**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

**ANNUALREPORTPURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

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

**Forthe fiscal year ended June 30, 2006**

**or**

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

**Forthe transition period from __________ to ___________**

**Commissionfile number: 1-7935**

**INTERNATIONAL RECTIFIERCORPORATION**

(Exact name of registrantas specified in its charter)

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

 

**233 Kansas StreetEl Segundo, CA 90245**

(Address of principalexecutive offices) (Zip Code)

Registrant’s telephonenumber, including area code: **(310) 726-8000**

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                   |
| Preferred  Stock Purchase Rights |   | The  New York Stock Exchange                   |

 

Securities registeredpursuant to Section 12(g) of the Act: None

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes þ  No

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes    No þ

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ                AcceleratedFiler                   Non-AcceleratedFiler       

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act. Yes    No þ

The aggregate market valueof the registrant’s voting Common Stock, par value $1.00 per share, held by non-affiliatesas of the last business day of the registrant’s most recently completed secondfiscal quarter was $2,165,690,458 (computed using the closing price of a shareof Common Stock on December 30, 2005, reported by the New York StockExchange).

There were****72,081,546shares of the registrant’s Common Stock, par value $1.00 per share, outstandingon September 8, 2006.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the registrant’s definitive proxy statement for the annual meeting ofstockholders scheduled to be held on November  20, 2006, which proxystatement will be filed no later than 120 days after the close of theregistrant’s fiscal year ended June 30, 2006, are incorporated byreference in Part III of this Annual Report on Form 10-K.

 

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**TABLEOF CONTENTS**

| Item       | ** ** | ** **                                                                                                               | ** ** | **Page**   |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** ** | ** ** | **PART I**                                                                                                          | ** ** | ** ** | ** ** |
| 1.         |       | Business                                                                                                                 |       | 1          |   |
| 1A.        |       | Risk Factors                                                                                                             |       | 16         |   |
| 1B.        |       | Unresolved Staff Comments                                                                                                |       | 26         |   |
| 2.         |       | Properties                                                                                                               |       | 27         |   |
| 3.         |       | Legal Proceedings                                                                                                        |       | 28         |   |
| 4.         |       | Submission of Matters to a  Vote of Security Holders                                                                     |       | 29         |   |
|       |       | Additional Item. Executive  Officers of the Registrant                                                                   |       | 29         |   |
| ** ** | ** ** | **PART II**                                                                                                         | ** ** | ** ** | ** ** |
| 5.         |       | Market for Registrants’  Common Equity, Related Stockholder Matters and Issuer Purchases of  Equity Securities |       | 31         |   |
| 6.         |       | Selected Financial Data                                                                                                  |       | 32         |   |
| 7.         |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                              |       | 35         |   |
| 7A.        |       | Quantitative and Qualitative  Disclosures About Market Risk                                                              |       | 55         |   |
| 8.         |       | Financial Statements and  Supplementary Data                                                                             |       | 58         |   |
| 9.         |       | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure                                    |       | 95         |   |
| 9A.        |       | Controls and Procedures                                                                                                  |       | 95         |   |
| 9B.        |       | Other Information                                                                                                        |       | 96         |   |
| ** ** | ** ** | **PART III**                                                                                                        | ** ** | ** ** | ** ** |
| 10.        |       | Directors and Executive  Officers of the Registrant                                                                      |       | 97         |   |
| 11.        |       | Executive Compensation                                                                                                   |       | 97         |   |
| 12.        |       | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters                          |       | 97         |   |
| 13.        |       | Certain Relationships  and Related Transactions                                                                          |       | 97         |   |
| 14.        |       | Principal Accountant  Fees and Services                                                                                  |       | 97         |   |
| ** ** | ** ** | **PART IV**                                                                                                         | ** ** | ** ** | ** ** |
| 15.        |       | Exhibits and Financial  Statement Schedule                                                                               |       | 97         |   |

 

  

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*This Annual Report on Form 10-K “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. These statements relate to expectations concerning matters that (a) arenot historical facts, (b) predict or forecast future events or results, or(c) embody assumptions that may prove to have been inaccurate. Theseforward-looking statements involve risks, uncertainties and assumptions. Whenthe Company uses words such as “believes,” “expects,” “anticipates” or similarexpressions, the Company is making forward-looking statements. Although theCompany believes that the expectations reflected in such forward-lookingstatements are reasonable, the Company cannot give readers any assurance thatsuch expectations will prove correct. The actual results may differ materiallyfrom those anticipated in the forward-looking statements as a result ofnumerous factors, many of which are beyond the company’s control. Importantfactors that could cause actual results to differ materially from the Company’sexpectations include, but are not limited to, the factors discussed in thesections entitled “Risk Factors” and “Critical Accounting Policies andEstimates” within “Management’s Discussion and Analysis of Financial Conditionand Results of Operations.” All forward-looking statements attributable to theCompany are expressly qualified in their entirety by the factors that may causeactual results to differ materially from anticipated results. Readers arecautioned not to place undue reliance on these forward-looking statements,which reflect management’s opinion only as of the date hereof. The Companyundertakes no duty or obligation to revise or publicly release the results ofany revision to these forward-looking statements. Readers should carefullyreview the risk factors described in this document as well as in otherdocuments the Company files from time to time with the Securities andExchange Commission.*

**PART I**

**Item 1. Business**

**Introduction**

We are a designer, manufacturer and marketer of powermanagement product devices which use power semiconductors. Power semiconductorsaddress core challenges of power management, power performance and powerconservation by increasing system efficiency, allowing more compactend-products, improving features and functionality, increasing fuel efficiency,and extending battery life. Our products are used in a variety of endapplications, including computers, communications networking, consumerelectronics, energy-efficient appliances, lighting, satellites, launchvehicles, aircraft and automotive diesel injection. In addition, we license ourintellectual property to third parties.

Our strategy involves focusing on the power managementrequirements of an application and developing value-added products to advancethe power management performance of that application. Our products consist ofPower Management Integrated Circuits, or Power Management ICs, Power Componentsand Power Systems.

