control over financial reporting as ofJune 30, 2005 and audits of its fiscal year 2004 and 2003 consolidatedfinancial statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinions, based on our audits,are presented below.

*Consolidated financial statements and financialstatement schedule*

In our opinion, theconsolidated financial statements listed in the accompanying index presentfairly, in all material respects, the financial position of InternationalRectifier Corporation and its subsidiaries at June 30, 2005 and 2004, andthe results of their operations and their cash flows for each of the threeyears in the period ended June 30, 2005 in conformity with accountingprinciples generally accepted in the United States of America. In addition, inour opinion, the financial statement schedule listed in the accompanying index****presentsfairly, in all material respects, the information set forth therein when readin conjunction with the related consolidated financial statements. Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audits. Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An audit offinancial statements includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion

*Internal control over financial reporting*

Also, in our opinion, management’s assessment,included in Management’s Report to Stockholders on Internal Control overFinancial Reporting appearing under Item 9A, that the Company maintainedeffective internal control over financial reporting as of June 30, 2005,based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), is fairly stated, in allmaterial respects, based on those criteria. Furthermore, in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of June 30, 2005, based on criteria established in *Internal Control—Integrated Framework*issued by the COSO. The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express opinions on management’s assessment and on theeffectiveness of the Company’s internal control over financial reporting basedon our audit. We conducted our audit of internal control over financialreporting in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. An audit of internal control over financial reporting includesobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we consider necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinions.

55

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A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.
| /s/ PRICEWATERHOUSECOOPERS  LLP |   |   |
|---------------------------------|--------|--------|
| PricewaterhouseCoopers LLP      |   |   |
| Los Angeles, California         |   |   |
| September 15, 2005         |   |   |

 

56

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**INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTOF OPERATIONS(In thousands except per share amounts)**
| ** **                                                                          | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                                                                            |       | $                                                   | 1,174,424  |   | $ | 1,060,500 |   | $ | 864,443 |   |
| Cost of sales                                                                       |       | 663,901                                             |       | 649,406 |   | 576,633 |   |
| Gross profit                                                                        |       | 510,523                                             |       | 411,094 |   | 287,810 |   |
| Selling and  administrative expense                                                 |       | 173,037                                             |       | 164,723 |   | 142,499 |   |
| Research and  development expense                                                   |       | 104,876                                             |       | 92,156 |   | 78,904 |   |
| Amortization of  acquisition-related intangible assets                              |       | 5,939                                               |       | 5,623 |   | 5,364 |   |
| Impairment of  assets, restructuring, severance and other charges                   |       | 33,952                                              |       | 33,534 |   | 187,890 |   |
| Other expense  (income), net                                                        |       | 7,377                                               |       | (5,038 | ) | 22 |   |
| Interest expense  (income), net                                                     |       | 1,274                                               |       | 1,812 |   | (671 | ) |
| Income (loss) before income taxes                                                   |       | 184,068                                             |       | 118,284 |   | (126,198 | ) |
| Provision for  (benefit from) income taxes                                          |       | 46,608                                              |       | 28,514 |   | (36,559 | ) |
| Net income (loss)                                                                   |       | $                                                   | 137,460    |   | $ | 89,770 |   | $ | (89,639 | ) |
| Net income (loss)  per common share:                                                |       |                                                |       |   |   |   |   |
| Net income (loss)  per common share—basic                                      |       | $                                                   | 2.03       |   | $ | 1.37 |   | $ | (1.40 | ) |
| Net income (loss) per common share—diluted                                     |       | $                                                   | 1.91       |   | $ | 1.31 |   | $ | (1.40 | ) |
| Average common shares outstanding—basic                                        |       | 67,621                                              |       | 65,459 |   | 63,982 |   |
| Average common  shares and potentially dilutive securities outstanding—diluted |       | 77,089                                              |       | 68,363 |   | 63,982 |   |

 

The accompanying notes are an integral part of this statement.

57

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**INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEET(In thousands except share amounts)**
| ** **                                                                                                                              | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                              |       |                    |       |                    |       |
| Current assets:                                                                                                                         |       |                    |       |                    |       |
| Cash and cash equivalents                                                                                                               |       | $                       | 359,978    |                    | $          | 339,024 |   |
| Short-term cash investments                                                                                                             |       | 278,157                 |       | 221,130                 |       |
| Trade accounts receivable, less allowance for  doubtful accounts                                                                        |       | 158,510                 |       | 154,911                 |       |
| Inventories, net                                                                                                                        |       | 177,560                 |       | 159,908                 |       |
| Current deferred income taxes                                                                                                           |       | 34,784                  |       | 44,141                  |       |
| Prepaid expenses and other receivables                                                                                                  |       | 53,387                  |       | 34,096                  |       |
| Total current assets                                                                                                                    |       | 1,062,376               |       | 953,210                 |       |
| Long-term cash investments                                                                                                              |       | 302,585                 |       | 276,055                 |       |
| Property, plant and equipment, at cost, less  accumulated depreciation ($520,335 in 2005 and $466,015 in 2004)                          |       | 488,204                 |       | 393,919                 |       |
| Goodwill                                                                                                                                |       | 152,457                 |       | 139,919                 |       |
| Acquisition-related intangible assets, less  accumulated amortization ($24,291 in 2005 and $18,455 in 2004)                             |       | 35,354                  |       | 28,605                  |       |
| Long-term deferred income taxes                                                                                                         |       | 76,158                  |       | 74,366                  |       |
| Other assets                                                                                                                            |       | 106,410                 |       | 150,932                 |       |
| Total assets                                                                                                                            |       | $                       | 2,223,544  |                    | $          | 2,017,006 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                          |       |                    |       |                    |       |
| Current liabilities:                                                                                                                    |       |                    |       |                    |       |
| Bank loans                                                                                                                              |       | $                       | 18,168     |                    | $          | 18,866 |   |
| Long-term debt, due within one year                                                                                                     |       | 163                     |       | 274                     |       |
| Accounts payable                                                                                                                        |       | 81,893                  |       | 78,164                  |       |
| Accrued salaries, wages and commissions                                                                                                 |       | 33,344                  |       | 36,510                  |       |
| Other accrued expenses                                                                                                                  |       | 91,328                  |       | 81,222                  |       |
| Total current liabilities                                                                                                               |       | 224,896                 |       | 215,036                 |       |
| Long-term  debt, less current maturities                                                                                                |       | 547,259                 |       | 560,019                 |       |
| Other long-term  liabilities                                                                                                            |       | 26,186                  |       | 22,950                  |       |
| Deferred income  taxes                                                                                                                  |       | —                  |       | 14,789                  |       |
| Commitments and  contingencies (Notes 10, 11 and 12)                                                                               |       |                    |       |                    |       |
| Stockholders’  equity:                                                                                                             |       |                    |       |                    |       |
| Common shares, $1 par value, authorized:  330,000,000; issued and outstanding: 66,826,428 shares in 2005 and 66,358,328  shares in 2004 |       | 69,826                  |       | 66,358                  |       |
| Preferred shares, $1 par value, authorized: 1,000,000;  issued and outstanding: none in 2005 and 2004                                   |       | —                  |       | —                  |       |
| Capital contributed in excess of par value of shares                                                                                    |       | 854,045                 |       | 757,169                 |       |
| Retained earnings                                                                                                                       |       | 435,145                 |       | 297,685                 |       |
| Accumulated other comprehensive income                                                                                                  |       | 66,187                  |       | 83,000                  |       |
| Total stockholders’ equity                                                                                                         |       | 1,425,203               |       | 1,204,212               |       |
| Total liabilities  and stockholders’ equity                                                                                        |       | $                       | 2,223,544  |                    | $          | 2,017,006 |   |

 

The accompanying notes are an integral part of this statement.

58

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**INTERNATIONAL RECTIFIERCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME (LOSS)**

**(In thousands except share amounts)**
| ** **                                                                                                                                          | ** ** | **Common  Shares** | ** ** | **Capital  Contributed  in Excess of  Par Value  of Shares** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Comprehensive  Income (Loss)** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------|------------|-----------|------------|
| **Balance,  June 30, 2002**                                                                                                                    |       |               | $          | 63,699                                                                           |       |                   |       | $                                                         | 691,295    |                                  |       |      | $          | 297,554 |   |   |   | $ | 6,097 |   |   |   | $ | — |   |   | $ | 1,058,645 |   |
| Net loss for the  year ended June 30, 2003                                                                                                     |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | (89,639    | )         |       |   | — |   |   |   | (89,639 | ) |   | (89,639 | ) |
| Other comprehensive income, net of tax:                                                                                                             |       |               |       |                                                                             |       |                   |       |                                                      |       |                                  |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation adjustments                                                                                                           |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | 23,886 |   |   | — |   |
| Unrealized gains  on foreign currency forward contract, net of deferred tax provision of $2,374                                                     |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | 4,043 |   |   | — |   |
| Net unrealized  gains on available-for-sale securities, net of deferred tax provision of  $5,643                                                    |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | 9,607 |   |   | — |   |
| Less:  Reclassification adjustments of gain on available-for-sale securities and  foreign currency forward contract, net of tax provision of $1,728 |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | (2,941 | ) |   | — |   |
| Other  comprehensive income                                                                                                                         |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | 34,595 |   |   |   | 34,595 |   |   | 34,595 |   |
| Comprehensive loss                                                                                                                                  |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | (55,044 | ) |   | — |   |
| Issuance of common shares:                                                                                                                          |       |               |       |                                                                             |       |                   |       |                                                      |       |                                  |       |      |       |   |   |   |   |   |   |   |   |   |   |
| 233,850—exercise  of stock options                                                                                                             |       |               | 234        |                                                                             |       |                   | 2,984      |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 3,218 |   |
| 252,724—stock  purchase plan                                                                                                                   |       |               | 253        |                                                                             |       |                   | 4,648      |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 4,901 |   |
| Tax benefits from  exercise of stock options and stock purchase plan                                                                      |       |               | —     |                                                                             |       |                   | 519        |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 519 |   |
| **Balance,  June 30, 2003**                                                                                                                    |       |               | $          | 64,186                                                                           |       |                   |       | $                                                         | 699,446    |                                  |       |      | $          | 207,915 |   |   |   | $ | 40,692 |   |   |   | $ | — |   |   | $ | 1,012,239 |   |
| Net income for the  year ended June 30, 2004                                                                                                   |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | 89,770     |      |       |   | — |   |   |   | 89,770 |   |   | 89,770 |   |
| Other comprehensive income, net of tax:                                                                                                             |       |               |       |                                                                             |       |                   |       |                                                      |       |                                  |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation adjustments                                                                                                           |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | 18,978 |   |   | — |   |
| Unrealized losses  on foreign currency forward contract, net of deferred tax benefit of $2,341                                                      |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | (3,986 | ) |   | — |   |
| Net unrealized  gains on available-for-sale securities, net of deferred tax provision of  $17,660                                                   |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | 30,423 |   |   | — |   |
| Less:  Reclassification adjustments of gain on available-for-sale securities and  foreign currency forward contract, net of tax provision of $1,826 |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | (3,107 | ) |   | — |   |
| Other  comprehensive income                                                                                                                         |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | 42,308 |   |   |   | 42,308 |   |   | 42,308 |   |
| Comprehensive  income                                                                                                                               |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | 132,078 |   |   | — |   |
| Issuance of common shares:                                                                                                                          |       |               |       |                                                                             |       |                   |       |                                                      |       |                                  |       |      |       |   |   |   |   |   |   |   |   |   |   |
| 1,876,664—exercise  of stock options                                                                                                           |       |               | 1,876      |                                                                             |       |                   | 36,757     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 38,633 |   |
| 296,481—stock  purchase plan                                                                                                                   |       |               | 296        |                                                                             |       |                   | 5,282      |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 5,578 |   |
| Tax benefits from  exercise of stock options and stock purchase plan                                                                      |       |               | —     |                                                                             |       |                   | 15,684     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 15,684 |   |
| **Balance,  June 30, 2004**                                                                                                                    |       |               | $          | 66,358                                                                           |       |                   |       | $                                                         | 757,169    |                                  |       |      | $          | 297,685 |   |   |   | $ | 83,000 |   |   |   | $ | — |   |   | $ | 1,204,212 |   |
| Net income for the  year ended June 30, 2005                                                                                                   |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | 137,460    |      |       |   | — |   |   |   | 137,460 |   |   | 137,460 |   |
| Other comprehensive income, net of tax:                                                                                                             |       |               |       |                                                                             |       |                   |       |                                                      |       |                                  |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation adjustments                                                                                                           |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | (4,267 | ) |   | — |   |
| Unrealized gains  on foreign currency forward contract, net of deferred tax provision of ($391)                                                     |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | 667 |   |   | — |   |
| Net unrealized  losses on available-for-sale securities, net of deferred tax benefit of  $8,248                                                     |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | (14,043 | ) |   | — |   |
| Less:  Reclassification adjustments of loss on available-for-sale securities and  foreign currency forward contract, net of tax benefit of ($487)   |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | 830 |   |   | — |   |
| Other  comprehensive loss                                                                                                                           |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | (16,813 | ) |   |   | (16,813 | ) |   | (16,813 | ) |
| Comprehensive  income                                                                                                                               |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | 120,647 |   |   | — |   |
| Issuance of common shares:                                                                                                                          |       |               |       |                                                                             |       |                   |       |                                                      |       |                                  |       |      |       |   |   |   |   |   |   |   |   |   |   |
| 3,213,840—exercise  of stock options                                                                                                           |       |               | 3,214      |                                                                             |       |                   | 64,321     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 67,535 |   |
| 254,260—stock  purchase plan                                                                                                                   |       |               | 254        |                                                                             |       |                   | 8,011      |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 8,265 |   |
| Tax benefits from  exercise of stock options and stock purchase plan                                                                      |       |               | —     |                                                                             |       |                   | 18,572     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 18,572 |   |
| Accelerated  vesting of stock options                                                                                                               |       |               | 5,972      |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | 5,972 |   |   |   |   |
| **Balance,  June 30, 2005**                                                                                                                    |       |               | $          | 69,826                                                                           |       |                   |       | $                                                         | 854,045    |                                  |       |      | $          | 435,145 |   |   |   | $ | 66,187 |   |   |   | $ | — |   |   | $ | 1,425,203 |   |

 

The accompanying notes are an integral part of this statement.

59

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**INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENT OFCASH FLOWS(In thousands)**
| ** **                                                                         | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flow from operating  activities:                                              |       |                                                |       |   |   |   |   |
| Net income (loss)                                                                  |       | $                                                   | 137,460    |   | $ | 89,770 |   | $ | (89,639 | ) |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 70,338                                              |       | 56,915 |   | 56,430 |   |
| Amortization of acquisition-related intangible  assets                             |       | 5,939                                               |       | 5,623 |   | 5,364 |   |
| Unrealized gains on derivative transactions                                        |       | (955                                                | )          | (860 | ) | (211 | ) |
| Impairment of assets, restructuring and severance  charges                         |       | —                                              |       | — |   | 180,214 |   |
| Deferred income taxes                                                              |       | (398                                                | )          | (14,638 | ) | (60,124 | ) |
| Tax benefit from options exercised                                                 |       | 18,572                                              |       | 15,684 |   | 519 |   |
| Accelerated vesting of stock options                                               |       | 5,972                                               |       | — |   | — |   |
| Change in operating assets and liabilities, net  (Note 1)                          |       | (16,003                                             | )          | 10,479 |   | 36,938 |   |
| Net cash provided  by operating activities                                         |       | 220,925                                             |       | 162,973 |   | 129,491 |   |
| Cash flow from  investing activities:                                              |       |                                                |       |   |   |   |   |
| Additions to property, plant and equipment                                         |       | (135,133                                            | )          | (86,170 | ) | (71,759 | ) |
| Proceeds from sale of property, plant and equipment                                |       | 265                                                 |       | 891 |   | 87 |   |
| Acquisition of certain business assets and  businesses, net of cash acquired       |       | (39,633                                             | )          | — |   | — |   |
| Acquisition of technologies                                                        |       | (11,500                                             | )          | — |   | — |   |
| Sale or maturities of cash investments                                             |       | 387,513                                             |       | 567,562 |   | 514,896 |   |
| Purchase of cash investments                                                       |       | (471,020                                            | )          | (566,000 | ) | (503,025 | ) |
| Other, net                                                                         |       | (7,527                                              | )          | 3,818 |   | (8,435 | ) |
| Net cash used in  investing activities                                             |       | (277,035                                            | )          | (79,899 | ) | (68,236 | ) |
| Cash flow from  financing activities:                                              |       |                                                |       |   |   |   |   |
| (Repayments of) proceeds from short-term debt                                      |       | (539                                                | )          | 544 |   | (2,260 | ) |
| Proceeds from long-term debt                                                       |       | —                                              |       | — |   | 104 |   |
| Repayments of long-term debt                                                       |       | (165                                                | )          | (120 | ) | (177 | ) |
| Repayments of capital lease obligations                                            |       | (288                                                | )          | (888 | ) | (991 | ) |
| Proceeds from exercise of stock options and stock  purchase plan                   |       | 75,800                                              |       | 44,211 |   | 8,119 |   |
| Other, net                                                                         |       | 1,597                                               |       | (382 | ) | (2,160 | ) |
| Net cash provided  by financing activities                                         |       | 76,405                                              |       | 43,365 |   | 2,635 |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | 659                                                 |       | (4,238 | ) | (1,797 | ) |
| Net increase in  cash and cash equivalents                                         |       | 20,954                                              |       | 122,201 |   | 62,093 |   |
| Cash and cash  equivalents, beginning of year                                      |       | 339,024                                             |       | 216,823 |   | 154,730 |   |
| Cash and cash  equivalents, end of year                                            |       | $                                                   | 359,978    |   | $ | 339,024 |   | $ | 216,823 |   |

 

The accompanying notes are an integral part of this statement.