Our Power Management ICs provide application-specificpower management solutions for computers, servers, routers, consumerelectronics, motor-control applications including energy-efficient appliances,aircraft, satellites, defense electronic systems, wireless and wirelinecommunication devices, and certain automotive applications. Our PowerComponents are used in virtually all of our end-markets, includingcomputers, communications networking, consumer electronics, energy-efficientappliances, lighting, satellites, launch vehicles, aircraft and automotivediesel injection. We supply Power Systems as modules for automotive electronics(including electric fan control, electric power steering and integratedstarter/alternator motors), other motor control applications (including industrialrefrigeration and air conditioning), and commercial and military aircraft.

We report in six segments that generally reflect ourproducts’ end-markets. We further summarize our segments in two groups, ourFocus Products and Non-Focus Products, to reflect our strategic goals and theallocation of our critical resources.

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OurFocus Product segments are:

·       Computingand Communications (“C&C”)—The Computing and Communication segment iscomprised of our Power Management ICs, including iPowirTM multi-chip modules andDirectFETTM solutions, and Power Components, primarily HEXFET Power Components,that address servers and high-end desktops, notebooks, communicationsnetworking, and digitally-oriented consumer products like game consoles. TheC&C segment products are also used in digital television, liquid crystaldisplays (“LCDs”), portable handheld devices and cellular phones, and areprimarily used for DC-DC converter type applications.

·       Energy-SavingProducts (“ESP”)—The Energy-Saving Product segment is comprised of our PowerManagement ICs and Power Components, primarily HEXFET and IGBT PowerComponents, for variable speed motion control in energy-saving appliances (suchas washing machines, refrigerators and air conditioners), industrial systems(such as fans, pumps and compressors), advanced lighting products (includingfluorescent lamps, high intensity discharge (“HID”) lamps, cold cathodefluorescent (“CCFL”) tubes and light emitting diodes (“LED”) lighting),advanced automotive solutions (primarily diesel injection, electric-gasolinehybrid and electric power steering systems), and consumer applications (for example,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 ongoing and one-timeroyalty income from licensing and activities related to the enforcement of ourpatents and other intellectual property, which may include claim settlementsfrom successful defense of our licenses.

OurNon-Focus Product segments are:

·       CommodityProducts (“CP”)—The Commodity Product segment is comprised primarily of older-generationPower Components that have widespread use through the power management industry,but are typically commodity in nature and sold with margins generally below ourstrategic targets.

·       Non-AlignedProducts (“NAP”)—The Non-Aligned Product segment includes businesses, productlines or products that we are targeting for realignment, whether by divestitureor otherwise. Currently, product lines reported in this segment include certainmodules (including our automotive system products), rectifiers, diodes andthyristors used in the automotive, industrial, welding and motor controlapplications.

Our Chief OperatingDecision Maker (“CODM”) for financial accounting purposes is our ChiefExecutive Officer who reviews the revenues and gross margin results for each ofthese segments in making decisions about allocating resources, including thefocus of research and development activities, and assessing performance. We donot allocate assets, sales and marketing, information systems, finance andadministrative costs to the operating segments, as these are not meaningfulstatistics to the CODM in making resource allocation decisions or in evaluatingperformance of the operating segments.

We market our productsthrough direct sales staff, representatives and distributors. Our customers include original equipmentmanufacturers (“OEMs”), distributors and subcontract manufacturers. Forcustomers in our Focus Product segments, we primarily use direct sales staffand representatives, including field application engineers and technical salessupport staff who can better address our customers’ requirements. For customersin the Non-Focus Product segments, we primarily sell through distributors. 

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No single OEM customer, distributor or subcontractmanufacturer accounted for more than ten percent of our consolidated revenuefor the fiscal year ended June 30, 2006.

We achieved consolidatedrevenues of $1.17 billion for the fiscal year ended June 30, 2006. Revenues from our Focus Product segmentsincreased to 76.1 percent of our consolidated revenues for the fiscal yearended June 30, 2006, from 73.0 percent for the prior fiscal year ended June 30,2005. Gross profit margin for our Focus Product segments was 47.6 percent forthe fiscal year ended June 30, 2006 and 50.6 percent for the prior fiscalyear ended June 30, 2005. In our Non-Focus Product segments, revenuesdecreased to 23.9 percent of our consolidated revenues for the fiscal yearended June 30, 2006, from 27.0 percent in the prior fiscal year ended. Grossprofit margin for Non-Focus Product segments was 15.9 percent for the fiscalyear ended June 30, 2006 and 24.1 percent for the prior fiscal year ended June 30,2005.

Our research anddevelopment program focuses on Power Management ICs and the advancement anddiversification of our HEXFET, power FET and IGBT product lines. We have been developing and introducing some ofthe most advanced power management products and new architectures for the next-generationof applications, including new game stations, digital televisions,high-performance servers, hybrid vehicles and energy-efficient appliances. Wecontinue to commit to research and development to generate new patents andother intellectual property and concentrate on incorporating our technologiesinto our Focus Products. In the fiscal yearsended June 30, 2006, 2005 and 2004, we spent $111.4 million (9.5 percentof revenue), $104.9 million (8.9 percent of revenue) and $92.2 million (8.7percent of revenue), 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 provide uswith capacity flexibility. During fiscal year 2006, we ramped up our 8-inch..25 micron-capable wafer manufacturing facility in Newport, Wales (UnitedKingdom), to support our most advanced analog and mixed-signal ICs and trenchMOSFETs. In calendar year 2006, we expect we will have added incrementalproduction capacity of $200 million to $300 million in annual revenue from thisfacility. We plan to use this fabrication capacity almost exclusively for ourFocus Products.

*Potential Divestiture.**  *We regularlyreview our products and technology portfolio to determine whether they arealigned with our long-term strategic objectives. We are actively considering asale of our entire, or a significant portion of our, Non-Focus Product business(with fiscal year 2006 revenues of approximately $280 million), andcertain complementary products of our Focus Product segments (with fiscal year2006 revenues of approximately $22 million) (the “Divestiture”). AtJune 30, 2006, our Board of Directors had not yet committed to adefinitive plan to sell, but we had prepared a variety of strategic options forconsideration. Any ultimate sale transaction will also require our Board ofDirectors’ approval, and is currently contemplated to include operations at ourMumbai, India; Borgaro, Italy; Xian, China; Krefeld, Germany; Swansea, Wales;and Halifax, Canada sites. The Divestiture will also include certain wafermanufacturing, product assembly and research and development equipmentcurrently located at our Temecula, California; Tijuana, Mexico; and El Segundo,California locations.

If the Divestiture iscompleted, we plan to continue our strategy of growing our Focus Productsbusiness and achieving greater profitability. We do not believe that thecompletion of the Divestiture will substantially alter the customer base thatwe serve or the competition that we face currently. For a few quartersfollowing a successful completion of the Divestiture, we plan to realign oursales, distribution and product development functions to a business basedsolely on our Focus Products. We also plan to configure our manufacturing andsupport infrastructure to address the initially lower revenue levels followingthe Divestiture.

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As part of the Divestiturewe anticipate that we will provide certain manufacturing, sales, marketing andadministrative support services to the buyer. We do not yet know the length oftime or level of all of the support services that may be required. Because thenature, timing, costs and reimbursements related to these services and othereffects of the Divestiture are not finalized, we cannot determine their impacton our financial performance or position.

*Restructuring Update.**  *In the secondquarter of fiscal 2003, we announced certain restructuring initiatives. Ourgoal was to better position ourselves for market conditions and de-emphasizeour commodity business. The restructuring plan included consolidating andclosing several older facilities and legacy operations. We also planned tolower overhead costs across our support organizations. As of June 30,2006, we have substantially completed our restructuring activities at a totalcost of $277.3 million through that date and have realized annualized savingsof approximately $80 million. We expect to complete the restructuring by theend of calendar year 2006 and anticipate $1 million to $2 million in remainingcharges.

**Industry Overview**

Power semiconductorsconvert power from an electrical outlet, a battery or an alternator running offan internal combustion engine into more efficient and useful power for a widerange of electrical and electronic systems and equipment. The moresophisticated the end product, the greater the need for specially-formatted,finely-regulated power. The importance of power semiconductor technologyrises with the increasing complexity of electronic products and theproliferation of electronic features in information technology, industrial,consumer, aerospace and defense and automotive products. According to iSuppli,a market research firm, the market for power management semiconductors incalendar year 2006 will be approximately $24 billion. Our products addressapproximately $17 billion, or more than approximately 72 percent, of thismarket in calendar year 2006.

Historically,demand for power semiconductors has been cyclical. Current demand is drivenlargely by the following:

·       *Information Technology (“IT”) Demand for Increased Speed andFunctionality.  *Product development roadmaps for the ITindustry call for continued increases in speed and functionality, andever-shrinking form factors driving power density in computers, servers,consumer electronics and a variety of leading-edge electronic devices andequipment. The need for greater power drives up current levels of processingand operating frequencies, and each new generation of IT relies more heavilyon, and places a higher value on, efficient, precise power management. Thedevelopment of WiMAX and the expected transition to more wideband technologiesis requiring significant enhancements in power management technology. As theworlds of computing, communications and consumer electronics converge, powerfuldevices and applications will emerge that will place increased data managementrequirements on servers, storage systems, routers and datacom equipment. Thesechanges will demand higher power performance levels.

·       *Consumer and Industrial Demand for Energy-Efficiency.  *Worldwidedemand for energy-efficient appliances, industrial motors, efficient lightingand consumer products, like home entertainment displays and audio equipment,continues 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 

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powertrain, areused to augment or replace traditional, less efficient systems. The need tomeet increased fuel efficiency is prompting a fundamental re-design ofautomotive electrical systems, which is shaped in part by advancements in powermanagement technology.

·       *Aerospace and Defense Demand for Advanced Power Management Technology.  *Inthe aerospace and defense industries, power management technology is criticalto meeting the rigorous space, weight and reliability requirements ofhighly-demanding applications and harsh environments. A renewed commitmentto national defense drives some of the demand in this segment through growth indefense applications. In addition, aircraft designs are converting fromhydraulic control systems to electronic control systems, which use a highercontent of power management products, and aerospace systems designers areconstantly striving for higher efficiency power conversion solutions.

**Strategy**

Our strategy involvesfocusing on the power management requirements of an application and developingvalue-added products, such as high performance Power Management ICs, to advancethe power management performance of that application. Our products address corechallenges of power management, power performance and power conservation, byincreasing system efficiency, allowing more compact end-products, improving featuresand functionality, increasing fuel efficiency, and extending battery life. Weimplement our strategy through the following initiatives:

·       *Adding Value inHigh Growth Markets.*   We concentrate ourpower management efforts on high growth markets where our products can addsignificant value. We believe this focus helps us develop the most advancedpower management products and solutions like next-generation game stations,servers, digital televisions and energy-efficient appliances. We are alsotargeting a wide range of applications that have not historically utilizedpower management technologies with our Power Management ICs and PowerComponents, including washing machines, refrigerators, air conditioners andother appliances from such market leaders as Electrolux, LG, Samsung, Sanyo andWhirlpool.

·       *Leveraging OurAdvanced Technology.*   Our advancedtechnology enables us to set performance and architecture standards for powerelectronics in targeted applications. Our research and development programfocuses on Power Management ICs and the advancement and diversification of ourHEXFET, power FET and IGBT product lines. Wehave been developing and introducing some of the most advanced power managementproducts and new architectures for the next-generation of applications,including the new game stations, digital televisions, high-performanceservices, hybrid vehicles and energy-efficient appliances. We continueto commit to research and development to generate new patents and otherintellectual property and concentrate on incorporating our technologies intoour Focus Products. During the three yearsended June 30, 2006, we spent $308.5 million on research anddevelopment. We have a growing portfolio of approximately 450 U.S. patents andapproximately 1,000 patent applications (including U.S. and foreignapplications and applications filed under treaty) pending worldwide (see “IntellectualProperty” below).