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**INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**1.   Businessand Summary of Significant Accounting Policies**

*Business*

International Rectifier Corporation (“IR” or the “Company”)is a leading designer, manufacturer and marketer of power management productsusing power semiconductors. Power semiconductors process electricity into aform more usable by electrical products. The Company’s products address the two core challenges of power management, powerconservation and power performance, by increasing system efficiency,allowing more compact end products, improving features and functionality andextending battery life.

The Company focuses on the power managementrequirements of a specific application and brings a comprehensive portfolio ofproducts and technologies to better satisfy the needs of that application. TheCompany concentrates on markets including computers, communications networking,consumer electronics, energy-saving appliances, lighting, satellites, launchvehicles, aircraft and automotive diesel injection, where its comprehensiveportfolio of technologies enable better, more competitive end products.

According to iSuppli, a leading industry source formarket information, the market for power management semiconductors in calendar year2004 was approximately $21 billion, growing to approximately $24 billionin calendar year 2005. The Company’s products address approximately$15 billion or over 70 percent of this market.

*Principles ofConsolidation*

The consolidated financialstatements include the accounts of the Company and all of its subsidiaries,which are located in North America, Europe and Asia. Intercompany transactionshave been eliminated in consolidation.

*Fiscal Year*

The Company operates on a52-53 week fiscal year under which fiscal 2005 consisted of 52 weeks ending July 3,2005, fiscal 2004 consisted of 52 weeks ending July 4, 2004, and fiscal2003 consisted of 53 weeks ending July 6, 2003. For ease of presenting theaccompanying consolidated financial statements, the fiscal year end for allperiods presented is shown as June 30.

*Revenue Recognition*

In accordance with Staff Accounting Bulletin No. 101,“Revenue Recognition”, the Company recognizes revenue when the evidence of anarrangement exists, pricing is fixed and determinable, collection is reasonablyassured, and delivery or performance of services has occurred. The Companyrecognizes the majority of revenues upon shipment for product sales to allcustomers, including distributors, with provisions for estimated returns andallowances recorded at the time of shipment. Certain customers have limitedrights of returns and price protection programs. The Company continuouslymonitors product returns and potential price adjustments and record a provisionfor these based on notification received of pending credits and historicalexperience. While such credits have historically been within the Company’sexpectations and the provisions established, the Company cannot guarantee thatit will continue to experience the same rate of returns and allowances. If thehistorical data and estimates used to calculate these provisions do notproperly reflect future activity, the Company’s revenues, gross profit, netincome and net income per common share could be impacted.

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Certain of the Company’scustomers’ contracts contain substantive acceptance provisions. In suchcircumstances, the Company recognizes revenue in accordance with specificcontract provisions, in most instances upon customer inspection or upondelivery of proof of conformance to customer specifications. The Company alsomaintains allowances for doubtful accounts for estimated losses resulting fromthe inability of its customers to make required payments. If the financialcondition of its customers was to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances might be required.

*Research andDevelopment*

Research and developmentcosts are expensed as incurred.

*Environmental Costs*

Costs incurred toinvestigate and remediate contaminated sites are expensed when such costs areidentified and estimable.

*Interest Income(Expense)*

Interestincome (expense) for the fiscal years ended June 30, 2005, 2004 and 2003are as follows (in thousands):
| ** **                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income                |       | $        | 17,956     |     | $          | 14,217   |       | $ | 20,375 |   |
| Interest expense               |       | (19,230  | )          | (16,029  | )          | (19,704  | )          |
| Interest income (expense), net |       | $        | (1,274     | )        | $          | (1,812   | )          | $ | 671 |   |

 

*Income Taxes*

Deferred income taxes are determined based on thedifference between the financial reporting and tax bases of assets andliabilities using enacted rates in effect during the year in which thedifferences are expected to reverse. Realization of deferred tax assets isdependent upon generating sufficient taxable income. Valuation allowances areestablished for the deferred tax assets for which the Company believes do notmeet the “more likely than not” criteria established by SFAS No. 109. Judgmentsregarding future taxable income may be revised due to changes in marketconditions, tax laws, or other factors. If the Company’s assumptions andestimates change in the future, then the valuation allowances established maybe increased, resulting in increased income tax expense. Conversely, if theCompany is ultimately able to use all or a portion of the deferred tax assetsfor which a valuation allowance has been established, then the related portionof the valuation allowance will be released to income as a credit to income taxexpense. Income tax expense is the taxpayable for the period and the change during the period in deferred tax assetsand liabilities.

The Company recognizes certain tax liabilities foranticipated tax audit findings in the U.S. and other tax jurisdictions based onour estimate of whether, and the extent to which additional taxes would be due,in accordance with SFAS No. 5, “Accounting for Contingencies”. If theaudit findings result in actual taxes owed more or less than what the Companyhad anticipated, its income tax expense would be increased or decreased,accordingly, in the period of the determination.

U.S. income taxes have notbeen provided on approximately $279.2 million of undistributed earnings offoreign subsidiaries since the Company considers these earnings to be investedindefinitely or offset by foreign tax credits. It is not practical to estimatethe amount of unrecognized deferred U.S. taxes on these undistributed earnings.

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*Net Income (Loss)per Common Share*

Net income (loss) percommon share—basic is computed by dividing net income (loss) available tocommon stockholders (the numerator) by the weighted average number of commonshares outstanding (the denominator) during the period. The computation of netincome (loss) per common share—diluted is similar to the computation of netincome (loss) per common share—basic except that the denominator is increasedto include the number of additional common shares that would have beenoutstanding for the exercise of stock options using the treasury stock methodand the conversion of the Company’s convertible subordinated notes using theif-converted method. The Company’s use of the treasury stock method reduces thegross number of dilutive shares by the number of shares purchasable from theproceeds of the options assumed to be exercised. The Company’s use of theif-converted method increases reported net income by the interest expenserelated to the convertible subordinated notes when computing net income percommon share—diluted.

*Statement of CashFlows*

Componentsin the change of operating assets and liabilities, net of effects ofacquisitions, for the fiscal years ended June 30, 2005, 2004 and 2003 werecomprised of the following (in thousands):
| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Trade accounts  receivable                      |       | $        | (4,195     | )        | $          | (11,106  | )          | $ | 14,811 |   |
| Inventories, net                                |       | (16,234  | )          | 15,184   |       | 6,973    |       |
| Prepaid expenses  and other receivables         |       | (12,787  | )          | 76       |       | (10,250  | )          |
| Accounts payable                                |       | 4,347    |       | (13,874  | )          | 20,488   |       |
| Accrued salaries,  wages and commissions        |       | (3,242   | )          | 6,907    |       | 1,914    |       |
| Other accrued  expenses                         |       | 16,108   |       | 13,292   |       | 3,002    |       |
| Change in operating assets and liabilities, net |       | $        | (16,003    | )        | $          | 10,479   |       | $ | 36,938 |   |

 

Supplementaldisclosures of cash flow information (in thousands):
| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash paid during the  year for: |       |     |       |     |       |     |       |
| Interest                        |       | $        | 16,566     |     | $          | 14,211   |       | $ | 19,194 |   |
| Income taxes                    |       | 13,925   |       | 11,395   |       | 18,890   |       |
| Interest  capitalized           |       | 2,336    |       | 1,408    |       | 1,380    |       |
|                                 |            |          |            |          |            |          |            |  |  |  |

 

*FairValue of Financial Instruments*

SFAS No. 107, “Disclosuresabout Fair Value of Financial Instruments,” requires the disclosure of fairvalue information about financial instruments. Quoted market prices, whenavailable, are used as the measure of fair value. In cases where quoted marketprices are not available, fair values are based on present value estimates orother valuation techniques. These derived fair values are significantlyaffected by assumptions used, the timing of future cash flows and the discountrate. Considerable judgment and assumptions, which are inherently subjective innature, are required to interpret market data in developing the estimates offair value. Accordingly, the estimated fair values may not necessarily berealized in an immediate sale or settlement of the instrument in a currentmarket exchange. The disclosure requirements of SFAS No. 107 excludecertain financial instruments (e.g., leases) and all non-financial instruments(e.g., fixed assets, intangibles).  Accordingly, the aggregate amount presenteddoes not reflect the underlying value of the Company. The Company’s financialinstruments, including cash, cash equivalents, accounts receivable, accountspayable and accrued liabilities are carried at cost, which approximates theirfair value because of the short-term nature of these investments.

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*Cash, CashEquivalents, and Cash Investments*

The Company classifies all highly liquid investmentspurchased with original or remaining maturities of ninety days or less at thedate of purchase to be cash equivalents. The cost of these investmentsapproximates fair value. The Company invests excess cash in marketablesecurities consisting primarily of commercial paper, corporate notes and bondsand U.S. government securities. At June 30, 2005 and 2004, all of theCompany’s marketable securities are classified as available-for-sale. Inaccordance with SFAS No. 115, “Accounting for Certain Investments in Debtand Equity Securities,” unrealized gains and losses on these investments areincluded as a separate component of stockholders’ equity, net of any relatedtax effect. Realized gains and losses and declines in value of theseinvestments judged by management to be other than temporary, if any, areincluded in interest income and expense.

Cash,cash equivalents and cash investments as of June 30, 2005 and 2004 aresummarized as follows (in thousands):
| ** **                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Cash and cash  equivalents                         |       | $        | 359,978    |     | $          | 339,024 |   |
| Short-term cash  investments                       |       | 278,157  |       | 221,130  |       |
| Long-term cash  investments                        |       | 302,585  |       | 276,055  |       |
| Total cash, cash  equivalents and cash investments |       | $        | 940,720    |     | $          | 836,209 |   |

 

*Inventories*

Inventoriesare stated at the lower of cost (principally first-in, first-out)or market. Inventories are reviewed for excess and obsolescence based upondemand forecasts within a specific time horizon and reserves are establishedaccordingly. Inventories at June 30, 2005 and 2004 were comprised of thefollowing (in thousands):
| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 33,328     |     | $          | 30,906 |   |
| Work-in-process |       | 82,802   |       | 69,702   |       |
| Finished goods  |       | 61,430   |       | 59,300   |       |
|            |       | $177,560 |       | $        | 159,908    |   |
|                 |            |          |            |          |            |  |  |

 

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*Property, Plant andEquipment*

Property,plant and equipment are stated at cost. Upon retirement or disposal, the assetcost and related accumulated depreciation and amortization are removed from theaccounts and any gain or loss on disposition is included in otherincome/expense. Depreciation is provided on the straight-line method,based on the estimated useful lives of the assets, ranging from three to 40years, or the units of production method based upon the estimated output of theequipment. Depreciation and amortization expense for the fiscal years ended June 30,2005, 2004 and 2003 was $62.7 million, $51.5 million and $51.7 million,respectively. Property, plant and equipment at June 30, 2005 and 2004 werecomprised of the following (in thousands):
| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Range of**    | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Useful Life** | ** ** |
| Building and  improvements                      |       | $          | 121,823    |       | $          | 115,200              |       |   | 3-40 |   |   |
| Equipment                                       |       | 754,776    |       | 640,295    |       |                 | 3-15       |   |   |
| Construction-in-progress                        |       | 112,206    |       | 86,470     |       |                 |       |   |   |
| Less accumulated  depreciation and amortization |       | (520,335   | )          | (466,015   | )          |                 |       |   |   |
|                                            |       | 468,470    |       | 375,950    |       |                 |       |   |   |
| Land                                            |       | 19,734     |       | 17,969     |       |                 |       |   |   |
|                                            |       | $          | 488,204    |       | $          | 393,919              |       |   |   |   |   |

 

Property, plant, and equipment at June 30, 2005and 2004, were adjusted to reflect the $169.0 million asset impairment chargestaken in the December 2002 quarter. See Note 6, “Impairment of Assets,Restructuring and Severance Charges”.

Amortization of improvements to leased premises isprovided on the straight-line method over the shorter of the remainingterm of the lease or estimated useful lives of the improvements. Capital leasesincluded in property, plant and equipment were not material at June 30,2005 and 2004.

Repairs and maintenancecosts are charged to expense. In the fiscal years ended June 30, 2005,2004 and 2003, repairs and maintenance costs were $35.2 million, $26.6 millionand $23.0 million, respectively.

*Long-LivedAssets*

Long-lived assetsare property, plant and equipment and purchased or internally-developedsoftware. The Company tests long-lived assets for impairment whenever events orchanges in circumstances indicate that their carrying amount may not berecoverable. Such events and circumstances include, but are not limited to:

·       Asignificant change in business strategy or in the extent or manner for whichthe asset is being used or in its physical condition;

·       Asignificant negative change in the business climate, industry conditions,economic conditions or market value of an asset; and

·       Currentperiod operating losses or negative cash flow combined with a history ofsimilar losses or a forecast that indicates continuing losses associated withthe use of an asset.

The Company evaluates the recoverability of long-livedassets based on the expected undiscounted cash flows for their asset group asdetermined in accordance with SFAS No. 144, “Accounting for Impairment orDisposal of Long-Lived Assets”, without regard to taxes. Impairments, if any,are recognized based upon the fair value of the assets. Fair value is basedupon a discounted cash flow analysis. The Company uses the undiscounted cashflows and applies an appropriate discount rate that is representative of thediscount rate used when evaluating potential acquisitions.

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In developing the cashflow projections, the Company uses revenue and cost assumptions based oncurrent levels adjusted for anticipated future market conditions. If thesemarket conditions do not materialize, the cash flow forecasts could bematerially impacted.

*Goodwill andAcquisition-Related Intangible Assets*

The Company classifies the difference between thepurchase price and the fair value of net assets acquired at the date ofacquisition as goodwill.  The Companyclassifies intangible assets apart from goodwill if the assets have contractualor other legal rights or if the assets can be separated and sold, transferred,licensed, rented or exchanged. Depending on the nature of the assets acquired,the amortization period may range from four to twelve years for thoseacquisition-related intangible assets subject to amortization.

The Company evaluates the carrying value of goodwilland acquisition-related intangible assets, including the related amortizationperiod, in the fourth quarter of each fiscal year. In evaluating goodwill andintangible assets not subject to amortization, the Company completes thetwo-step goodwill impairment test as required by SFAS No. 142, “Goodwilland Other Intangible Assets”. The Company identified its reporting units anddetermined the carrying value of each reporting unit by assigning the assetsand liabilities, including the existing goodwill and intangible assets, tothose reporting units, in order to assess goodwill for impairment. A reportingunit is the lowest level of the Company for which there is discrete informationand whose results are regularly reviewed by the Company.

In the first of a two-step impairment test, theCompany determined the fair value of these reporting units using a discountedcash flow valuation model. The Company compared the discounted cash flows forthe reporting unit to its carrying value. If the fair value of a reporting unitexceeds its carrying value, goodwill of the reporting unit is considered notimpaired and no further testing is required. If the fair value does not exceedthe carrying value, the second step of the goodwill impairment test shall beperformed to measure the amount of impairment loss, if any. The second stepcompared the implied fair value of the reporting unit with the carrying amountof that goodwill. Based on its annual impairment test, the Company determinedthat goodwill was not impaired as of fiscal year ended June 30, 2005.

At June 30,2005 and 2004, acquisition-related intangible assets are as follows (inthousands):
| ** **                                   | ** ** | ** **                         | ** **  | **2005**                    | ** ** | **2004**                      | ** ** |
|----------------------------------------------|------------|------------------------------------|-------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **Amortization  Periods  (Years)** | ** **  | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Complete  technology                         |       |                               | 4 – 12 |                        |       | $                             | 36,665     |   |   | $ | (11,859 | ) |   | $ | 24,293 |   |   | $ | (8,831 | ) |   |
| Distribution  rights and customer lists      |       |                               | 5 – 12 |                        |       | 15,667                        |       |   | (7,243 | ) |   | 15,454 |   |   | (5,681 | ) |   |
| Intellectual  property and other             |       |                               | 5 – 12 |                        |       | 7,313                         |       |   | (5,189 | ) |   | 7,313 |   |   | (3,943 | ) |   |
| Total  acquisition-related intangible assets |       |                               |        |                        |       | $                             | 59,645     |   |   | $ | (24,291 | ) |   | $ | 47,060 |   |   | $ | (18,455 | ) |   |

 

As of June 30, 2005, estimated amortizationexpense for the next five years is as follows (in thousands): fiscal 2006:$4,239; fiscal 2007: $2,899; fiscal 2008: $2,527; fiscal 2009: $2,489 andfiscal 2010: $2,489.