We also generaterevenues from licensing and activities related to the enforcement of ourpatents and other intellectual property. We report ongoing and one-timeroyalties from these activities under our IP segment. In the fiscal years ended June 30, 2006, 2005 and 2004, licensesunder our patents generated royalty income of $40.9 million, $41.2 million and$41.9 million, respectively. However, the IP segment revenue has beenand is largely dependent on the continued enforceability and validity of ourlicensed MOSFET patents, which will expire between 2006 and 2010, with thebroadest remaining in effect until calendar years 2007 and 2008. Our IP segmentrevenue is also dependent on the ability of our competitors to design aroundour licensed MOSFET 

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technology or todevelop competing technologies and general market conditions. The continuationof such royalties is subject to a number of risks (see Item 1A, “RiskFactors—Our ongoing protection and reliance on our intellectual property assetsexpose us to material risks”).

Aside from our MOSFET technologies, our intellectualproperty strategy has been to use our intellectual property primarily for thedesign and development of a value-added family of products. In our IP segment,we concentrate our efforts on the licensing of technologies or fields of usethat have application beyond our product groups or which no longer align withour long-term business strategies for our product groups. We also targetcertain technologies for licensing that we believe help establish our productplatforms and structures as industry standards and thereby, enhance the growthof certain products.

·       *ExtendingLeadership in Advanced Power Components.*   We pioneered afundamental technology for power MOSFETs and estimate that the majority of theworld’s planar power MOSFETs are produced by us or use our patented technology.As our broadest MOSFET patents will expire in 2007 and 2008, we have investedaggressively to advance trench, planar and other process technologies. Ourleadership position in Power Components provides us with a platform forcontinued expansion in value-added growth markets.

·       *Capitalizing onRelationships with Market Leaders.*   Many industryleaders look to us for products and programs that address their mostchallenging power management needs. These relationships put us at the forefrontof developing products for new trends in the marketplace. Our strategy ofdriving significant content adoption with these customers into applicationspecific areas requires a large, well trained technical sales team. We intendto increase the number of our technical product sales professionals and fieldapplication engineers worldwide, to offer technological design expertise andhigh quality customer service.

·       *Focusing onManufacturing Efficiency.*   We fabricate mostof our chips in facilities designed to address the specific requirements ofpower semiconductors. We have wafer fabrication and/or assembly productionfacilities in California, Massachusetts, Mexico, the United Kingdom, Italy,India and China. We also use third-party foundries and assemblers that provideus with capacity flexibility. We have beenramping up our 8-inch .25 micron-capable wafer manufacturing facility inNewport, Wales (United Kingdom), to support our most advanced analog andmixed-signal ICs and trench MOSFETs.

*Potential Divestiture.**  *We regularlyreview our products and technology portfolio to determine whether they arealigned with our long-term strategic objectives. We are actively considering asale of our entire, or a significant portion of our, Non-Focus Product business(with fiscal year 2006 revenues of approximately $280 million), andcertain complementary products of our Focus Product segments (with fiscal year2006 revenues of approximately $22 million) (the “Divestiture”). AtJune 30, 2006, our Board of Directors had not yet committed to adefinitive plan to sell, but we had prepared a variety of strategic options forconsideration. Any ultimate sale transaction will also require our Board ofDirectors’ approval, and is currently contemplated to include operations at ourMumbai, India; Borgaro, Italy; Xian, China; Krefeld, Germany; Swansea, Wales;and Halifax, Canada sites. The Divestiture will also include certain wafermanufacturing, product assembly and research and development equipmentcurrently located at our Temecula, California; Tijuana, Mexico; and El Segundo,California locations.

If the Divestiture iscompleted, we plan to continue our strategy of growing our Focus Productsbusiness and achieving greater profitability. We do not believe that thecompletion of the Divestiture will substantially alter the customer base thatwe serve or the competition that we face currently. For a few quartersfollowing a successful completion of the Divestiture, we plan to realign oursales, distribution and product development functions to a business basedsolely on our Focus Products. We also plan to 

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configureour manufacturing and support infrastructure to address the initially lowerrevenue levels following the Divestiture.

As part of the Divestiturewe anticipate that we will provide certain manufacturing, sales, marketing andadministrative support services to the buyer. We do not yet know the length oftime or level of all of the support services that may be required. Because thenature, timing, costs and reimbursements related to these services and other affectsof the Divestiture are not finalized, we cannot determine their impact on ourfinancial performance or position.

**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. We use our technology,comprehensive experience in power management, and low-cost manufacturingplatforms to offer what we believe is one of the industry’s most advanced andcompetitive lines of power management products.

***Power ManagementIntegrated Circuits***

Power ManagementIntegrated Circuits, or Power Management ICs, are analog, mixed signal, anddigital semiconductors that integrate logic and/or power management functionson the same chip to optimize system performance. Our Power Management ICs aresemiconductors that often integrate several system functions includingreference, logic, control, supervision, protection and monitoring on the samechip. These devices optimize the performance of circuits that often includepower MOSFETs and IGBTs and allow our customers to simplify circuit design andassembly, improve reliability, and reduce overall system size and cost. Theability of these ICs to sense and respond to circuit conditions makes theirperformance superior to discrete components. Our ICs often use our proprietarypower MOSFET technology. We have obtained substantial patent protection for ourICs and have additional patent applications pending.

Increased complexity incomputers, routers, servers, and other devices require increased levels ofpower and more effective heat dissipation, making power management one of themost critical tasks. IT applications are trending to lower voltages andhigher current levels, which require greater efficiency and more complex powermanagement to meet speed and performance demands. Advanced consumer electronicssuch as PDP televisions and game consoles also require more efficient andcomplex power management.

Motors consumeapproximately half of the world’s electricity. New variable-speed motorsequipped with our Power Management ICs increase energy efficiency andperformance in a wide range of household, commercial and industrialapplications. For example, while most refrigerator motors can operate only atfull speed, a refrigerator equipped with variable-speed motor can run atthe exact speed needed to more efficiently maintain the required temperature.Our Power Management ICs designed for variable-speed motors reduceelectricity consumption, simplify product design, improve product performanceand reduce overall costs. We have achieved multiple sole-source design winsfrom leading worldwide manufacturers in high-end washing machines,refrigerators and other energy-saving appliances.

We continue to investaggressively in our Power Management IC technologies and key trench, planar andother process technologies. These investments have resulted in what we believeare the most efficient Power Management ICs. Among other attributes, we believethese product offerings set the industry standard for performance and cost-efficiencyin high-volume consumer electronics applications.

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***Power Components***

*Switching Products.**  *Power MOSFETs and IGBTs rapidly and efficientlyswitch electricity on and off in order to supply power in a form that can beformatted to the specific requirements of a circuit. Through our HEXFET product line, we are the market leader inpower MOSFETs according to iSuppli market research firm. Our emphasis onquality control and reliability has helped us maintain market acceptance andbrand recognition of our HEXFET lineof products. We pioneered the fundamental planar technology that set theindustry standard for power MOSFETs.

MOSFETs are critical in awide variety of electric products. Communications applications include cellularphones, telephone networks and modems. Computer and peripheral applicationsinclude power supplies, disk drives and printers. Office equipment applicationsinclude copiers and facsimile machines. Consumer electronics applicationsinclude home entertainment*,* videocameras, household appliances and power tools. Automobile applications includeanti-lock braking systems, fuel injection systems, power accessories andair bags. Industrial applications include automated production equipment,instrumentation and test equipment. Aerospace and defense applications includecommunications satellites and satellite command-and-controlsystems.

IGBTs typically performthe switch function in industrial applications that require higher current andvoltage than power MOSFETs can handle efficiently. The performance andruggedness of these devices enable them to replace bipolar transistors andthyristors in many high-voltage, high-current motor control andpower conditioning applications. Energy-efficient, variable-speedmotor controls are an emerging application, and we believe hybrid and electricvehicles may require large quantities of IGBTs. Our IGBT technology is closelyrelated to our power MOSFET technology. We believe our patents on fundamentalpower MOSFET technology also apply to IGBTs.

*Regulators, Rectifiers,Diodes, Thyristors and Interfaces.**  *Wemanufacture a broad line of regulators, rectifiers, diodes, thyristors andinterfaces. These products, which also condition electrical power to make itmore efficient and usable, are used in industrial end products that requirepower-handling capability from one amp to 5,000 amps and from 20 volts to 5,000volts. Applications include motor and lighting controls, welding equipment,forklifts, machine tools, induction heating, locomotives, motor-drivenproduction lines, 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 diodes are used with IGBTsin higher-current, lower-frequency applications such as motorcontrols.

***Power Systems***

Power Systems combinepower semiconductors with other power management components in specializedmodules that improve power efficiency and simplify circuit design. Our PowerSystems are used in DC-DC converters, automotive electronics and motor control.Our products provide a cost-effective alternative to custom analogdesigns.

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 systems improve reliability and maintenance. Our Power Systems aredesigned into integrated starter/alternator motors, electric power steeringsystems, fuel pumps, water pumps and fan controls.

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**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 wafer fabrication and/or assembly facilitiesin California, Massachusetts, Mexico, the United Kingdom, Italy, India andChina. In addition, we have equipment at or manufacturing supply agreementswith, subcontractors located in China, the Czech Republic, Germany, Korea,Malaysia, Philippines, Taiwan, Thailand and the United States.

Our Newport, Wales facility provides wafer fabricationcapacity for our most advanced mixed-signal, analog and MOSFET processes. Wehave a wafer fabrication facility in Temecula, California used primarily forMOSFET-related processes. We have a high-voltage Power Management IC waferfabrication facility in El Segundo, California. Assembly operations forproducts used in the aerospace and defense applications, which includeshigh-reliability Power Components, are located in Leominster, Massachusetts;Santa Clara, California; and Tijuana, Mexico. We manufacture substantially allof our Schottky diodes, high-power rectifiers and thyristors at our Torino,Italy facility. Plants that assemble power MOSFETs and other products arelocated overseas in facilities we own or in subcontracted facilities. Ourhigh-volume assembly lines for power MOSFETs, IGBTs and diodes are located inour facility in Tijuana, Mexico. We use production facilities in Swansea, Walesto manufacture and assemble automotive modules. As part of our restructuringactivities, as of June 30, 2006, we have moved all of the manufacturingactivities from Krefeld, Germany to our Swansea, Wales and Tijuana, Mexicofacilities. In a duty-free zone in India, we have an assembly facility forrectifiers and thyristors. The Mesa, Arizona facility we acquired at thebeginning of fiscal year 2005 provides specialty silicon epitaxial services both in-house and to thirdparties. For our manufacturing facilities by reportable segment, refer to “Item2. Properties” below.

During the fiscal year ended June 30, 2006, weoperated at over 90 percent of our worldwide in-house wafer fabrication andassembly manufacturing capacities, without considering subcontract or foundrycapacity. During the fiscal year 2006, our revenues were negatively affected bywafer fabrication constraints for certain fast growing Focus Products. In orderto meet the high demand for our Focus Products, we accelerated our capitalexpansion plans and added capacity to our wafer fabrication manufacturingfacility in Newport, Wales. In calendar year 2006, we expect we will have addedincremental production capacity of $200 million to $300 million in annualrevenue from this facility, although we cannot assure you that capacityconstraints will not affect revenue growth in the future. We plan to use thisfabrication capacity almost exclusively for our Focus Products. For the fiscalyear ended June 30, 2006, our capital expenditures were $158.5 million, up17 percent over the prior fiscal year ended June 30, 2005.