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Thecarrying amount of goodwill by segment as of fiscal year ended June 30,2005, is as follows (in thousands):
| Energy-Saving  Products               |   | $      | 70,310  |   |
|---------------------------------------|--------|--------|---------|--------|
| Aerospace and  Defense                |   | 45,765 |    |
| Computing and  Communications         |   | 28,803 |    |
| Non-Aligned  Products                 |   | 4,318  |    |
| Intellectual  Property                |   | 3,261  |    |
| Goodwill balance,  June 30, 2005 |   | $      | 152,457 |   |

 

As of June 30, 2005, $43.3 million of goodwill isdeductible for income tax purposes for which $2.9 million, $2.1 million and$2.1 million were deducted in the fiscal years ended June 30, 2005, 2004and 2003, respectively.

Thechanges in the carrying amount of goodwill for the fiscal years ended June 30,2005 and 2004 are as follows (in thousands):
| ** **                   | ** ** | **Goodwill** | ** ** |
|------------------------------|------------|--------------|------------|
| Balance,  June 30, 2003 |       | $            | 136,818    |   |
| New acquisition              |       | 266          |       |
| Foreign exchange  impact     |       | 2,835        |       |
| Balance,  June 30, 2004 |       | $            | 139,919    |   |
| New acquisitions             |       | 12,958       |       |
| Foreign exchange  impact     |       | (420         | )          |
| Balance, June 30,  2005 |       | $            | 152,457    |   |

 

New acquisitions in thefiscal year ended June 30, 2005, primarily relates to the acquisition ofthe specialty silicon epitaxial services business from Advanced TechnologyMaterials, Inc., as discussed in Note 13, “Acquisitions”. Thegoodwill associated with this acquisition has been assigned to the Computingand Communications, Energy-Saving Products and Intellectual Property segmentsbased on revenues.

*Other AccruedExpenses*

Otheraccrued expenses at June 30, 2005 and 2004 were comprised of the following(in thousands):
| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Accrued taxes                   |       | $        | 46,704     |     | $          | 36,934 |   |
| Short-term  severance liability |       | 10,988   |       | 11,784   |       |
| Other accrued  expenses         |       | 33,636   |       | 32,504   |       |
| Total accrued  expenses         |       | $        | 91,328     |     | $          | 81,222 |   |

 

*DerivativeFinancial Instruments*

The Company’s primary objectives for holding derivativefinancial instruments are to (1) hedge non-U.S. currency risks and (2) minimizeU.S. interest rate risk. The Company’s derivative instruments are recorded atfair value and are included in other current assets, other long-term assets orother long-term liabilities. The Company’s accounting policies for derivativefinancial instruments are based on its criteria for designation as hedgingtransactions, either as cash flow or fair value hedges as defined by SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 138,“Accounting for Certain Derivative Instruments and Certain Hedging Activities,an amendment of SFAS No. 133”, and SFAS No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities”. A cash 

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flow hedge refers to thehedge of the exposure to variability in the cash flows of an asset or aliability, or of a forecasted transaction. A fair value hedge refers to thehedge of the exposure to changes in fair value of an asset or a liability, orof an unrecognized firm commitment. The criteria for designating a derivativeas a hedge include the instrument’s effectiveness in risk reduction and, inmost cases, a one-to-one matching of the derivative instrument to itsunderlying transaction. The Company recognizes gains and losses on derivativesthat are not designated as hedges for accounting purposes currently in earnings.These gains and losses generally offset changes in the values of hedged assetsor liabilities.

For currency forward contracts, the Company measuresthe effectiveness of the hedge using forward rates to value the forwardcontract and the forward value of the underlying hedged transaction. Forinterest rate swaps, the Company measures the effectiveness using regressionanalysis, which offsets the change in fair value of the long-term debt with thechange in fair value of the interest rate swap.

The Company recognizes incurrent period’s interest and other income and expense, depending on the natureof the underlying asset or liability, the ineffective portions of the hedge, aswell as the amounts not included in the assessment of effectiveness. If theCompany determined that the original hedged transaction probably will not occuras anticipated, and a cash flow hedge is to be discontinued, it wouldreclassify the unrealized gains or losses into earnings. The Company wouldrecognize subsequent gains or losses on the related derivative instrument inincome in each period until the instrument matures, is terminated or is sold.

*Foreign CurrencyTranslations*

In general, the functionalcurrency of a foreign operation is deemed to be the local country’s currency.Assets and liabilities of operations outside the United States are translatedinto U.S. dollars using current exchange rates. Income and expense aretranslated at average exchange rates prevailing during the period. The effectsof foreign currency translation adjustments are included as a component ofaccumulated other comprehensive income within stockholders’ equity.

*Accumulated OtherComprehensive Income*

Thecomponents of accumulated other comprehensive income as of June 30, 2005and 2004 were as follows (in thousands):
| ** **                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Foreign currency  translation adjustments                                  |       | $        | 37,697     |     | $          | 41,964 |   |
| Net unrealized  gains (losses) on foreign currency forward contracts  |       | 84       |       | (1,413   | )          |
| Net unrealized  gains on available-for-sale securities                     |       | 28,406   |       | 42,449   |       |
| Accumulated other  comprehensive income                                    |       | $        | 66,187     |     | $          | 83,000 |   |

 

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*Stock-BasedCompensation*

TheCompany accounts for stock-based compensation plans using the intrinsicvalue method prescribed in Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees.” Hadthe Company recorded compensation expense using the accounting methodrecommended by SFAS No. 123, net income (loss) and net income (loss) percommon share—basic and diluted would approximate the following (in thousands,except per share data):
| ** **                                                                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income  (loss), as reported                                                                                            |       | $        | 137,460    |     | $          | 89,770   |       | $ | (89,639 | ) |
| Less total  stock-based employee compensation expense determined under fair value based  method for all awards, net of tax |       | (114,003 | )          | (48,667  | )          | (38,720  | )          |
| Pro forma net  income (loss)                                                                                               |       | $        | 23,457     |     | $          | 41,103   |       | $ | (128,359 | ) |
| Net income (loss)  per common share—basic, as reported                                                                |       | $        | 2.03       |     | $          | 1.37     |       | $ | (1.40 | ) |
| Net income (loss)  per common share—basic, pro forma                                                                  |       | $        | 0.35       |     | $          | 0.63     |       | $ | (2.01 | ) |
| Net income (loss)  per common share—diluted, as reported                                                              |       | $        | 1.91       |     | $          | 1.31     |       | $ | (1.40 | ) |
| Net income (loss) per  common share—diluted, pro forma                                                                |       | $        | 0.43       |     | $          | 0.60     |       | $ | (2.01 | ) |

 

The fiscal-year ended June 30, 2005 included$65.1 million, net of tax, of future compensation expense that was recognizedas a result of the accelerated vesting of stock options on April 17, 2005.The Company accelerated the vesting of all then outstanding equity awards,including employee stock options and restricted stock units (“RSUs”), primarilyto avoid recognizing in its income statement $108 million in associatedcompensation expense in future periods as a result of the adoption of FASB StatementNo. 123R, “Share-Based Payment” (“SFAS No. 123R”). See also Note 5, “CapitalStock”.

The effects of applyingSFAS No. 123 in this pro forma disclosure are not indicative of futureamounts. SFAS No. 123 does not apply to awards prior to 1996.

*Cost of Start-UpActivities*

The Company expenses allstart-up and pre-operating costs as they are incurred in accordance withStatement of Position 98-5, “Reporting on the Costs of Start-Up Activities.”

*Patent Costs*

The Company expenses legalcosts incurred in developing patent applications. The Company capitalizes legalcosts related to the defense and enforcement of issued patents for whichsuccess is deemed probable. The related costs are amortized over the remaininguseful lives of the patents, which extend from 2007 through 2008 for our keyMOSFET patents, using the straight-line method. Such deferred costs arereviewed for impairment and recoverability periodically. Capitalized patentcosts, net of accumulated amortization at June 30, 2005 and 2004, were approximately$14.7 million and $14.9 million, respectively.

*Concentration ofRisk*

The Company places itscash in investment-grade vehicles with high credit quality financialinstitutions. The Company performs periodic credit evaluations of its customers’financial conditions and generally does not require collateral.

*Estimates*

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported assets and liabilities and 

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thedisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported revenues and expenses during the reporting period.Actual results could differ from those estimates.

*Reclassification*

Certainreclassifications have been made to previously reported amounts to conform tothe current year presentation. Certain reclassifications have been madeto June 30, 2004 and 2003 cash equivalent, short-term cash investments andcash flows from investing activities. Previously, the Company’s investments inauction rate preferred securities were recorded in cash and cash equivalentsrather than short-term cash investments. The Company reclassified auction ratepreferred securities from cash and cash equivalents to short-term investmentsbecause the underlying instruments have contractual maturity dates exceedingninety days. As a result of the reclassifications, the Company’s consolidatedbalance sheet and cash flows from investing activities were affected as follows:

·       cashand cash equivalents decreased by $100.6 million and $134.0 million as of June 30,2004 and 2003, respectively;

·       short-termcash investments increased by $100.6 million and $134.0 million as of June 30,2004 and 2003, respectively;

·       netcash used for the purchase of cash investments increased by $33.4 million anddecreased by $48.3 million for the fiscal years ended June 30, 2004 and2003, respectively; and

·       netchange in cash and cash equivalents decreased by $33.4 million and increased by$48.3 million for the fiscal years ended June 30, 2004 and 2003,respectively.

The reclassifications hadno impact on the Company’s total current assets, stockholders’ equity, cashflows provided by operating activities or total consolidated results reportedin any period presented.

**2.   Investments**

Available-for-salesecurities as of June 30, 2005 are summarized as follows (in thousands):
| ** **                              | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss (1)** | ** ** | **Net  Unrealized  Loss** | ** ** | **Market  Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-----------------------------|------------|--------------------------------------|------------|---------------------------|------------|-------------------|------------|
| Short-Term Cash Investments:  |       |                | ** ** | ** **                  | ** ** |                                 | ** ** | ** **                |       |              | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Corporate debt                          |       | $                   | 179,372    |                        |       | $                                    | 6          | ** **                |       |              | $          | (1,477 | ) |   |   | $ | (1,471 | ) |   | $ | 177,901 |   |
| U.S. government  and agency obligations |       | 99,728              |       |                        | —     | ** **                           |       |                      | (576       | )                 |       |   | (576 | ) |   | 99,152 |   |
| Other debt                              |       | 1,105               |       |                        | —     | ** **                           |       |                      | (1         | )                 |       |   | (1 | ) |   | 1,104 |   |
| Total short-term cash investments       |       | $                   | 280,205    |                        |       | $                                    | 6          | ** **                |       |              | $          | (2,054 | ) |   |   | $ | (2,048 | ) |   | $ | 278,157 |   |
| Long-Term Cash Investments:   |       |                |       |                        |       |                                 |       | ** **                |       |              |       | ** ** |   |   |   | ** ** |   |   |   |
| Corporate debt                          |       | $                   | 124,727    |                        |       | $                                    | 249        | ** **                |       |              | $          | (355 | ) |   |   | $ | (106 | ) |   | $ | 124,621 |   |
| U.S. government  and agency obligations |       | 116,082             |       |                        | 239        | ** **                           |       |                      | (134       | )                 |       |   | 105 | ** ** |   | 116,187 |   |
| Other debt                              |       | 61,765              |       |                        | 131        | ** **                           |       |                      | (119       | )                 |       |   | 12 | ** ** |   | 61,777 |   |
| Total long-term  cash investments       |       | $                   | 302,574    |                        |       | $                                    | 619        | ** **                |       |              | $          | (608 | ) |   |   | $ | 11 | ** ** |   | $ | 302,585 |   |
|                                         |            |                     |            |                             |            |                                      |            |                           |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Available-for-salesecurities as of June 30, 2004 are summarized as follows (in thousands):
| ** **                                   | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss (1)** | ** ** | **Net  Unrealized  Gain** | ** ** | **Market  Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|-----------------------------|------------|--------------------------------------|------------|---------------------------|------------|-------------------|------------|
| Short-Term Cash Investments:       |       |                |       |                        |       |                                 |       |                      |       |              |       |   |   |   |   |   |   |   |   |
| Corporate auction  rate preferred securities |       | $                   | 100,600    |                        |       | $                                    | —     |                      |       |              | $          | — |   |   |   | $ | — |   |   | $ | 100,600 |   |
| Corporate debt                               |       | 81,960              |       |                        | 5          |                                 |       |                      | (299       | )                 |       |   | (294 | ) |   | 81,666 |   |
| U.S. government  and agency obligations      |       | 21,639              |       |                        | 2          |                                 |       |                      | (48        | )                 |       |   | (46 | ) |   | 21,593 |   |
| Other debt                                   |       | 17,282              |       |                        | —     |                                 |       |                      | (11        | )                 |       |   | (11 | ) |   | 17,271 |   |
| Total short-term cash investments            |       | $                   | 221,481    |                        |       | $                                    | 7          |                      |       |              | $          | (358 | ) |   |   | $ | (351 | ) |   | $ | 221,130 |   |
| Long-Term Cash Investments:        |       |                |       |                        |       |                                 |       |                      |       |              |       |   |   |   |   |   |   |   |   |
| Corporate debt                               |       | $                   | 159,280    |                        |       | $                                    | 33         |                      |       |              | $          | (1,689 | ) |   |   | $ | (1,656 | ) |   | $ | 157,624 |   |
| U.S. government  and agency obligations      |       | 87,420              |       |                        | 9          |                                 |       |                      | (517       | )                 |       |   | (508 | ) |   | 86,912 |   |
| Other debt                                   |       | 31,798              |       |                        | 21         |                                 |       |                      | (300       | )                 |       |   | (279 | ) |   | 31,519 |   |
| Total long-term  cash investments            |       | $                   | 278,498    |                        |       | $                                    | 63         |                      |       |              | $          | (2,506 | ) |   |   | $ | (2,443 | ) |   | $ | 276,055 |   |
|                                              |            |                     |            |                             |            |                                      |            |                           |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          No investment has beenin a material loss position for greater than one year.

As indicated at Note 1, “Business and Summary ofSignificant Accounting Policies”*,*certain reclassification has been made to the June 30, 2004 short-termcash investments to include auction rate preferred securities. Previously, theCompany’s investments in auction rate preferred securities were recorded incash and cash equivalents rather than short-term cash investments. Auction ratepreferred securities are securities with an underlying component of a long-termdebt or an equity instrument. These auction rate securities trade or mature ona shorter term than the underlying instrument based on an auction bid thatresets the interest rate of the security. The auction or reset dates occur atintervals that are typically less than three months, providing high liquidityto otherwise longer term investments. As of June 30, 2005, the Company hadno investments in these securities.

The Company holds as strategic investments the commonstock of two publicly-traded Japanese companies, one of which is Nihon InterElectronics Corporation (“Nihon”), a related party as further disclosed in Note14, “Related Party Transactions”. The Company accounts for theseavailable-for-sale investments under SFAS No. 115. These stocks are tradedon the Tokyo Stock Exchange. The market values of the equity investmentsincluded in other long-term assets at June 30, 2005 and 2004 were $71.2million and $94.1 million, respectively, compared to their purchased cost of$24.2 million. Mark-to-market (losses) gains, net of tax, for the fiscal yearsended June 30, 2005 and 2004, were ($14.4) million and $32.2 million,respectively, and were included in other comprehensive income.

Theamortized cost and estimated fair value of cash investments at June 30,2005, by contractual maturity, are as follows (in thousands):
| ** **              | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
|-------------------------|------------|---------------------|------------|--------------------------------|------------|
| Due in 1 year or  less  |       | $                   | 280,205    |                           | $          | 278,157 |   |
| Due in 1-2 years        |       | 166,676             |       | 166,306                        |       |
| Due in 2-5 years        |       | 101,673             |       | 101,967                        |       |
| Due after 5 years       |       | 34,225              |       | 34,312                         |       |
| Total cash  investments |       | $                   | 582,779    |                           | $          | 580,742 |   |

 

In accordance with the Company’s investment policywhich limits the length of time that cash may be invested, the expecteddisposal dates may be less than the contractual maturity dates as indicated inthe table above.

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Gross realized gains and(losses) were $0.04 million and $(0.05) million, respectively, for the yearended June 30, 2005. Gross realized gains and (losses) were $2.6 millionand $(0.3) million, respectively, for the year ended June 30, 2004. Grossrealized gains and (losses) were $4.8 million and $(1.2) million, respectively,for the year ended June 30, 2003. The cost of marketable securities soldwas determined by the weighted average cost method.

**3.   DerivativeFinancial Instruments**

The Company is exposed tovarious risks, including fluctuations in interest and foreign currency rates.In the normal course of business, the Company also faces risks that are eithernon-financial or non-quantifiable. Such risks principally include country risk,credit risk and legal risk and are not discussed or quantified in the followinganalyses.

*Interest Rate Risk*

In December 2001, the Company entered intointerest rate swap transaction (the “Transaction”) with an investment bank, JPMorgan Chase Bank (the “Bank”), to modify the Company’s effective interestpayable with respect to $412.5 million of its $550 million outstandingconvertible debt (the “Debt”) (see Note 4, “Bank Loans and Long-Term Debt”). InApril 2004, the Company entered into an interest rate swap transaction(the “April 2004 Transaction”) with the Bank to modify the effectiveinterest payable with respect to the remaining $137.5 million of the Debt. TheCompany will receive from the Bank fixed payments equal to 4.25 percent of thenotional amount, payable on January 15 and July 15. In exchange, theCompany will pay to the Bank floating rate payments based upon the LondonInterBank Offered Rate (“LIBOR”) multiplied by the notional amount. At theinception of the Transaction, interest rates were lower than that of the Debtand the Company believed that interest rates would remain lower for an extendedperiod of time. The variable interest rate paid since the inception of theswaps has averaged 2.47 percent, compared to a coupon of 4.25 percent on theDebt. During the fiscal years ended June 30, 2005, 2004 and 2003, thesearrangements reduced interest expense by $8.0 million, $12.9 million and $10.4million, respectively. Accounted for as a fair value hedge under SFAS No. 133,the mark-to-market adjustments of the Transaction and April 2004Transaction were offset by the mark-to-market adjustments on the Debt,resulting in no material impact to earnings. The market value of theTransaction was a $0.3 million liability and a $13.1 million assetposition at June 30, 2005 and 2004, respectively. The market value of the April 2004Transaction was a $3.4 million and a $1.3 million liability position at June 30,2005 and 2004, respectively.