We have substantially completed our restructuringactivities previously announced in December 2002, to de-emphasize ourcommodity business (see “Item 7, Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”). As part of this strategy, wehave consolidated and closed certain manufacturing sites, upgraded equipmentand processes in designated facilities and discontinued production in a numberof others that cannot support more advance technology platforms or productswithin our Focus Product segments.

We are activelyconsidering a sale of our entire, or a significant portion of our, Non-FocusProduct business (with fiscal year 2006 revenues of $280 million), and certaincomplementary products of our Focus Product segments (with fiscal year 2006revenues of approximately $22 million) (the “Divestiture”). At 

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June 30, 2006,our Board of Directors had not yet committed to a definitive plan to sell, butwe had prepared a variety of strategic options for consideration. Any ultimatesale transaction will also require our Board of Directors’ approval, and iscurrently contemplated to include operations at our Mumbai, India; Borgaro,Italy; Xian, China; Krefeld, Germany; Swansea, Wales; and Halifax, Canadasites. The Divestiture will also include certain wafer manufacturing, productassembly and research and development equipment currently located at ourTemecula, California, Tijuana, Mexico and El Segundo, California locationsrelated to our Non-Focus Products. If the contemplated Divestiture is completedwe will continue to retain the manufacturing facilities primarily used for ourFocus Products.

**Marketing, Salesand 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, includingfield application engineers and technical sales support staff who may be betterable to serve the customers’ needs. For customers in the Non-Focus Productsegments, we primarily sell through distributors.

For the fiscal year ended June 30, 2006, ourproduct sales by region, based on the location of the customer, were 26 percentfrom North America, 23 percent from Europe and 51 percent****from Asia, which includes Japan and AsiaPacific, compared to 29 percent, 23 percent and 48 percent for North America,Europe and Asia, respectively, for the prior fiscal year ended June 30,2005. Our domestic direct sales force is organized into five regional saleszones. In Europe, our products are sold through our own sales force as well asthrough independent sales agents and distributors. Our European sales andrepresentative offices are in Austria, Denmark, Finland, France, Germany,Italy, Sweden, Switzerland, Russia and the United Kingdom. In Asia, we havesales representative 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, Risk Factors—Ourinternational operations expose 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 application engineers provide customers withtechnical 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, 2006. 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, twodistributors, individually accounting for more than ten percent of C&C’srevenue, accounted for approximately 25 percent of the segment’s revenue forthe fiscal year ended June 30, 2006. One of the distributors accounted forapproximately 15 percent of our CP revenue for the fiscal year ended June 30,2006. One of the OEM customers included at the table below accounted forapproximately 24 percent of our NAP revenue for the fiscal year ended June 30,2006. No single OEM customer, distributor or subcontract manufacturer accountedfor more than ten percent of the revenues in our other segments.

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Thefollowing table lists some of our major customers by revenues, by businesssegment and end-market for fiscal year 2006:

| 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, Denso, Nagares, Siemens VDO, Temic, TRW, Valeo and Visteon               |
| A&D              |       | Aerospace and  Defense                  |       | Astrium, BAE, Boeing, Honeywell, ITT, L3 Communications,  Lockheed-Martin, Loral and Northrop-Grumman |

 

| **Business Segment(s)*** | ** ** | **Distributors and Subcontract  Manufacturers (based on revenues for fiscal year 2006):** |
|--------------------------|------------|-------------------------------------------------------------------------------------------|
| C&C, ESP, CP, NAP    |       | Distributors                                                                              |   | Arrow Electronics, Avnet, C&H, 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         |

 

We do not believe that thecompletion of the contemplated Divestiture will substantially alter thecustomer base that we serve currently in the Focus Product segments remainingfollowing the Divestiture.

**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 include Intersil, Linear Technology, Maxim IntegratedProducts, Semtech and Texas Instruments. Our major competitors in PowerComponents include Fairchild Semiconductor, Infineon Technologies, Mitsubishi,ON Semiconductor, Philips, Renesas, STMicroelectronics, Toshiba and Vishay.Aside from typical industry competitors, our Power Systems products often offerour customers an improved alternative to their internal manufacturing systemsinternally.

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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, and Volterra |
| Energy-Saving Products       |       | Fairchild, Infineon  Technologies, Intersil, Mitsubishi, National Semiconductor, Philips, Renesas,  STMicroelectronics, Shindengen, Texas Instruments, Toshiba and Vishay |
| 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                                                    |
| Non-Aligned Products         |       | Mitsubishi, STMicroelectronics and Toshiba                                                                                                                                |

 

We do not believe that thecompletion of the contemplated Divestiture will substantially alter thecompetition that we face currently in the Focus Product segments remainingfollowing the Divestiture.

**Backlog**

As of June 30, 2006, our backlog of orders was$566.0 million compared to $393.7 million as of June 30, 2005. Theincrease in our backlog is primarily in our C&C and ESP segments,reflecting major new programs in game stations, servers, digital televisions,and energy-efficient appliances. Backlog is comprised of purchase orders andcustomer forecast commitments scheduled to be shipped within the followingtwelve months. Given adequate notice, we usually allow customers to cancelpurchase orders without penalty. The amount of unfilled orders at a particulartime is affected by numerous factors, including the timing of the receipt oforders, changes in product mix, our ability to schedule the manufacturing orshipping of products and the availability of subcontract manufacturing. Theamount of backlog to be shipped during any period is dependent on variousfactors and can vary significantly from month to month. Accordingly, backlog isnot necessarily indicative of sales for any future period.

Backlogby business segment as of fiscal years ended June 30, 2006 and 2005 is asfollows (in thousands):

| ** **                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Computing and  Communications |       | $        | 274,917    |     | $          | 124,867 |   |
| Energy-Saving  Products       |       | 127,311  |       | 115,905  |       |
| Aerospace and  Defense        |       | 50,949   |       | 51,106   |       |
| Focus Products Backlog        |       | 453,177  |       | 291,878  |       |
| Commodity Products            |       | 72,593   |       | 58,289   |       |
| Non-Aligned  Products         |       | 40,193   |       | 43,486   |       |
| Non-Focus Products Backlog    |       | 112,786  |       | 101,775  |       |
| Total Backlog                 |       | $        | 565,963    |     | $          | 393,653 |   |

 

**Research andDevelopment**

Our research and development program focuses on PowerManagement ICs and the advancement and diversification of our HEXFET, power FETand IGBT product lines. We have beendeveloping and introducing some of the most advanced power management productsand new architectures for the next-

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generationof applications, including new game stations, servers, digital televisions, andenergy-efficient appliances. We continue to commit to research anddevelopment to generate new patents and other intellectual property andconcentrate on incorporating our technologies into our Focus Products. In the fiscal years ended June 30, 2006, 2005and 2004, we spent $111.4 million (9.5 percent of revenue), $104.9 million(8.9 percent of revenue), and $92.2 million (8.7 percent of revenue),respectively, on research and development activities.

Our design centers arelocated throughout the world, including the United States, Canada, the United Kingdom,Denmark, Italy, France, Germany and Singapore. During fiscal year 2006, wecontinued to introduce advanced power management solutions that drive highperformance computing and save energy across our served markets. These productsalso highlighted the company’s focus on delivering integrated solutions andextensive applications support. Among them were a) tailored iMOTIONTM integrateddesign platforms for washers and air conditioners, b) ICs and chipsetsimproving power density and efficiency in DC-DC applications found in highperformance computers and servers, c) the continued expansion of IR’s popularXPhase® and DirectFET® product families, d) ICs for Class Daudio and electronic lighting ballasts, e) several “application-ready”reference designs for point-of-load DC/DC conversion, 48V isolated DC-DCconversion, multi-channel Class D audio, and power factor correction, f)IR’s SmartRectifierTM IC helping computer and consumer entertainment devicesmeet emerging system and standby power regulations, and g) newradiation-hardened DC-DC converters and ultra-low dropout (ULDO) voltageregulators for military and aerospace applications. If the contemplatedDivestiture is completed, it is anticipated that the Canada and Germany designcenters that relate to our Non-Focus Products will be divested as part of thesale.

**IntellectualProperty**

We continue to make significant investments indeveloping and protecting our intellectual property. In the past fiscal year,we added over 110 patents worldwide. We have approximately 450 issued unexpiredU.S. patents and approximately 1,000 patent applications pending worldwide(including U.S. applications, foreign applications and applications filed undertreaty). Our power MOSFET patents expire between 2005 and 2010, with thebroadest remaining in effect until 2007 and 2008. We are also licensed to usecertain patents owned by others. We have several registered trademarks in theUnited States and abroad, including the trademark HEXFET® and DirectFET®.We believe that our intellectual property contributes to our competitiveadvantage.

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. We currently have license agreements with the majority ofpower MOSFET manufacturers in the United States and abroad.

We report ongoing and one-time royalties from thelicensing and activities related to the enforcement of our patents and otherintellectual property under the IP segment. In the fiscal years ended June 30,2006, 2005 and 2004, we derived $40.9 million, $41.2 million and $41.9 millionof royalty revenues from license agreements, respectively. However, the IPsegment revenue is dependent on the continued enforceability and validity ofour patents, the ability of our competitors to design around our MOSFETtechnology or develop competing technologies, and general market conditions.The continuation of such royalties is subject to a number of risks (see “Item1A, Risk Factors—Our ongoing protection and reliance on our intellectualproperty 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 

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defendthose products in the marketplace. In our IP segment, we concentrate ourefforts on the licensing of technologies or fields of use that have applicationbeyond our product groups or which no longer align with our long-term businessstrategies for our product groups. We also target certain technologies forlicensing that we believe help establish our product platforms and structuresas industry standards and thereby, enhance the growth of certain products.

**EnvironmentalMatters**

Federal, state, local and foreign laws and regulationsimpose various restrictions and controls on the storage, use and discharge ofcertain materials, chemicals and gases used in semiconductor manufacturingprocesses, and on the operation of our facilities and equipment. We believe weuse reasonable efforts to maintain a system of compliance and controls forthese laws and regulations. Despite our efforts and controls, from time to time,issues may arise with respect to these matters. However, we do not believe thatgeneral compliance with such laws and regulations as now in effect will have amaterial adverse effect on our results of operations, financial position orcash flows.

Additionally, under some of these laws andregulations, we 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, we may be subject to common lawclaims if it releases substances that damage or harm third parties. We cannotmake assurances that changes in environmental laws and regulations will notrequire additional 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”),a former operating subsidiary of ours that discontinued operations in 1986,were each 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 againstRachelle have been settled. We have taken the position that none of the wastesgenerated by Rachelle were hazardous.

Counsel for Rachelle received a letter dated August 2001from the U.S. Department of Justice, directed to all or substantially all PRPsfor the OII Site, offering to settle claims against such parties for all workperformed through and including the final remedy for the OII Site. The offer requireda payment from Rachelle in the amount of approximately $9.3 million in order totake advantage of the settlement. Rachelle did not accept the offer.

It remains the position of Rachelle that the wasteswere not hazardous. Our insurer has not accepted liability, although it hasmade payments for defense costs for the lawsuit against us. We have made noaccrual for potential loss, if any; however, an adverse outcome could have amaterial adverse effect on our results of operations or cash 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.

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**Employees**

As of August 31,2006, we employed approximately 6,300 people, of whom approximately 4,300 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. Weconsider our relations with our employees to be good. As previously discussed,we are considering the sale of our entire Non-Focus Product business andcertain complementary products within our Focus Product segments. If a sale iscompleted, we currently believe up to 1,500 of our employees may be affected bythe sale.