Both transactions terminate on July 15, 2007 (“TerminationDate”), subject to certain early termination provisions. On or after July 18,2003 and prior to July 14, 2007, if the ten-day average closing price ofthe Company’s common stock equals or exceeds $77.63, the Transaction and the April 2004Transaction will terminate. Depending on the timing of the early terminationevent, the Bank would be obligated to pay the Company an amount equal to theredemption premium called for under the terms of the Debt.

In support of the Company’s obligation under the twotransactions, the Company is required to obtain irrevocable standby letters ofcredit in favor of the Bank, totaling $7.5 million plus a collateralrequirement for the Transaction and April 2004 Transaction, as determinedperiodically. At June 30, 2005, $12.0 million in letters of credit wereoutstanding related to both transactions.

The Transaction and the April 2004 Transactionqualify as fair value hedges under SFAS No. 133. To test effectiveness ofthe hedge, regression analysis is performed quarterly comparing the change infair value of the two transactions and the Debt. The fair values of thetransactions and the Debt are calculated quarterly as the present value of thecontractual cash flows to the expected maturity date, where the expectedmaturity date is based on probability-weighted analysis of interest ratesrelating to the five-year 

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LIBOR curve and theCompany’s stock prices. For the fiscal years ended June 30, 2005, 2004 and2003, the hedges were highly effective and therefore, the ineffective portiondid not have a material impact on earnings.

In April 2002, theCompany entered into an interest rate contract (the “Contract”) with aninvestment bank, Lehman Brothers (“Lehman”), to reduce the variable interestrate risk of the Transaction. The notional amount of the Contract is $412.0million, representing approximately 75 percent of the Debt. Under the terms ofthe Contract, the Company has the option to receive a payout from Lehmancovering our exposure to LIBOR fluctuations between 5.5 percent and 7.5 percentfor any four designated quarters. The market value of the Contract at June 30,2005 and 2004 was $0.1 million and $0.9 million, respectively, and was includedin other long-term assets. Interest expense was increased by mark-to-marketlosses of $0.8 million, $0.5 million and $3.1 million for the fiscal yearsended 2005, 2004 and 2003, respectively.

*Foreign CurrencyRisk*

The Company conducts business on a global basis inseveral foreign currencies, and at various times, is exposed to fluctuationswith the British Pound Sterling, the Euro and the Japanese Yen. The Company’srisk to the European currencies is partially offset by the natural hedge ofmanufacturing and selling goods in both U.S. dollars and the European currencies.Considering its specific foreign currency exposures, the Company has thegreatest exposure to the Japanese Yen, since it has significant yen-basedrevenues without the yen-based manufacturing costs. The Company has establisheda foreign-currency hedging program using foreign exchange forward contracts,including the Forward Contract described below, to hedge certain foreigncurrency transaction exposures. To protect against reductions in value andvolatility of future cash flows caused by changes in currency exchange rates,it has established revenue, expense and balance sheet hedging programs. Currencyforward contracts and local Yen and Euro borrowings are used in these hedgingprograms. The Company’s hedging programs reduce, but do not always eliminate,the impact of currency exchange rate movements.

In March 2001, the Company entered into afive-year foreign exchange forward contract (the “Forward Contract”) for thepurpose of reducing the effect of exchange rate fluctuations on forecastedintercompany purchases by our subsidiary in Japan. The Company has designatedthe Forward Contract as a cash flow hedge under which mark-to-marketadjustments are recorded in accumulated other comprehensive income, a separatecomponent of stockholders’ equity, until the forecasted transactions arerecorded in earnings. Under the terms of the Forward Contract, the Company isrequired to exchange 1.2 billion yen for $11.0 million on a quarterly basisfrom June 2001 to March 2006. At June 30, 2005, three quarterly paymentsof 1.2 billion yen remained to be swapped at a forward exchange rate of 109.32yen per U.S. dollar. The market value of the forward contract was a $0.1million asset and a ($2.2) million liability at June 30, 2005 and 2004,respectively. The mark-to-market gains (losses), net of tax, of $0.7 million,(4.0) million and $4.0 million for the fiscal years ended June 30, 2005,2004 and 2003, respectively, were included in other comprehensive income. Basedon effectiveness tests comparing forecasted transactions through the ForwardContract expiration date to its cash flow requirements, the Company does notexpect to incur a material charge to income during the next twelve months as aresult of the Forward Contract.

The Company hadapproximately $75.9 million and $62.4 million in notional amounts of forwardcontracts not designated as accounting hedges under SFAS No. 133 at June 30,2005 and 2004, respectively. Net realizedand unrealized foreign-currency net gains recognized in earnings were $1.4million for the fiscal year ended June 30, 2005 and less than $1 millionfor the fiscal years ended June 30, 2004 and 2003.

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**4.   Bank Loans and Long-Term Debt**

Thefollowing is a summary of the Company’s long-term debt and other loans atJune 30, 2005 and 2004 (in thousands):
| ** **                                                                                                                                                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Convertible  subordinated notes at 4.25% due in 2007 ($550,000 principal amount, plus  accumulated fair value adjustment of ($3,360) and $9,173 at June 30,  2005 and 2004, respectively) |       | $        | 546,640    |     | $          | 559,173 |   |
| Other loans and  capitalized lease obligations                                                                                                                                                      |       | 782      |       | 1,120    |       |
| Debt, including  current portion of long-term debt ($163 in 2005 and $274 in 2004)                                                                                                             |       | 547,422  |       | 560,293  |       |
| Credit facility  and other foreign revolving bank loans at rates from 1.38% to 3.85%                                                                                                                |       | 18,168   |       | 18,866   |       |
| Total debt                                                                                                                                                                                          |       | $        | 565,590    |     | $          | 579,159 |   |

 

In July 2000, the Company sold $550 millionprincipal amount of 4.25 percent Convertible Subordinated Notes due 2007. Theinterest rate is 4.25 percent per year on the principal amount, payable in cashin arrears semi-annually on January 15 and July 15. The notes areconvertible into shares of the Company’s common stock at any time on or before July 15,2007, at a conversion price of $73.935 per share, subject to certainadjustments. The notes are subordinated to all of the Company’s existing andfuture debt. The Company may redeem any of the notes, in whole or in part,subject to certain call premiums on or after July 18, 2003, as specifiedin the notes and related indenture agreement. In December 2001 and April 2004,the Company entered into transactions with the JP Morgan Chase Bank for $412.5million and $137.5 million notional, respectively, which had the effect ofconverting the interest rate to variable and required that convertible notes bemarked to market (see Note 3, “Derivative Financial Instruments”).

The Company entered into a three-year syndicatedmulti-currency revolving credit facility, led by BNP Paribas, expiring in November 2006(the “Facility”). The Facility provides a credit line of $150 million of whichup to $150 million may be used for standby letters of credit. The Facilitybears interest at (i) local currency rates plus (ii) a margin between0.75 percent and 2.0 percent for base rate advances and a margin of between1.75 percent and 3.0 percent for euro-currency rate advances. Other advancesbear interest as set forth in the credit agreement. The annual commitment feefor the Facility is subject to a leverage ratio as determined by the creditagreement and was 0.375 percent of the unused portion of the total facility ateach period-end. The Facility also contains certain financial and othercovenants, with which the Company was in compliance at June 30, 2005. TheCompany pledged as collateral shares of certain of its subsidiaries. At June 30,2005, the Company had $17.1 million borrowings and $16.4 million letters ofcredit outstanding under the Facility. At June 30, 2004, the Company had$17.2 million borrowings and $14.4 million letters of credit outstanding underthe Facility. Of the letters of credit outstanding, $12.0 million and $11.5million were related to the interest rate swap transactions (see Note 3) at June 30,2005 and 2004, respectively.

At June 30, 2005, theCompany had $166.6 million in total revolving lines of credit, of which $34.5million had been utilized, consisting of $16.4 million in letters of credit and$18.2 million in foreign revolving bank loans, which is included in the tableabove. As of June 30, 2005, scheduledprincipal payments on long-term debt are as follows: fiscal 2006: $0.1million; fiscal 2007: $0.1 million; fiscal 2008: $550.0 million; and fiscal2009: $0.1 million; and thereafter: $0.6 million. For the $550 million ofconvertible notes due in July 2007, the Company expects that it will beable to refinance the debt through public offering of debt or equity.

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**5.   Capital Stock**

*Employee StockPurchase Plan*

TheCompany has a compensatory employee stock purchase plan (“ESPP”). Under theESPP, employees are allowed to designate between two and ten percent of theirbase compensation to purchase shares of the Company’s common stock at 85percent of fair market value at a designated date. During fiscal years ended June 30,2005, 2004 and 2003, 254,260; 296,481 and 252,724 shares were purchased atweighted average per share exercise prices of $32.50, $18.82 and $19.26, respectively.The weighted average per share fair value of ESPP options granted in the fiscalyears ended June 30, 2005, 2004 and 2003, was $14.97, $13.06 and $8.50 pershare, respectively, which were estimated using the Black-Scholes optionpricing model with the following weighted average assumptions:
| ** **             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected life  (years) |       | 0.5      |       | 0.5      |       | 0.5      |       |
| Interest rate          |       | 2.1      | %          | 1.1      | %          | 1.8      | %          |
| Volatility             |       | 46.6     | %          | 75.0     | %          | 75.0     | %          |
| Dividend yield         |       | 0.0      | %          | 0.0      | %          | 0.0      | %          |

 

In November 2003, thestockholders of the Company approved an amendment to the ESPP, which increasedthe number of shares available for issuance by 1,000,000 shares and extendedthe expiration date to 2013. Shares authorized under this plan that remainedunissued were 778,642; 1,032,902 and 329,383 at June 30, 2005, 2004 and2003, respectively. As of fiscal year ended June 30, 2005, the Company hassuspended issuance of shares under the current ESPP, pending submission of anew employee stock purchase plan to the Company’s stockholders for approval atthe November 2005 stockholders meeting.

*Stock Option Plans*

For the fiscal years ended June 30, 2005, 2004and 2003, the Company’s employee stock options were granted with an exerciseprice at least equal to the fair value of the Company’s common stock at thedate of grant (“at market”), under one of three stock option plans: the Amendedand Restated Stock Incentive Plan of 1992 (“1992 Plan”), the 1997 EmployeeStock Incentive Plan (“1997 Plan”) and the 2000 Incentive Plan (“2000 Plan”).Options granted prior to and on January 1, 2002 generally becameexercisable in annual installments of 20 percent beginning on the firstanniversary date, and expire after ten years. Options granted after January 1,2002 and before November 22, 2004, generally became exercisable in annualinstallments of 25 percent beginning on the first anniversary date, and expireafter seven years. Options granted after November 22, 2004, generallybecame exercisable in annual installments of one-third beginning on the firstanniversary date, and expire after five years.

Under the 1992 Plan, options to purchase shares of theCompany’s common stock may be granted to the Company’s employees, officers anddirectors. In November 1996, the stockholders of the Company approved anamendment to the 1992 Plan, which broadened the types of options and otherstock-based awards (e.g., restricted stock, SARs and performance shares)that may be granted (prior to the amendment, only non-qualified options couldbe granted). This plan expired on December 31, 2002.

Under the 1997 Plan, options to purchase shares of theCompany’s common stock may be granted to the Company’s employees andconsultants. The terms of the 1997 Plan were substantially similar to thoseunder the amended 1992 Plan, except that officers and directors were noteligible for grants under the 1997 Plan. During fiscal years ended June 30,2005, 2004 and 2003, only non-qualified options were issued under the 1997Plan. As noted below, on November 22, 2004, the Company’s stockholdersapproved an amendment to the 2000 Plan to increase the authorized number ofshares to include the available shares that were outstanding under the 1997Plan, at which point no awards were to be granted under the 1997 Plan.

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Under the 2000 Plan, options to purchase shares of theCompany’s common stock and other stock-based awards may be granted to theCompany’s employees, consultants, officers and directors. The terms of the 2000Plan were substantially similar to those under the amended 1992 Plan. On November 22,2004, the Company’s shareholders approved an amendment to the 2000 Plan whichincreased the authorized number of shares to be granted from 7,500,000 to12,000,000, plus any available shares outstanding under the 1992 and 1997 Plans.The amendment changed the options expiration term on future grants to fiveyears, and contained certain limitations on the maximum number of shares thatmay be awarded to an individual. No awards may be granted under the 2000 Planafter August 24, 2014. As of June 30, 2005, there were 4,632,470shares available for future grants.

Asummary of the status of options under the 2000, 1997 and 1992 Plans are asfollows:
| ** **                      | ** ** | **Shares** | ** ** | **Weighted  Average  Option Exercise  Price Per Share** | ** ** | **Weighted  Average  Grant Date Fair  Value Per Share** | ** ** |
|---------------------------------|------------|------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Outstanding  June 30, 2002 |       | 12,249,398 |       |                                                                   | $          | 34.47                                                                       |       |   |   | — |   |   |
| Options granted                 |       | 3,947,812  |       |                                                                   | $          | 20.96                                                                       |       |   |   | $ | 13.14 |   |   |
| Options exercised               |       | (233,926   | )          |                                                                   | $          | 12.57                                                                       |       |   |   | — |   |   |
| Options expired or canceled     |       | (693,941   | )          |                                                                   | $          | 37.37                                                                       |       |   |   | — |   |   |
| Outstanding  June 30, 2003 |       | 15,269,343 |       |                                                                   | $          | 31.13                                                                       |       |   |   | — |   |   |
| Options granted                 |       | 3,416,029  |       |                                                                   | $          | 42.32                                                                       |       |   |   | $ | 26.76 |   |   |
| Options exercised               |       | (1,876,664 | )          |                                                                   | $          | 20.44                                                                       |       |   |   | — |   |   |
| Options expired or canceled     |       | (691,711   | )          |                                                                   | $          | 35.30                                                                       |       |   |   | — |   |   |
| Outstanding  June 30, 2004 |       | 16,116,997 |       |                                                                   | $          | 34.56                                                                       |       |   |   | — |   |   |
| Options granted                 |       | 1,283,360  |       |                                                                   | $          | 39.12                                                                       |       |   |   | $ | 15.47 |   |   |
| Options exercised               |       | (3,213,840 | )          |                                                                   | $          | 20.78                                                                       |       |   |   | — |   |   |
| Options expired or canceled     |       | (604,707   | )          |                                                                   | $          | 39.98                                                                       |       |   |   | — |   |   |
| Outstanding  June 30, 2005 |       | 13,581,810 |       |                                                                   | $          | 38.01                                                                       |       |   |   | — |   |   |

 

Thefair value of options at date of grant indicated for the summary of the statusof options table above, was estimated using the Black-Scholes optionpricing model with the following weighted average assumptions:
| ** **             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected life  (years) |       | 4.0      |       | 5.0      |       | 5.0      |       |
| Interest rate          |       | 4.0      | %          | 3.3      | %          | 2.9      | %          |
| Volatility             |       | 43.6     | %          | 75.0     | %          | 75.0     | %          |
| Dividend yield         |       | 0.0      | %          | 0.0      | %          | 0.0      | %          |

 

In March 2005, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 107 (“SAB No. 107”)that provided the Staff’s views regarding valuation of share-based paymentspursuant to FASB Statement No. 123R, (“SFAS No. 123R”) issued in December 2004.With respect to volatility, SAB No. 107 clarified that there is not aparticular method of estimating volatility and to the extent that the Companyhas traded financial instruments from which it can derive the impliedvolatility, it may be appropriate to use only implied volatility in itsassumptions. The Company has certain financial instruments that are publiclytraded from which it can derive the implied volatility. Therefore, beginning inJanuary 2005, the Company used implied volatility for valuing its stockoptions, whereas previously, it had used historical volatility. The Companybelieves implied volatility is a better indicator of expected volatilitybecause it is generally reflective of both historical volatility andexpectations of how future volatility will differ from historical volatility.

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SAB No. 107 also provided certain “simplified”method for determining expected life in valuing stock options. To the extentthat an entity cannot rely on its historical exercise data to determine theexpected life, SAB No. 107 has prescribed a simplified “plain-vanilla”formula. Subsequent to the 2000 Plan amendments on November 22, 2004, theCompany issued stock options having five-year expiration with generally athree-year annual vesting term, whereas, prior to then, the Company grantedstock options having seven or ten-year expiration with generally a four orfive-year annual vesting term. Therefore, beginning in January 2005, theCompany applied SAB No. 107 “plain-vanilla” method for determining theexpected life, whereas previously, it had used historical exercise data todetermine the expected life.

Thefollowing table summarizes significant option groups outstanding at June 30,2005 and related weighted average price and life information:
| ** **                 | ** **                                                 | **Options Outstanding** | ** ** | **Options Exercisable**                             | ** ** |
|----------------------------|------------------------------------------------------------|------------------------------|------------|----------------------------------------------------------|------------|
| ** **                 | **Range of Exercise  Price per Share** | ** **                   | ** ** | **Number  Outstanding at  June 30, 2005** | ** ** | **Weighted Average  Remaining Life  (Years)** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Number  Exercisable at  June 30, 2005** | ** ** | **Weighted Average  Exercise Price** | ** ** |
| $0.00 to $17.44  |                                                       |                         | 766,666    |                                                     |       |   | 3.62 |   |   |   | $ | 12.28 |   |   |   | 743,090 |   |   |   | $ | 12.67 |   |   |
| $17.50 to $26.00 |                                                       |                         | 2,535,149  |                                                     |       |   | 3.73 |   |   |   | $ | 20.76 |   |   |   | 2,533,649 |   |   |   | $ | 20.67 |   |   |
| $27.09 to $37.19 |                                                       |                         | 1,817,741  |                                                     |       |   | 5.90 |   |   |   | $ | 34.47 |   |   |   | 1,817,741 |   |   |   | $ | 34.47 |   |   |
| $38.09 to $43.77 |                                                       |                         | 3,452,239  |                                                     |       |   | 5.09 |   |   |   | $ | 40.96 |   |   |   | 3,444,202 |   |   |   | $ | 40.96 |   |   |
| $43.84 to $54.13 |                                                       |                         | 3,863,378  |                                                     |       |   | 4.73 |   |   |   | $ | 46.64 |   |   |   | 3,736,761 |   |   |   | $ | 46.55 |   |   |
| $54.69 to $63.88 |                                                       |                         | 1,146,637  |                                                     |       |   | 5.39 |   |   |   | $ | 61.15 |   |   |   | 1,146,637 |   |   |   | $ | 61.15 |   |   |
|                       |                                                       |                         | 13,581,810 |                                                     |       |   |   |   |   |   |   |   |   |   | 13,422,080 |   |   |   |   |   |   |
|                            |                                                            |                              |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Additionalinformation relating to the stock option plans at June 30, 2005, 2004 and2003 is as follows:
| ** **                                                 | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Options  exercisable                                       |       | 13,422,080 |       | 7,052,506  |       | 6,184,519  |       |
| Options available  for grant                               |       | 4,632,470  |       | 1,262,180  |       | 4,072,291  |       |
| Total reserved common  stock shares for stock option plans |       | 18,214,280 |       | 17,379,720 |       | 19,341,634 |       |

 

On April 17, 2005, the Company accelerated thevesting of all then outstanding equity awards, including employee stock optionsand restricted stock units (“RSUs”), primarily to avoid recognizing in itsincome statement approximately $108 million in associated compensation expensein future periods, of which approximately $60 million would have beenrecognized in fiscal year 2006 as a result of the adoption of SFAS No. 123R.Unvested awards to purchase 6.9 million shares, 1.2 million held by officersand directors, became exercisable as a result of the vesting acceleration. Theintrinsic value of the options and RSUs on the acceleration date was $41.4million, of which $5.1 million were related to awards held by officers anddirectors.

The Company recorded $6.0million non-cash compensation charge as a result of the accelerated vesting infiscal 2005, of which $3.9 million is related to the excess of the intrinsicvalue over the fair market value of the Company’s stock on the accelerationdate of those options that would have been forfeited or expired unexercised hadthe vesting not been accelerated, and $2.1 million is related to theamortization of outstanding RSUs, including $0.3 million for the excess of theintrinsic value over the fair market value of the Company’s stock on theacceleration date. In determining the forfeiture rates of the stock options,the Company reviewed the unvested options’ original life, time remaining tovest and whether these options were held by officers and directors of theCompany. The compensation charge will be adjusted in future period financialresults as actual forfeitures are realized.

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*Shareholder RightsPlan*

On August 2, 1996, the Company’s Board of Directorsadopted a Shareholder Rights Plan (the “Plan”) under which preferred stockpurchase rights (the “Rights”) have been and will continue to be granted foreach outstanding share of the Company’s common stock held at the close ofbusiness on August 14, 1996. The Plan is intended to ensure fair andequitable treatment for all shareholders in the event of unsolicited attemptsto acquire the Company.

The Rights will become exercisable ten days after aperson or group (the “Acquirer”) has acquired beneficial ownership of 20percent or more of the Company’s common stock other than pursuant to aqualified offer, or announces or commences a tender offer or exchange offerthat could result in the acquisition of beneficial ownership of 20 percent ormore. Once exercisable, each Right entitles the holder to purchase one one-thousandthof a share of a new series of preferred stock at an exercise price of $135,subject to adjustment to prevent dilution. If the Acquirer acquires 20 percentor more of the Company’s common stock, each Right (except those held by theAcquirer) entitles the holder to purchase either the Company’s stock or stockin the merged entity at half of market value. The Rights have no voting power,expire on August 14, 2006, and may be redeemed at a price of $0.01 perRight up to and including the tenth business day after a public announcementthat the Acquirer has acquired 20 percent or more of the Company’s shares.

The Company amended andrestated its Rights Agreement to remove the requirement that continuingdirectors vote in board approvals of certain corporate transactions as of December 15,1998.

**6.**   Impairmentof Assets, Restructuring and Severance Charges

During fiscal 2003 second quarter ended December 31,2002, the Company announced its restructuring initiatives. Under theseinitiatives, the goal was to reposition the Company to better fit the marketconditions, de-emphasize its commodity business and accelerate the Company’smove to what it categorizes as proprietary products, which refer to Power Management ICs, Advanced Circuit Devices andPower Systems. The Company’s restructuring plan included consolidatingand closing certain manufacturing sites, upgrading equipment and processes indesignated facilities and discontinuing production in a number of others thatcannot support more advanced technology platforms or products within its FocusProduct segments. The Company also planned to lower overhead costs across itssupport organizations. The Company has substantially completed theserestructuring activities as of June 30, 2005. The Company expects tocomplete the remaining activities, primarily the closing of a fabrication lineat El Segundo, California and an assembly line at Krefeld, Germany by fiscalyear end 2006 or sooner.

Total charges associated with the December 2002initiatives are expected to be approximately $280 million. These charges willconsist of approximately $220 million for asset impairment, plant closure andother charges, $6 million of raw material and work-in-process inventory, and$54 million for severance-related costs.

For the fiscal year ended June 30, 2005, theCompany recorded $34.0 million in total restructuring-related charges,consisting of: $25.3 million for asset impairment, plant closure costs andother charges, and $8.7 million for severance-related costs. For the fiscalyear ended June 30, 2004, the Company recorded $33.5 million in totalrestructuring-related charges, consisting of: $15.2 million for assetimpairment, plant closure costs and other charges, and $18.3 million forseverance-related costs. For the fiscal year ended June 30, 2003, theCompany recorded $193.9 million in total restructuring-related charges,consisting of: $169.7 million for asset impairment, plant closure costs andother charges, $6.0 million for raw material and work-in-process inventorycharges, and $18.2 million for severance-related costs. Restructuring-relatedcosts were charged as incurred in accordance with SFAS No. 146, “Accountingfor the Costs Associated with Exit or Disposal Activities”. Asset impairmentswere calculated in accordance with SFAS No. 144. In determining the assetgroups, the Company grouped assets at the lowest 

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level for whichindependent identifiable cash flows were available. In determining whether anasset was impaired the Company evaluated undiscounted future cash flows andother factors such as changes in strategy and technology. The undiscounted cashflows from the Company’s initial analyses were less than the carrying amountfor certain of the asset groups, indicating impairment losses. Based on this,the Company determined the fair value of these asset groups using the presentvalue technique, by applying a discount rate to the estimated future cash flowsthat is consistent with the rate used when analyzing potential acquisitions.

As of June 30,2005, the Company had recorded $261.4 million in total charges, consisting of:$210.1 million for asset impairment, plant closure costs and othercharges, $6.0 million for raw material and work-in-process inventorycharges, and $45.3 million for severance-related costs. Components of the$210.1 million asset impairment, plant closure and other charges included thefollowing items:

·       Asthe Company emphasizes more advanced generation planar products, it expects thefuture revenue stream from its less advanced facilities in Temecula, Californiato decrease significantly. These facilities had a net book value of $138.3million and were written down by $77.7 million. It is expected that thesefacilities will continue in use until approximately December 2007 and theremaining basis is being depreciated over units of production during thisperiod. It is assumed that salvage value will equal disposition costs.

·       Asthe Company emphasizes more advanced generation trench products, it expects thefuture revenue stream from its less advanced facility in El Segundo, Californiato decrease significantly. This facility had a net book value of $59.5 millionand was written down by $57.2 million. This facility had significantly reducedproduction as of fiscal year ended June 30, 2003 and is used primarily forresearch and development activities.

·       Asthe Company emphasizes more advanced generation Schottky products, it expectsthe future revenue stream from its less advanced facility in Borgaro, Italy todecrease significantly. This facility had a net book value of $20.5 million andwas written down by $13.5 million. It is expected that this facility willcontinue in use until approximately December 2007 and the remaining basisis being depreciated over units of production during this period. It is assumedthat salvage value will equal disposition costs.

·       TheCompany restructured its manufacturing activities in Europe. Based on a reviewof its Swansea, Wales facility, a general-purpose module facility, the Companydetermined that this facility would be better suited to focus only onautomotive applications. The general-purpose module assets at this facility,with a net book value of $13.6 million, were written down by $8.2 million. Inaddition, the Company has substantially completed the move of its manufacturingactivities from its automotive facility in Krefeld, Germany to its Swansea,Wales and Tijuana, Mexico facilities as of June 30, 2005. The Company hasalso moved the production from its Venaria, Italy facility to its Borgaro,Italy and Mumbia, India facilities, which was completed as of December 31,2003. The Company stopped manufacturing products at its Oxted, England facilityas of September 30, 2003.

·       TheCompany has eliminated the manufacturing of its non-space military products inits Santa Clara, California facility as of July 31, 2004. Currently,subcontractors handle the Company’s non-space qualified productspreviously manufactured in this facility. The Company is also transitioning theassembly and test of non-space Power Components from its Leominster,Massachusetts facility to its Tijuana, Mexico facility, and expects to completethis activity by calendar year end 2005. Associated with these reductions inmanufacturing activities, certain assets with a net book value of $4.0 millionwere written down by $2.0 million.

·       $51.5million in other miscellaneous items were charged, including $42.9 million inrelocation costs and other impaired asset charges and $8.6 million in contract terminationand settlement costs.

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As a result of the restructuring initiatives, certainraw material and work-in-process inventories were impaired, including productsthat could not be completed in other facilities, materials that were notcompatible with the processes used in the alternative facilities, and materialssuch as gases and chemicals that could not readily be transferred. Based onthese factors the Company wrote down these inventories, with a carrying valueof $98.2 million, by $6.0 million. For the fiscal years ended June 30,2005, 2004 and 2003, the Company disposed of $1.8 million, $0.4 million and$2.6 million, respectively, of these inventories, which did not have a materialimpact on gross margin for the fiscal years then ended. As of June 30,2005, $1.2 million of these inventories remained to be disposed.

As of June 30, 2005, the Company has recorded$45.3 million in severance-related charges: $40.1 million in severancetermination costs related to approximately 1,200 administrative, operating andmanufacturing positions, and $5.1 million in pension termination costs at itsmanufacturing facility in Oxted, England. The severance charges associated withthe elimination of positions, which included the persons notified to date, hadbeen and will continue to be recognized ratably over the future service period,as applicable, in accordance with SFAS No. 146, “Accounting for the CostsAssociated with Exit or Disposal Activities”. The Company measured the totaltermination benefits at the communication date based on the fair value of theliability as of the termination date. A change resulting from a revision toeither the timing or the amount of estimated cash over the future serviceperiod will be measured using the credit-adjusted risk-free rate that was usedto initially measure the liability. The cumulative effect of the change will berecognized as an adjustment to the liability in the period of the change.

During fiscal 2002, the Company had recorded anestimated $5.1 million in severance costs associated with the acquisition ofTechnoFusion GmbH in Krefeld, Germany. In fiscal 2003, the Company finalizedits plan and determined that total severance would be approximately $10million, and accordingly, the Company adjusted purchased goodwill by $4.8million. The Company communicated the plan and the elimination of approximately250 positions primarily in manufacturing to its affected employees at that time.The associated severance is expected to be paid by calendar year end 2005.

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Thefollowing summarizes the Company’s severance accrual related to the June 2001restructuring, the TechnoFusion acquisition and the December 2002restructuring plan for the periods ended June 30, 2005, 2004 and 2003. Severanceactivity related to the elimination of 29 administrative and operatingpersonnel as part of the previously reported restructuring in the fiscalquarter ended June 30, 2001, is also disclosed. The remaining June 2001severance relates primarily to certain legal accruals associated with thatrestructuring, which will be paid or released as the outcome is determined (inthousands):
| ** **                                                                                          | ** ** | **June  2001  Restructuring** | ** ** | **December  2002  Restructuring** | ** ** | **TechnoFusion  Severance  Liability** | ** ** | **Total  Severance  Liability** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| Accrued  severance, June 30, 2002                                                              |       |                          | $          | 1,454                             |       |                                   |       | $                               | —     |   |   |   | $ | 5,480 |   |   | $ | 6,934 |   |
| Costs incurred or  charged to “impairment of assets, restructuring and severance charges” |       |                          | —     |                              |       |                                   | 15,991     |                            |       |   | — |   |   | 15,991 |   |
| Purchase price  adjustment                                                                          |       |                          | —     |                              |       |                                   | —     |                            |       |   | 4,823 |   |   | 4,823 |   |
| Costs paid                                                                                          |       |                          | (424       | )                                 |       |                                   | (10,058    | )                               |       |   | — |   |   | (10,482 | ) |
| Foreign exchange  impact                                                                            |       |                          | —     |                              |       |                                   | (299       | )                               |       |   | (427 | ) |   | (726 | ) |
| Accrued  severance, June 30, 2003                                                              |       |                          | $          | 1,030                             |       |                                   |       | $                               | 5,634      |   |   |   | $ | 9,876 |   |   | $ | 16,540 |   |
| Costs incurred or  charged to “impairment of assets, restructuring and severance charges” |       |                          | —     |                              |       |                                   | 15,450     |                            |       |   | — |   |   | 15,450 |   |
| Costs paid                                                                                          |       |                          | (333       | )                                 |       |                                   | (13,935    | )                               |       |   | (4,390 | ) |   | (18,658 | ) |
| Foreign exchange  impact                                                                            |       |                          | —     |                              |       |                                   | 31         |                            |       |   | 581 |   |   | 612 |   |
| Accrued  severance, June 30, 2004                                                              |       |                          | $          | 697                               |       |                                   |       | $                               | 7,180      |   |   |   | $ | 6,067 |   |   | $ | 13,944 |   |
| Costs incurred or  charged to “impairment of assets, restructuring and severance charges” |       |                          | —     |                              |       |                                   | 8,677      |                            |       |   | — |   |   | 8,677 |   |
| Costs paid                                                                                          |       |                          | (326       | )                                 |       |                                   | (7,810     | )                               |       |   | (3,770 | ) |   | (11,906 | ) |
| Foreign exchange  impact                                                                            |       |                          | —     |                              |       |                                   | 77         |                            |       |   | (190 | ) |   | (113 | ) |
| Accrued severance,  June 30, 2005                                                              |       |                          | $          | 371                               |       |                                   |       | $                               | 8,124      |   |   |   | $ | 2,107 |   |   | $ | 10,602 |   |

 

**7.**   Segmentand Geographic Information

The Company is a designer, manufacturer and marketerof power management products that are generally divided among three productcategories and sold across one or more reportable segments: Power ManagementICs and Advanced Circuit Devices, Power Components and Power Systems. PowerManagement Integrated Circuits, or Power Management ICs, are analog, mixedsignal, and digital semiconductors that integrate logic and/or power managementfunctions on the same chip to optimize system performance. Advanced CircuitDevices are chipsets, multi-chip modules and other advanced-performancedevices that generally address power management requirements in demandingapplications, and which the Company does not consider to be commodity innature. Power Components are discrete devices used in general power managementapplications. These include metal oxide semiconductor field effect transistors(MOSFETs) and insulated gate bipolar transistors (IGBTs), regulators,rectifiers, diodes, thyristors and interfaces. Power MOSFETs and IGBTs rapidlyand efficiently switch electricity on and off in order to supply power in aform that can be formatted to the specific requirements of a circuit. PowerSystems combine power semiconductors with other power management components inmodules that improve power efficiency, provide a cost-effectivealternative to custom analog designs and enable customers to introduce newproducts more quickly.

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Revenuesby the three broad product categories are as follows:
| ** **                                         | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|----------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Power Management  ICs and Advanced Circuit Devices |       | $         | 672,786    |      | $          | 493,295   |       | $ | 334,439 |   |
| Power Components                                   |       | 331,321   |       | 403,721   |       | 355,745   |       |
| Power Systems                                      |       | 129,157   |       | 121,557   |       | 132,271   |       |
| Total Product Revenues                             |       | 1,133,264 |       | 1,018,573 |       | 822,455   |       |
| Intellectual  Property                             |       | 41,160    |       | 41,927    |       | 41,988    |       |
| Total  Consolidated Revenues                       |       | $         | 1,174,424  |      | $          | 1,060,500 |       | $ | 864,443 |   |

 

As of fiscal year ended June 30, 2005, theCompany has substantially completed its restructuring activities which includedreorganizing certain business units based on the products’ end-markets orstrategic application. The Company determined in the fourth quarter of fiscalyear 2005 that its six business units are reportable segments as defined bySFAS No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation”. The segments are further categorized into two groups, which arethe Focus Product segments or Non-Focus Product segments to reflect the Company’sstrategic goals. To facilitate the comparison of current year segment resultsto that of prior years, segment disclosures for fiscal years 2004 and 2003 havebeen restated to reflect these changes.

The Company’s FocusProduct segments are:

·       Computingand Communications (“C&C”)—The Computing and Communications segment iscomprised of the Company’s Power Management ICs, Advanced Circuit Devices,including iPowirTM multi-chip modules and DirectFETTMsolutions, and Power Components (primarily HEXFET Power Components) thataddress servers and high-end desktops, notebooks, communications networking,and digitally-oriented consumer products like game consoles. The C&C segmentproducts are also used in digital television, liquid crystal displays (“LCDs”),portable handheld devices and cellular phones, and are primarily used for DC-DCconverter type applications.

·       Energy-SavingProducts (“ESP”)—The Energy-Saving Product segment is comprised of the Company’sPower Management ICs, Advanced Circuit Devices and Power Components (primarilyHEXFET and IGBT Power Components) that provide solutions for variable speedmotion control in energy-saving appliances (such as washing machines,refrigerators and air conditioners) and industrial systems (such as fans, pumpsand compressors), advanced lighting products (including fluorescent lamps, highintensity discharge (“HID”) lamps, cold cathode fluorescent (“CCFL”) tubes andlight emitting diodes (“LED”) lighting), advanced automotive solutions(primarily diesel injection, electric-gasoline hybrid and electric powersteering systems), and consumer applications (for example, plasma TVs, anddigital-audio units).

·       Aerospaceand Defense (“A&D”)—The Aerospace and Defense segment is comprised ofadvanced power management solutions, such as radiation-hardened powermanagement modules, radiation-hardened Power Components, and otherhigh-reliability Power Components that address power management requirements insatellites, launch vehicles, aircrafts, ships, submarines and other defense andhigh-reliability applications.

·       IntellectualProperty (“IP”)—The Intellectual Property segment reports the Company’s businessof licensing our intellectual property to third parties. The IP segment incomehas been and is largely dependent on the continued enforceability and validityof the Company’s licensed MOSFET patents, which will generally reach theirmaturity in a few years. Aside from its MOSFET technologies, the Company’sintellectual property strategy has been to use its intellectual propertyprimarily for the design and development of value-added families of products. Inthe IP segment, the Company concentrates its efforts on the licensing oftechnologies or fields of use that have 

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application beyond itsproduct groups or which no longer align with its long-term business strategiesfor its product groups. The Company also targets certain technologies for licensingthat it believes help establish its product platforms and structures asindustry standards and, thereby, enhance the growth of certain products.

The Company’sNon-Focus Product segments are:

·       CommodityProducts (“CP”)—The Commodity Product segment is comprised primarily of older-generationPower Components that are sold with margins generally below the Company’s targetsand are typically commodity in nature. These products have widespread usethroughout the power management products industry and are often complementaryto many of its Focus Products offerings or allow the Company to provide a fullrange of customer or application offerings. The Company often offers theseproducts to take advantage of cross-selling opportunities for its other productfamilies. These products may help to increase the Company’s manufacturingeconomies of scale.

·       Non-AlignedProducts (“NAP”)—The Non-Aligned Product segment includes businesses, productlines or products the Company is targeting for realignment, whether by changingthe business model for how it participates in the business, or by divestitureor other strategic transactions, such as joint venture or partnership. TheCompany plans to support its Non-Focus Products to the extent it believesappropriate, to manage, maintain or increase their value in line with itslong-term goals for these segments. Currently, product lines reported in thissegment include certain modules, rectifiers, diodes and thyristors used inautomotive, industrial, welding and motor control applications.

The Company’s Chief Operating Decision Maker (“CODM”)is the Chief Executive Officer who reviews the revenues and gross marginresults for each of these segments in making decisions about allocatingresources, including the focus of research and development activities, andassessing performance. The Company does not allocate sales and marketing,information systems, finance and administrative costs to the operatingsegments, as these are not meaningful statistics to the CODM in making resourceallocation decisions or in evaluating performance of the operating segments.

The accounting policies of the segments are the sameas those described in Note 1, “Business and Summary of Significant AccountingPolicies”. The Company’s wafer manufacturing facilities fabricate integratedcircuits for all business units as necessary and their operating costs arereflected in the segments’ cost of revenues on the basis of product costs. Generalmanufacturing overhead and variances are allocated to the segments based ontheir percentage of total revenues. Because operating segments are generallydefined by the products they design and sell, they do not make sales to eachother. Depreciation and amortization related to the manufacturing of goods isincluded in gross profit for the segments. Due to the Company’s methodology forcost build up at the product level it is impractical to determine the amount ofdepreciation and amortization included in each segment’s gross profit. TheCompany does not discretely allocate assets to its operating segments, nor doesthe CODM evaluate operating segments using discrete asset information.

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The segment results forthe fiscal years ended June 30, 2005, 2004 and 2003 are as follows (inthousands except percentages):
| ** **                    | ** ** | **2005**   | ** ** | **2004**     | ** ** | **2003**          | ** ** |
|-------------------------------|------------|------------|------------|--------------|------------|-------------------|------------|
| **Business Segment**     | ** ** | ** ** | ** ** | **Revenues** | ** ** | **Gross  Profit** | ** ** | **Revenues** | ** ** | **Gross  Profit** | ** ** | **Revenues** | ** ** | **Gross  Profit** | ** ** |
| Computing and  Communications |       | $          | 386,662    |         | $          | 172,370           |       | $ | 328,330 |   | $ | 133,226 |   | $ | 222,276 |   | $ | 75,552 |   |
| Energy-Saving  Products       |       | 300,521    |       | 165,149      |       | 250,763           |       | 123,442 |   | 208,775 |   | 95,923 |   |
| Aerospace and  Defense        |       | 129,295    |       | 55,354       |       | 108,610           |       | 40,656 |   | 110,979 |   | 41,641 |   |
| Intellectual  Property        |       | 41,160     |       | 41,160       |       | 41,927            |       | 41,927 |   | 41,988 |   | 41,988 |   |
| Subtotal Focus Products       |       | 857,638    |       | 434,033      |       | 729,630           |       | 339,251 |   | 584,018 |   | 255,104 |   |
| Commodity  Products           |       | 206,226    |       | 58,918       |       | 217,856           |       | 55,891 |   | 179,318 |   | 21,196 |   |
| Non-Aligned  Products         |       | 110,560    |       | 17,572       |       | 113,014           |       | 15,952 |   | 101,107 |   | 11,510 |   |
| Subtotal Non-Focus Products   |       | 316,786    |       | 76,490       |       | 330,870           |       | 71,843 |   | 280,425 |   | 32,706 |   |
| Consolidated  Total           |       | $          | 1,174,424  |         | $          | 510,523           |       | $ | 1,060,500 |   | $ | 411,094 |   | $ | 864,443 |   | $ | 287,810 |   |
|                               |            |            |            |              |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Revenuesfrom unaffiliated customers are based on the location in which the saleoriginated. The Company includes in long-lived assets, all long-term assetsexcluding long-term cash investments, long-term deferred income taxes,goodwill and acquisition-related intangibles. Geographic information for thefiscal years ended June 30, 2005, 2004 and 2003 is presented below (inthousands):
| ** **                                  | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|---------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Revenues from Unaffiliated Customers        |       |      |       |      |       |      |       |
| North America, primarily  the United States |       | $         | 367,801    |      | $          | 309,662   |       | $ | 283,015 |   |
| Asia                                        |       | 510,764   |       | 467,994   |       | 346,779   |       |
| Europe                                      |       | 254,699   |       | 240,917   |       | 192,661   |       |
| Subtotal                                    |       | 1,133,264 |       | 1,018,573 |       | 822,455   |       |
| Royalties (unallocated)                     |       | 41,160    |       | 41,927    |       | 41,988    |       |
| Total                                       |       | $         | 1,174,424  |      | $          | 1,060,500 |       | $ | 864,443 |   |
| Long-lived Assets                           |       |      |       |      |       |      |       |
| North America, primarily  the United States |       | $         | 347,892    |      | $          | 358,243   |       |   |   |
| Asia                                        |       | 23,598    |       | 17,728    |       |      |       |
| Europe                                      |       | 223,124   |       | 168,880   |       |      |       |
| Total                                       |       | $         | 594,614    |      | $          | 544,851   |       |   |   |

 

No single originalequipment manufacturer (“OEM”), customer, distributor or subcontractmanufacturer accounted for more than ten percent of the Company’s consolidatedrevenues in fiscal 2005, 2004 or 2003. For its Focus Product segments, theCompany primarily sells direct to OEM customers. However, three distributorsaccounted for approximately 39 percent of C&C revenues for the fiscal yearended June 30, 2005. One distributor accounted for approximately 12percent of CP revenues for the fiscal year ended June 30, 2005. One OEMcustomer included accounted for approximately 27 percent of NAP revenues forthe fiscal year ended June 30, 2005. No single OEM customer, distributoror subcontract manufacturer account for more than ten percent of the Company’sother reportable segments. No customer accounted for more than 10 percent ofthe Company’s accounts receivable at June 30, 2005 and 2004.

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**8.**   Income Taxes

Income(loss) before income taxes for the fiscal years ended June 30, 2005, 2004and 2003 is as follows (in thousands):
| ** **                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                                 |       | $        | 34,280     |     | $          | 10,613   |       | $ | (149,668 | ) |
| Foreign                                  |       | 149,788  |       | 107,676  |       | 23,470   |       |
| Total income (loss)  before income taxes |       | $        | 184,068    |     | $          | 118,289  |       | $ | (126,198 | ) |

 

The provision (benefit)for income taxes for the fiscal years ended June 30, 2005, 2004 and 2003is as follows (in thousands):
| ** **                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current income taxes:     |       |     |       |     |       |     |       |
| Domestic                  |       | $        | 4,774      |     | $          | 17,034   |       | $ | 5,734 |   |
| Foreign                   |       | 23,184   |       | 26,118   |       | 17,831   |       |
|                      |       | 27,958   |       | 43,152   |       | 23,565   |       |
| Deferred income taxes:    |       |     |       |     |       |     |       |
| Domestic                  |       | 18,584   |       | (16,406  | )          | (56,596  | )          |
| Foreign                   |       | 66       |       | 1,768    |       | (3,528   | )          |
|                      |       | 18,650   |       | (14,638  | )          | (60,124  | )          |
| Total provision (benefit) |       | $        | 46,608     |     | $          | 28,514   |       | $ | (36,559 | ) |

 

The tax benefit from options exercised reduced currentincome taxes payable for 2005, 2004 and 2003 by $18.6 million, $15.7 millionand $0.5 million, respectively.

TheCompany’s effective tax rate on pretax income differs from the U.S. federalstatutory tax rate for the fiscal years ended June 30, 2005, 2004 and2003, as follows:
| ** **                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory tax  rate                      |       | 35.0     | %          | 35.0     | %          | (35.0    | )%         |
| Foreign tax rate  differential           |       | (1.7     | )          | (3.0     | )          | 9.5      |       |
| Foreign tax  credit benefit              |       | (4.7     | )          | (4.0     | )          | (1.7     | )          |
| Research tax  credit benefit             |       | (2.7     | )          | (3.5     | )          | (2.6     | )          |
| State taxes, net  of federal tax benefit |       | (0.5     | )          | 0.3      |       | (2.4     | )          |
| Other, net                               |       | (0.1     | )          | (0.7     | )          | 3.2      |       |
| Effective tax  rate                      |       | 25.3     | %          | 24.1     | %          | (29.0    | )%         |

 

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Themajor components of the net deferred tax asset (liability) as of June 30,2005 and 2004 are as follows (in thousands):
| ** **                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  liabilities:                                  |       |     |       |     |       |
| Depreciation                                                |       | $        | (31,686    | )        | $          | (26,988 | ) |
| Effect of state taxes                                       |       | (7,386   | )          | (6,040   | )          |
| Mark-to-market adjustments of available-for-sale securities |       | (17,107  | )          | (23,859  | )          |
| Other                                                       |       | (724     | )          | (1,226   | )          |
| Total deferred tax liabilities                              |       | (56,903  | )          | (58,113  | )          |
| Deferred tax assets:                                        |       |     |       |     |       |
| Financial statement reserves                                |       | 9,772    |       | 11,144   |       |
| Credit carryovers                                           |       | 108,114  |       | 96,285   |       |
| Impairment of assets, restructuring and severance  charges  |       | 67,909   |       | 57,900   |       |
| Net operating loss carryovers                               |       | 21,287   |       | 32,155   |       |
| Other                                                       |       | 8,913    |       | 17,877   |       |
| Total deferred tax assets                                   |       | 215,995  |       | 215,361  |       |
| Valuation  allowance                                        |       | (48,150  | )          | (53,530  | )          |
| Net deferred tax asset                                      |       | $        | 110,942    |     | $          | 103,718 |   |

 

The Company has approximately $26.5 million and $51.6million of U.S. federal foreign tax credits and U.S. federal research anddevelopment tax credit carryforwards, respectively, before valuation allowance,available to reduce income taxes otherwise payable, which expire from 2006 to2025. The Company has approximately $3.2 million of alternative minimum taxcredits, which can be carried over indefinitely to offset regular taxliabilities to the extent of the alternative minimum tax. Before valuation allowances,the Company has $26.7 million in state research and development tax creditsthat carry forward indefinitely.

The Company has NOL carryforwards for U.S. federal,United Kingdom and Italy purposes of approximately $0.2 million, $55.7 millionand $13.6 million, respectively. The U.S. federal, United Kingdom and ItalyNOLs begin to expire in 2023, indefinitely, and 2007, respectively, withcertain limitations.

Pursuant to Sections 382 and 383 of the InternalRevenue Code, the utilization of NOLs and other tax attributes may be subjectto substantial limitations if certain ownership changes occur during athree-year testing period (as defined). The Company does not believe anownership change has occurred as of June 30, 2005, that would limit theCompany’s utilization of its NOL, credit carryovers or other tax attributes. 

Realization of deferred tax assets is dependent upongenerating sufficient taxable income. The Company believes that there is a riskthat certain deferred tax assets, including research and development credits, foreign operating lossesand depreciation differences, may result in no benefit and,accordingly, has established a valuation allowance of $48.1 million againstthem. Although realization is not assured for the remaining deferred taxassets, the Company believes it is more likely than not that the deferred taxassets will be realized through future taxable earnings or alternative taxstrategies.

In December 2004, the FASB issued FASB Staff PositionNo. FAS 109-1 “Application of FASB Statement No. 109, ‘Accounting for IncomeTaxes’, to the Tax Deduction on Qualified Production Activities by the AmericanJobs Creation Act of 2004” (“FSP FAS No. 109-1”). The American Jobs CreationAct of 2004 (“AJCA”), subject to certain limitations, a phased-in introduces aspecial nine percent tax deduction on qualified production activities. FSP FASNo. 109-1 clarifies that this tax deduction should be accounted for as aspecial tax deduction in accordance with SFAS No. 109, 

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“Accounting for IncomeTaxes”, rather than as a tax rate reduction. The Company is currently assessing the potential impact of this newlegislation based on the fact that additional guidance is still being issued,but does not believe the adoption of FSP FAS No. 109-1 will have a materialimpact on its consolidated financial position, results of operations or cashflows. 

In December 2004, the FASB issued FASB Staff PositionNo. 109-2, “Accounting and Disclosure Guidance for the Foreign EarningsRepatriation Provision within the American Jobs Creations Act of 2004” (“FSPFAS No. 109-2”), which introduces a limited time 85 percent dividends receiveddeduction on the repatriation of certain foreign earnings to a U.S. tax payer(repatriation provision), provided certain criteria are met. The Company iscurrently evaluating the impact of FSP FAS No. 109-2, and expects tosubstantially complete the analysis by the third quarter of fiscal year2006. 

As a matter of course, theCompany is regularly audited by various taxing authorities. Unfavorablesettlement of any particular issue would require use of cash. Favorableresolution would be recognized as a reduction to the effective tax rate in theyear of resolution or a reduction of goodwill if it relates to purchased taxliabilities. The Company’s tax reserves are included in income taxes payable.While it is often difficult to predict the final outcome or the timing ofresolution of any particular tax matter, the Company does not expect theresults of these audits to have a material impact on its financial position orresults of operations.

**9.**   Net Income (Loss)per Common Share

Thereconciliation of the numerator and denominator of the net income (loss) percommon share—basic and diluted determined in accordance with SFAS No. 128, “Earningsper Share,” is as follows for the fiscal years ended June 30, 2005, 2004and 2003 (in thousands, except per share amounts):
| ** **                                | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|---------------------------|------------|----------------------------|------------|
| Year ended  June 30, 2005            |       |                    |       |                      |       |                       |       |   |   |   |   |   |   |
| Net income per  common share—basic   |       |                    | $          | 137,460                   |       |                       |       | 67,621 |   |   |   | $ | 2.03 |   |   |
| Effect of  dilutive securities:           |       |                    |       |                      |       |                       |       |   |   |   |   |   |   |
| Stock options                             |       |                    | —     |                      |       |                       | 2,029      |   |   |   | (0.06 | ) |   |
| Convertible subordinated notes            |       |                    | 9,853      |                      |       |                       | 7,439      |   |   |   | (0.06 | ) |   |
| Net income per  common share—diluted |       |                    | $          | 147,313                   |       |                       |       | 77,089 |   |   |   | $ | 1.91 |   |   |
| Year ended June 30, 2004             |       |                    |       |                      |       |                       |       |   |   |   |   |   |   |
| Net income per  common share—basic   |       |                    | $          | 89,770                    |       |                       |       | 65,459 |   |   |   | $ | 1.37 |   |   |
| Effect of  dilutive securities:           |       |                    |       |                      |       |                       |       |   |   |   |   |   |   |
| Stock options                             |       |                    | —     |                      |       |                       | 2,904      |   |   |   | (0.06 | ) |   |
| Net income per  common share—diluted |       |                    | $          | 89,770                    |       |                       |       | 68,363 |   |   |   | $ | 1.31 |   |   |
| Year ended June 30, 2003             |       |                    |       |                      |       |                       |       |   |   |   |   |   |   |
| Net loss per  common share—basic     |       |                    | $          | (89,639                   | )          |                       |       | 63,982 |   |   |   | $ | (1.40 | ) |   |
| Effect of  dilutive securities:           |       |                    |       |                      |       |                       |       |   |   |   |   |   |   |
| Stock options                             |       |                    | —     |                      |       |                       | —     |   |   |   | — |   |   |
| Net loss per common  share—diluted   |       |                    | $          | (89,639                   | )          |                       |       | 63,982 |   |   |   | $ | (1.40 | ) |   |

 

The fiscal year ended June30, 2005 included the effect from the conversion of 7,439,000 shares of theCompany’s outstanding convertible subordinated notes (“the Effect”), whichnegatively impacted net income by ($0.06). The fiscal years ended June 30, 2004and 2003 did not include the Effect, as the Effect would have beenanti-dilutive. Additionally, 859,000 shares of the Company’s stock options forthe fiscal year ended June 30, 2003 were excluded from the “net loss per commonshare—diluted” calculation, since including those shares would have beenanti-dilutive.

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**10.**   EnvironmentalMatters

Federal, state and local laws and regulations imposevarious restrictions and controls on the storage, use and discharge of certainmaterials, chemicals and gases used in semiconductor manufacturing processes.The Company does not believe that compliance with such laws and regulations asnow in effect will have a material adverse effect on the Company’s results ofoperations, financial position or cash flows. 

However, under some of these laws and regulations, theCompany could be held financially responsible for remedial measures ifproperties are contaminated or if waste is sent to a landfill or recyclingfacility that becomes contaminated. Also, the Company may be subject to commonlaw claims if it releases substances that damage or harm third parties. TheCompany cannot make assurances that changes in environmental laws andregulations will not require additional investments in capital equipment andthe implementation of additional compliance programs in the future, which couldhave a material adverse effect on the Company’s results of operations,financial position or cash flows, as could any failure by the Company to complywith environmental laws and regulations. 

International Rectifier Corporation and RachelleLaboratories, Inc. (“Rachelle”), a former operating subsidiary of the Companythat discontinued operations in 1986, were each named a potentially responsibleparty (“PRP”) in connection with the investigation by the United StatesEnvironmental Protection Agency (“EPA”) of the disposal of allegedly hazardoussubstances at a major superfund site in Monterey Park, California (“OII Site”).Certain PRPs who settled certain claims with the EPA under consent decreesfiled suit in Federal Court in May 1992 against a number of other PRPs,including the Company, for cost recovery and contribution under the provisionsof the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”).IR has settled all outstanding claims that have arisen against it out of theOII Site.  No claims against Rachellehave been settled.  The Company has takenthe position that none of the wastes generated by Rachelle were hazardous.

Counsel for Rachelle received a letter dated August2001 from the U.S. Department of Justice, directed to all or substantially allPRPs for the OII Site, offering to settle claims against such parties for allwork performed through and including the final remedy for the OII Site.  The offer required a payment from Rachelle inthe amount of approximately $9.3 million in order to take advantage of thesettlement.  Rachelle did not accept theoffer.

It remains the position of Rachelle that its wasteswere not hazardous.  The Company'sinsurer has not accepted liability, although it has made payments for defensecosts for the lawsuit against the Company. The Company has made no accrual for potential loss, if any; however, anadverse outcome could have a material adverse effect on the Company’s resultsof operations or cash flows.

The Company received aletter in June 2001 from a law firm representing UDT Sensors, Inc. relating toenvironmental contamination (chlorinated solvents such as trichlorethene)assertedly found in UDT’s properties in Hawthorne, California. The letteralleges that the Company operated a manufacturing business at that location inthe 1970’s and/or 1980’s and that it may have liability in connection with theclaimed contamination. The Company has made no accrual for any potential lossessince there has been no assertion of specific facts on which to form the basisfor determination of liability.

**11.**   Commitments

As of June 30, 2005, the future minimum leasecommitments under non-cancelable operating leases of equipment and realproperty are as follows: fiscal 2006: $4.4 million; fiscal 2007: $3.6 million;fiscal 2008: $2.4 million; fiscal 2009: $2.2 million; fiscal 2010 andthereafter: $4.2 million. Capital lease obligations were not material as ofJune 30, 2005.

Total rental expense onall operating leases charged to income was $12.4 million, $11.6 million and$10.3 million in the fiscal years ended June 30, 2005, 2004 and 2003,respectively. The Company had 

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outstandingpurchase commitments for capital expenditures of approximately $24.2 million atJune 30, 2005. 

**12.**   Litigation

In June 2000, the Company filed suit in FederalDistrict Court in Los Angeles, California against IXYS Corporation, alleginginfringement of its key U.S. patents 4,959,699; 5,008,725 and 5,130,767. Thesuit sought damages and other relief customary in such matters. The FederalDistrict Court entered a permanent injunction, effective on June 5, 2002,barring IXYS from making, using, offering to sell or selling in, or importinginto the United States, MOSFETs (including IGBTs) covered by the Company’s U.S.patents 4,959,699; 5,008,725 and/or 5,130,767. In August 2002, the Court ofAppeals for the Federal Circuit stayed that injunction, pending appeal on themerits. In that same year, following trial on damages issues, a FederalDistrict Court jury awarded the Company $9.1 million in compensatory damages.The Federal District Court subsequently tripled the damages, increasing theaward from $9.1 million to approximately $27.2 million, and ruled that theCompany is entitled to an additional award of reasonable attorney’s fees for atotal monetary judgment of about $29.5 million. In March 2004, the U.S. Courtof Appeals for the Federal Circuit reversed the summary judgment granted theCompany by the Federal District Court in Los Angeles of infringement by IXYS ofthe Company’s U.S. patents 4,959,699; 5,008,725 and 5,130,767. The FederalCircuit reversed in part and vacated in part infringement findings of theDistrict Court, granted IXYS the right to present certain affirmative defenses,and vacated the injunction against IXYS entered by the District Court. Theruling by the Federal Circuit had the effect of vacating the damages judgmentobtained against IXYS. The Federal Circuit affirmed the District Court’srulings in the Company’s favor regarding the validity and enforceability of thethree Company patents. Following remand, a federal court jury in Los Angeles,California held on September 15, 2005 that IXYS elongated octagonal MOSFETs andIGBTs infringed the Company’s 4,959,699 patent but did not infringe theCompany’s 5,008,725 and 5,130,767 patents. The jury will return on October 4,2005 to hear the Company’s claim for damages for infringement of the 4,959,699patent. In addition, the Company  willcontinue to pursue its other available remedies.

In January 2002, theCompany filed suit in the Federal District Court in Los Angeles, Californiaagainst Hitachi, Ltd. (“Hitachi”) and affiliated companies alleginginfringement of certain of its U.S. patents. The Company later broughtadditional claims alleging infringement of certain other of IR’s patents.Hitachi denied infringement and validity of the patents and entered acounterclaim of patent misuse. During fiscal 2004, the Company added RenesasTechnology Corp (“Renesas”) and its U.S. affiliate to such suit as additionalparties defendant. Renesas is a joint venture comprised of Hitachi (55 percent)and Mitsubishi Electric Corporation (45 percent). In January 2004, the Company, Hitachi andRenesas entered into a patent cross-license agreement. The agreement alsosettled the previously pending litigation among the parties. In the quarterended March 31, 2004, the Company reported a one-time pretax gain, net of legalexpenses and related costs, of approximately $5.9 million related to thismatter. The agreement also provides for Hitachi and Renesas paying an on-goingroyalty on worldwide sales covered by certain Company power MOSFET/IGBTpatents. The Company will pay an on-going royalty to Hitachi on Company salesin Japan of certain power MOSFETs and to Renesas on the Company’s sales inJapan of certain other products. The agreement takes effect for payment ofongoing royalties on April 1, 2004 and will continue through the expiration ofthe applicable licensed patents.

**13.**   Acquisitions

In July 2004, the Company acquired the specialtysilicon epitaxial services business from Advanced Technology Materials, Inc.(“ATMI”) for $39.6 million in cash, net of claim settlement as described below,in order to lower production costs and to gain certain key intellectualproperty for epitaxial silicon substrate manufacturing. During the fiscalquarter ended December 31, 2004, the Company and ATMI 

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settled the claimregarding certain processes transferred as part of the purchase transactionthat failed to qualify in accordance with contract specifications, and $1.8million was reimbursed to the Company.

The Company accounted forthe acquisition under the purchase method of accounting. The purchase price of$39.6 million was allocated as follows: $25.0 million for fixed assets, $0.8million for inventory, $1.0 million for acquisition-related intangible assets,$0.3 million for other current assets and $12.5 million for goodwill. Thefinancial results of the acquisition have been included in the consolidatedfinancial statements from the date of the acquisition. The Company’sconsolidated pro forma net sales, income and earnings per share would not havebeen materially different from the reported amount for the fiscal years endedJune 30, 2005, 2004 and 2003, had the acquisition occurred at the beginning ofthose periods.

**14.**   Related PartyTransactions

As discussed in Note 2, the Company holds as strategicinvestment common stock of Nihon Inter Electronics Corporation (“Nihon”), arelated party. At June 30, 2005, 2004 and 2003, the Company owned approximately17.5 percent of the outstanding shares of Nihon. As previously reported, theCompany’s Chief Financial Officer was the Chairman of the Board and a directorof Nihon until June 28, 2005. In addition, the general manager of the Company’sJapan subsidiary is a director of Nihon. Although the Company has a member onthe Board of Directors of Nihon, it does not exercise significant influence,and accordingly, the Company records its interest in Nihon based on readilydeterminable market values in accordance with SFAS No. 115 (see Note 2). 

In June 2002, the Companyentered into agreements to license certain technology to Nihon and to contractNihon to manufacture certain products. The value of the licensing andmanufacturing agreements is $5.4 million and $2.0 million, respectively, ofwhich $0.2 million, $3.3 million and $2.5 million was recognized as revenue forthe fiscal years ended June 30, 2005, 2004 and 2003, respectively.

**15.**   QuarterlyFinancial Data (Unaudited)

Summarized quarterlyfinancial data is as follows (in thousands, except per share amounts):
| ** **   | ** ** | **Revenues** | ** ** | **Gross Profit** | ** ** | **Net  Income (Loss)** | ** ** | **Net Income  (Loss) Per  Common  Share — Basic** | ** ** | **Net Income  (Loss) Per  Common  Share — Diluted (1)** | ** ** |
|--------------|------------|--------------|------------|-----------------------|------------|-----------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **2005 (2)** | ** ** |         |       |                  |       |                        |       |                                                                       |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |
| 1st Quarter  |       | $            | 312,225    |                  |       | $                           | 133,437    |                                                                       |       |                                                                                  | $          | 37,580 |   |   |   | $ | 0.56 |   |   |   | $ | 0.53 |   |   |
| 2nd Quarter  |       | 298,560      |       |                  | 129,381    |                        |       |                                                                       | 39,514     |                                                                                  |       |   | 0.59 |   |   |   | 0.55 |   |   |
| 3rd Quarter  |       | 281,871      |       |                  | 125,267    |                        |       |                                                                       | 35,673     |                                                                                  |       |   | 0.53 |   |   |   | 0.48 |   |   |
| 4th Quarter  |       | 281,768      |       |                  | 122,438    |                        |       |                                                                       | 24,693     |                                                                                  |       |   | 0.36 |   |   |   | 0.35 |   |   |
| **2004 (2)** |       |         |       |                  |       |                        |       |                                                                       |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |
| 1st Quarter  |       | $            | 234,129    |                  |       | $                           | 84,144     |                                                                       |       |                                                                                  | $          | 16,731 |   |   |   | $ | 0.26 |   |   |   | $ | 0.25 |   |   |
| 2nd Quarter  |       | 252,314      |       |                  | 94,883     |                        |       |                                                                       | 16,888     |                                                                                  |       |   | 0.26 |   |   |   | 0.25 |   |   |
| 3rd Quarter  |       | 275,411      |       |                  | 109,175    |                        |       |                                                                       | 26,745     |                                                                                  |       |   | 0.41 |   |   |   | 0.39 |   |   |
| 4th Quarter  |       | 298,646      |       |                  | 122,892    |                        |       |                                                                       | 29,406     |                                                                                  |       |   | 0.44 |   |   |   | 0.42 |   |   |
|              |            |              |            |                       |            |                             |            |                                                                            |            |                                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Fiscal fourth quarter2004 through fiscal third quarter 2005 included the dilutive effect from theconversion of the Company’s outstanding convertible subordinated notes into7,439,000 shares of common stock (the “Effect”). The conversion effect was notincluded in the other quarters, since the Effect would have been anti-dilutive.

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(2)          Fiscal first quarter2004 through fiscal fourth quarter 2005 included pretax impairment of assets,restructuring and severance-related charges, as follows (in thousands):
| ** **                                                             | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                             | ** ** | **1st  Quarter**     | ** ** | **2nd  Quarter**     | ** ** | **3rd  Quarter** | ** ** | **4thQuarter** | ** ** | **1st  Quarter** | ** ** | **2nd  Quarter** | ** ** | **3rd  Quarter** | ** ** | **4th  Quarter** | ** ** |
| Impairment of assets,  relocation costs and other charges         |       |                 | $          | 4,860                |       |   |   | $ | 5,631 |   |   |   | $ | 6,304 |   |   | $ | 8,480 |   |   | $ | 1,425 |   |   | $ | 5,883 |   |   | $ | 3,188 |   |   |   | $ | 4,738 |   |   |
| Severance-related                                                      |       |                 | 1,831      |                 |       |   | 1,200 |   |   |   | 1,773 |   |   | 3,873 |   |   | 2,604 |   |   | 4,207 |   |   | 6,719 |   |   |   | 4,770 |   |   |
| Total impairment of  assets, restructuring and severance charges  |       |                 | $          | 6,691                |       |   |   | $ | 6,831 |   |   |   | $ | 8,077 |   |   | $ | 12,353 |   |   | $ | 4,029 |   |   | $ | 10,090 |   |   | $ | 9,907 |   |   |   | $ | 9,508 |   |   |

 

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**Item9. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

None 

**Item 9A. Controls and Procedures**

(a)           Evaluationof disclosure controls and procedures

The term “disclosure controls and procedures” refersto the controls and other procedures of a company that are designed to ensurethat information required to be disclosed by the company in the reports that itfiles under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded,processed, summarized and reported, within required time periods. Ourmanagement, with the participation of our Chief Executive Officer, AlexanderLidow, and Chief Financial Officer, Michael P. McGee, carried out anevaluation of the effectiveness of our disclosure controls and procedurespursuant to Exchange Act Rule 13a-15(b). Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that, as of the end ofthe period covered by this report, such controls and procedures are effectiveat the reasonable assurance level in making known to them material informationrelated to us (including our consolidated subsidiaries) required to be includedin this report.

Disclosure controlsand procedures, no matter how well designed and implemented, can provide onlyreasonable assurance of achieving an entity’s disclosure objectives. Thelikelihood of achieving such objectives is affected by limitations inherent indisclosure controls and procedures. These include the fact that human judgmentin decision-making can be faulty and that breakdowns in internal control canoccur because of human failures such as simple errors, mistakes or intentionalcircumvention of the established processes.

(b)          Management’s Report onInternal Control over Financial Reporting 

Internal control over financial reporting is a processdesigned by, or under the supervision of, our chief executive officer and chieffinancial officer and effected by our board of directors, management and otherpersonnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of the consolidated financialstatements for external purposes in accordance with generally acceptedaccounting principles and includes those policies and procedures that: (1)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of our assets; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that our receipts and expenditures are being madeonly in accordance with authorizations of management and directors; and (3)provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use or disposition of our assets that could have amaterial effect on the consolidated financial statements. 

We are responsible for establishing and maintainingadequate internal control over financial reporting. We have used the frameworkset forth in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission to assess our internal control over financial reporting.Based upon this assessment, we have concluded that our internal control overfinancial reporting was effective as of June 30, 2005. PricewaterhouseCoopersLLP, an independent registered public accounting firm who audited our financialstatements included in this annual report on Form 10-K, has also audited ourassessment of the effectiveness of our internal control over financialreporting as of June 30, 2005.

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(c)    Changes in internal control over financial reporting

There was no change in ourinternal controls over financial reporting during the fourth fiscal quarterthat has materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting.

**Item 9B. Other Information**

None 

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**PART III**

For information called forby Items 10, 11, 12, 13 and 14, reference is made to theitems under “Election of Directors”, “General Information—Security Ownership ofPrincipal Stockholders and Management”, and “Ratification of Independent RegisteredPublic Accounting Firm—Independent Accountants” in the Registrant’s definitiveproxy statement for its annual meeting of stockholders, to be held November 21,2005, which will be filed with the Securities and Exchange Commission within120 days after July 3, 2005, and which is incorporated herein byreference. Certain information concerning the executive officers of the Companyis included in Part I. See “Additional Item” on page 19.

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**PART IV**

**Item15. Exhibits and Financial Statement Schedules**

a.                 FinancialStatements and Financial Statement Schedule being filed as part of this reportare listed in the index on page 54.

b.                Exhibits filed aspart of this report are listed on the Exhibit Index on page 96.

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**EXHIBIT INDEX**

Incorporated By Reference:
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                            | ** ** | **Item**                                                                                                                                                                        | ** ** | **Document** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| 3(a)             |       | Certificate of Incorporation of the Company, as  amended to date                                                                                                                                                                                                      |       | Registration Statement on Form S-8 filed with  the Securities and Exchange Commission on July 19, 2004, Registration  No. 333-117489. (Exhibit 3.1)         |
| 3(b)             |       | Amended and Restated  Bylaws of the Company                                                                                                                                                                                                                           |       | Registration Statement  on Form S-8 filed with the Securities and Exchange Commission on  July 19, 2004, Registration No. 333-117489. (Exhibit 3.2)         |
| 4(a)             |       | Amended and Restated  Rights Agreement between International Rectifier Corporation and Chase Mellon  Shareholder Services, LLC, dated as of December 15, 1998                                                                                                    |       | Form 10-K—Annual  Report for fiscal year ended June 30, 1999, filed with the Securities  and Exchange Commission on October 1, 1999. (Exhibit 4(a))    |
| 4(b)             |       | Indenture, dated as of  July 19, 2000, between International Rectifier Corporation and Wells  Fargo Bank Minnesota, National Association, as Trustee, including the form of  41¤4  Percent Convertible Subordinated Note Due 2007 as Exhibit A thereto |       | Current Report on  Form 8-K filed with the Securities and Exchange Commission on  July 28, 2000. (Exhibit 4.1)                                                   |
| 4(c)             |       | Registration Rights  Agreement, dated as of July 19, 2000, by and among International Rectifier  Corporation, as Issuer, and Morgan Stanley & Co. Incorporated, J.P.  Morgan & Co. and Banc of America Securities LLC                          |       | Current Report on  Form 8-K filed with the Securities and Exchange Commission on  July 28, 2000. (Exhibit 4.1)                                                   |
| 10(a)*           |       | Amendment to International  Rectifier Corporation 1984 Stock Participation Plan                                                                                                                                                                                       |       | Registration Statement  on Form S-8 filed with the Securities and Exchange Commission on  May 12, 1994, Registration No. 33-53589. (Exhibit 4.1)            |
| 10(b)*           |       | Executive Employment  Agreement dated May 15, 1991 between International Rectifier Corporation  and Eric Lidow and amended as of April 12, 1995                                                                                                             |       | Form 10-K—Annual  Report for fiscal year ended June 30, 1991                                                                                                     |
| 10(c)*           |       | Amendment dated  April 12, 1995 to the Executive Employment Agreement dated May 15,  1991 between International Rectifier Corporation and Eric Lidow                                                                                                        |       | Form 10-K—Annual  Report for fiscal year ended June 30, 1995 filed with the Securities and  Exchange Commission on August 25, 1995. (Exhibit 10(r))    |
| 10(d)*           |       | International Rectifier  Corporation Grantor Trust for Retirement Benefits for Eric Lidow dated  October 24, 1995 and amended as of February 22, 1996                                                                                                       |       | Form 10-K—Annual  Report for fiscal year ended June 30, 1996, filed with the Securities  and Exchange Commission on September 25, 1996.(Exhibit 10(p)) |
| 10(e)*           |       | International Rectifier  Corporation 1997 Employee Stock Incentive Plan                                                                                                                                                                                               |       | Registration Statement  on Form S-8 filed with the Securities and Exchange Commission on  February 26, 1998, Registration No. 33-46901.  (Exhibit 4.1)      |

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| 10(f)* |   | Amendment to International Rectifier Corporation  1997 Employee Stock Incentive Plan, dated October 1, 2001                                                                                                                   |   | Registration Statement on Form S-8 filed with  the Securities and Exchange Commission on October 1, 2001, Registration  No. 333-70560. (Exhibit 4.2)          |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10(g)* |   | International Rectifier  Corporation Amended and Restated Stock Incentive Plan of 1992                                                                                                                                             |   | Registration Statement  on Form S-8 filed with the Securities and Exchange Commission on  December 2, 1997, Registration No. 33-41363.  (Exhibit 4.1)         |
| 10(h)* |   | International Rectifier  Corporation Retirement Savings Plan                                                                                                                                                                       |   | Registration Statement  on Form S-8 filed with the Securities and Exchange Commission on  June 24, 1998, Registration No. 33-57575. (Exhibits 4.1, 4.2  and 4.3)   |
| 10(i)* |   | Amendment to Executive  Employment Agreement dated May 15, 1991 between International Rectifier  Corporation and Eric Lidow amended as of June 22, 1998                                                                  |   | Form 10-K—Annual  Report for fiscal year ended June 30, 1998, filed with the Securities  and Exchange Commission on September 30, 1998. (Exhibit 10(ab)) |
| 10(j)* |   | First Amendment to  International Rectifier Corporation Grantor Trust for Retirement Benefits for  Eric Lidow, dated October 25, 1995 and amended as of February 22,  1996 and June 22, 1998                        |   | Form 10-K—Annual  Report for fiscal year ended June 30, 1998, filed with the Securities  and Exchange Commission on September 30, 1998. (Exhibit 10(ac)) |
| 10(k)* |   | Second Amendment to  International Rectifier Corporation Grantor Trust for Retirement Benefits for  Eric Lidow, dated October 25, 1995 and amended as of February 22,  1996, June 22, 1998, and August 5, 1998 |   | Form 10-K—Annual  Report for fiscal year ended June 30, 1998, filed with the Securities  and Exchange Commission on September 30, 1998. (Exhibit 10(ad)) |
| 10(l)* |   | Amendment to Executive  Employment Agreement dated May 15, 1991 between International Rectifier  Corporation and Eric Lidow amended as of June 22, 1998 and  August 5, 1998                                         |   | Form 10-K—Annual  Report for fiscal year ended June 30, 1998, filed with the Securities  and Exchange Commission on September 30, 1998. (Exhibit 10(ae)) |
| 10(m)* |   | First Amendment dated  September 29, 1999, to Consulting, Nondisclosure, Severance and  Resignation Agreement between Derek Lidow and International Rectifier  Corporation, dated as of May 10, 1999                     |   | Form 10-K—Annual  Report for fiscal year ended June 30, 1999, filed with the Securities  and Exchange Commission on October 1, 1999. (Exhibit 10(ag))    |
| 10(n)* |   | International Rectifier  Corporation 2000 Stock Incentive Plan                                                                                                                                                                     |   | Registration Statement  on Form S-8 filed with the Securities and Exchange Commission on  May 18, 2000, Registration Number 333-37308. (Exhibit 4)                 |
| 10(o)* |   | International Rectifier  Corporation 1997 Stock Incentive Plan                                                                                                                                                                     |   | Registration Statement  on Form S-8 filed with the Securities and Exchange Commission on  October 1, 2001, Registration Number 333-41904. (Exhibit 4.1)            |
| 10(p)* |   | International Rectifier Corporation 2000 Incentive  Plan (Amended and Restated as of September 28, 2000)                                                                                                                      |   | Proxy Statement on Schedule 14A filed with the  Securities and Exchange Commission on October 12, 2000. (Annex to Proxy  Statement)                                          |

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| 10(q)  |   | Credit Agreement, dated  as of November 7, 2003, among International Rectifier Corporation, the  initial lenders named therein, Wells Fargo Bank N.A., Union Bank of  California as co-syndication agents, Comerica Bank and Feet Bank as  co-documentation agents and BNP Paribas as sole arranger                                  |   | Form 10-Q—Quarterly  Report for the quarterly period ended September 30, 2003 filed with the  Securities and Exchange Commission on November 19, 2003.  (Exhibit 10.1) |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10(r)* |   | International Rectifier  Corporation 2000 Incentive Plan (Amended and Restated as of August 27,  2003)                                                                                                                                                                                                                               |   | Proxy Statement on  Schedule 14A filed with the Securities and Exchange Commission on  October 10, 2003. (Annex B)                                                                         |
| 10(s)* |   | International Rectifier  Corporation Restated 1984 Stock Participation Plan                                                                                                                                                                                                                                                               |   | Proxy Statement on  Schedule 14A filed with the Securities and Exchange Commission on  October 10, 2003. (Annex A)                                                                         |
| 10(t)* |   | Amendment to  International Rectifier Corporation Amended and Restated Stock Incentive Plan  of 1992 effective as of February 20, 2002                                                                                                                                                                                               |   | Form 10-Q—for the  quarterly period ended March 31, 2001, filed with the Securities and  Exchange Commission on May 16, 2001.                                               |
| 10(u)  |   | Amendment, dated as of  March 22, 2001, to ISDA Master Agreement dated as of July 1, 1999,  between International Rectifier and BNP Paribas                                                                                                                                                                                     |   | Form 10-Q—for the  quarterly period ended March 31, 2001, filed with the Securities and  Exchange Commission on May 16, 2001. (Exhibit 3)                              |
| 10(v)* |   | Executive Agreement date  June 28, 2001 between International Rectifier Corporation and Gerald  Koris                                                                                                                                                                                                                                |   | Form 10-K—Annual  Report for fiscal year ended June 30, 2002, filed with the Securities  and Exchange Commission on September 30, 2002. (Exhibit 10(ao))               |
| 10(w)* |   | Amended and restated  International Rectifier Corporation 2000 Stock Incentive Plan, effective as  of November 24, 2004.                                                                                                                                                                                                             |   | Form 8-K dated  November 24, 2004, filed with the Securities and Exchange Commission.                                                                                                      |
| 10(x)* |   | International Rectifier  Corporation Deferred Compensation Plan                                                                                                                                                                                                                                                                           |   | Form 10-Q—for the  quarterly period ended September 30, 2004, filed with the Securities and  Exchange Commission on November 12, 2004. (Exhibit 10.1)                       |
| 10(y)* |   | Master Trust Agreement,  effective as of November 11, 2004, between International Rectifier  Corporation, a Delaware corporation, and Wilmington Trust Company, a Delaware  corporation, as trustee, to evidence the master trust to be established  pursuant to the International Rectifier Corporation Deferred Compensation  Plan |   | Form 10-Q—for the  quarterly period ended September 30, 2004, filed with the Securities and  Exchange Commission on November 12, 2004. (Exhibit 10.2)                       |

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| 14 |   | Human Resources Policy—Code of Ethics |   | Form 10-Q—for the quarterly period ended  September 30, 2004, filed with the Securities and Exchange Commission on  November 12, 2004. (Exhibit 10.3) |
|----|--------|--------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*                    Denotesmanagement contract or compensation plan or arrangement.

**Submitted Herewith:**

See page 54 for an index of FinancialStatements and Financial Statement Schedule being filed as part of this report.
| 21   |   | List of Subsidiaries                                                                                                                                                |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 23   |   | Consent of Independent Registered Public Accounting  Firm                                                                                                           |
| 31.1 |   | Certification Pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 |   | Certification Pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 |   | Certification Pursuant to 18 U.S.C. 1350, Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                   |
| 32.2 |   | Certification Pursuant to 18 U.S.C. 1350, Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                   |

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|        |   | INTERNATIONAL  RECTIFIER CORPORATION                                                                                       |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|
|   |   | (Registrant)                                                                                                               |
|   | By:    | /s/  MICHAEL P. MCgEE                                                                                                      |
|   |   | Michael P. McGee                                                                                                           |
|   |   | *Executive  Vice President  Chief Financial Officer  (Duly authorized officer and principal  financial accouting officer)* |

 

Date: September 16, 2005

Each person whose signature appears below herebyauthorizes Michael P. McGee, as attorney-in-fact and agent, withfull powers of substitution, to sign on his behalf, individually and in thecapacities stated below, and to file any and all amendments to this Form 10-K,and other documents in connection therewith, with the Securities and ExchangeCommission, granting to said attorney-in-fact and agent full powerand authority to perform any other act on behalf of the undersigned required tobe done in the premises.

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.
|                       | **Signatures** | ** **                               | ** ** |                          | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|-----------------------|----------------|------------------------------------------|------------|--------------------------|-----------|------------|------------|--|----------|------------|
| /s/ ERIC LIDOW        |           | Chairman of the Board                    |       | September 16,  2005 |
| Eric Lidow            |           |                                     |       |                     |
| /s/ ALEXANDER  LIDOW  |           | Director, Chief  Executive Officer       |       | September 16,  2005 |
| Alexander Lidow       |           | (Principal Executive Officer)            |       |                     |
| /s/ JACK o. VANCE     |           | Director                                 |       | September 16,  2005 |
| Jack O. Vance         |           |                                     |       |                     |
| /s/ ROCHUS e.  VOGT   |           | Director                                 |       | September 16,  2005 |
| Rochus E. Vogt        |           |                                     |       |                     |
| /s/ JAMES D.  PLUMMER |           | Director                                 |       | September 16,  2005 |
| James D. Plummer      |           |                                     |       |                     |
| /s/ MINORU  MATSUDA   |           | Director                                 |       | September 16,  2005 |
| Minoru Matsuda        |           |                                     |       |                     |
| /s/ ROBERT  ATTIYEH   |           | Director                                 |       | September 16,  2005 |
| Robert Attiyeh        |           |                                     |       |                     |
| /s/ MICHAEL P.  MCGEE |           | Chief Financial Officer                  |       | September 16,  2005 |
| Michael P. McGee      |           | (Principal Financial Accounting Officer) |       |                     |

 

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**SCHEDULE II**

**INTERNATIONALRECTIFIER CORPORATION AND SUBSIDIARIESVALUATION AND QUALIFYING ACCOUNTS AND RESERVESFor the Fiscal Years Ended June 30, 2005, 2004 and 2003(In thousands)**
| ** **                                        | ** ** | ** **                                     | ** ** | **Additions**                                | ** ** | ** **                 | ** ** | ** **              | ** ** |
|---------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged to  Cost and  Expenses** | ** ** | **Charged to  Other** | ** ** | **Deductions (1)** | ** ** | **Balance at  End of  Period** | ** ** |
| **2005**                                          |       |                                           |       |                                         |       |                       |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred income  tax valuation allowance          |       |                                           | $          | 53,530                                       |       |                       |       | $                       | (2,025     | ) |   |   | $ | — |   |   |   | $ | (3,355 | ) |   |   | $ | 48,150 |   |   |
| Inventory  valuation reserve                      |       |                                           | 18,165     |                                         |       |                       | 7,001      |                    |       |   | — |   |   |   | (18,518 | ) |   |   | 6,648 |   |   |
| **2004**                                          |       |                                           |       |                                         |       |                       |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred income  tax valuation allowance          |       |                                           | 63,507     |                                         |       |                       | —     |                    |       |   | — |   |   |   | (9,977 | ) |   |   | 53,530 |   |   |
| Inventory  valuation reserve                      |       |                                           | 21,062     |                                         |       |                       | 9,837      |                    |       |   | — |   |   |   | (12,734 | ) |   |   | 18,165 |   |   |
| **2003**                                          |       |                                           |       |                                         |       |                       |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred income  tax valuation allowance (2) |       |                                           | 70,056     |                                         |       |                       | 6,986      |                    |       |   | — |   |   |   | (13,535 | ) |   |   | 63,507 |   |   |
| Inventory valuation  reserve                      |       |                                           | 24,871     |                                         |       |                       | 8,040      |                    |       |   | — |   |   |   | (11,849 | ) |   |   | 21,062 |   |   |
|                                                   |            |                                                |            |                                              |            |                            |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Deductions include thewrite-off of obsolete and scrap inventory, revaluation of federal, state andforeign valuation allowance, and the effect of SFAS No. 52, “ForeignCurrency Transactions”.

(2)          The ($13,535) Deductionsinclude a $26,593 reduction in valuation allowance on European SemiconductorManufacturing, Ltd.’s (“ESM”) deferred tax assets, which was established at theacquisition date in the fourth quarter of fiscal year 2002. In fiscal 2003, theCompany determined that expected manufacturing volumes and profits at ESM wouldrecover a portion these deferred tax assets. The reduction to valuationallowance was partially offset by $13,058 increases in valuation allowance ondeferred tax assets related to certain foreign subsidiaries’ capital allowancesand net operating loss carryforwards.

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