**AvailableInformation**

We file, with the Securities and Exchange Commission (“SEC”)pursuant to Section 13(a) or 15(d) of the Exchange Act, annualreports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports filed orfurnished. These reports may be accessed at the SEC’s Public Reference Room at100 F Street, N.E., Washington, D.C. 20549. Information on the operation of thePublic Reference Room is available by calling the SEC at 1-800-SEC-0330.The SEC maintains 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 is http://www.irf.com. We makeavailable free of charge through our Internet website our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,proxy statements and amendments to those reports, as soon as reasonablypracticable after we electronically file such material with, or furnish it to,the SEC.

We also make available, free of charge, through ourcorporate governance website, our corporate charter, bylaws, CorporateGovernance Guidelines, charters of the committees of our Board of Directors,code of ethics and other information and material, including information abouthow to contact our Board of Directors, its committees and their members. Tofind this information and materials, visit our corporate governance section ofour website at www.irf.com.

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**Item 1A. RiskFactors**

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

This Annual Report on Form 10-KReport includes some statements and other information that are not historicalfacts but are “forward-looking statements” as that term is defined in thePrivate Securities Litigation Reform Act of 1995. The materials presented canbe identified 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. Unlessrequired by law, we undertake no obligation to publicly update or revise anyforward looking statements, to reflect new information, future events orotherwise.

**Factors That May AffectFuture Results**

***Changes in end-market demand or downturns in thehighly cyclical semiconductor industry could affect our operating results andthe value of our business.***

We may experience significant changes in ourprofitability as a result of variations in sales, changes in product mix soughtby customers, seasonality, price competition for orders and the costsassociated with the introduction of new products and start-up of new facilitiesand additional capacity lines. The markets for our products depend on continueddemand with the product technological platforms and in the mix we plan for andproduce in the information technology, consumer, industrial, aerospace anddefense and automotive markets. Changes in the demand mix, needed technologiesand these end markets may adversely affect our ability to match our products,inventory and capacity to meet customer demand and could adversely affect ouroperating results and financial condition.

In addition, the semiconductor industry is highlycyclical and the value of our business may decline during the down portion ofthese cycles. We have experienced these conditions in our business in therecent past and we cannot predict when we may experience such downturns in thefuture. Future downturns in the semiconductor industry, or any failure of theindustry to recover fully from its recent downturns could seriously impact ourrevenue and harm our business, financial condition and results of operations.Although markets for our semiconductors appear stable, we cannot assure youthat they will continue to be stable or that our markets will not experiencerenewed, possibly more severe and prolonged, downturns in the future.

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

Our revenue and gross margin guidance is dependent ona certain level of consumer and/or corporate spending for the specific mix ofproducts we produce and have the capacity to produce. If our projections ofthese expenditures fail to materialize, or materialize in a mix different fromthat for which we anticipate and build inventory, whether due to reducedconsumer or corporate spending from increased oil prices or otherwise, ourrevenue and gross margin could be adversely impacted.

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

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.  For example, in our Computing andCommunications segment, we have announced substantial new design or programwins in next generation 

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game stations and arecurrently manufacturing and shipping on that basis.  The semiconductor industry is subject torapid changes in customer outlooks or unexpected build ups of inventory in thesupply channel as a result of shifts in end-market demand generally or in themix of that demand.  Accordingly, many ofthese purchase orders or forecasts may be revised or canceled withoutpenalty.  As a result, we must commitresources to the manufacturing of products, and a specific mix of products,without any advance purchase commitments from customers.  Our inability to sell products after we devotesignificant resources to build them could have a material adverse effect on ourlevels of inventory (the value of our inventory), our revenue and our operatingresults generally.  Additionally,cancellation or significant reduction in significant customer programs, likethose for next generation game stations and servers, could materially affectour ability to achieve our revenue and margin targets.

***We build and maintain inventory in order to meet ourhistoric and projected needs, but cannot guarantee that our inventory will beadequate to meet our needs or will be usable at a future date.***

At the end of fiscal year ended June 30, 2006, we reported netinventories of $214.1 million. We build and maintain inventory in order to meetour historic and projected needs, but cannot guarantee that the inventory webuild will be adequate or the right mix of products to meet market demand. Ifwe do not project and build the proper mix and amount of inventory, our revenueand gross margin may be adversely affected. Additionally, if we produce or haveproduced inventory that does not meet current or future demand, we maydetermine at some point that certain of the inventory may only be sold at adiscount or may not be sold at all, resulting in the reduction in the carryingvalue of our inventory and a material adverse effect on our financial conditionand operating results.

***The semiconductor business is highly competitive andincreased competition could adversely affect the price of our products andotherwise reduce the value of an investment in our company.***

The semiconductor industry, including the sectors inwhich we do business, is highly competitive. Competition is based on price,product performance, technology platform, product availability, quality,reliability and customer service. Price pressures often emerge as competitorsattempt to gain a greater market share by lowering prices or by offering a moredesirable technological solution. Pricing and other competitive pressures canadversely affect our revenue and gross margin, and hence, our profitability. Wealso compete in various markets with companies of various sizes, many of whichare larger and have greater financial and other resources than we have, andthus they may be better able to withstand adverse economic or marketconditions. In addition, companies not currently in direct competition with usmay introduce competing products in the future.

***Failure to timely complete our expansion plans for ourwafer fabrication facility could adversely affect our revenue growth andability to achieve our margin targets.***

We operated at over 90 percent of our worldwidein-house wafer fabrication and assembly manufacturing capacities, withoutconsidering subcontract or foundry capacity. During the fiscal year 2006, ourrevenues were negatively affected by wafer fabrication constraints for certainfast growing Focus Products. In order to meet the high demand for our FocusProducts, we accelerated our capital expansion plans and added capacity to ourwafer fabrication manufacturing facility in Newport, Wales. In calendar year2006, we expect we will have added incremental production capacity of $200million to $300 million in annual revenue from this facility. We plan to usethis fabrication capacity almost exclusively for our Focus Products. If we failto timely execute on our plans in advance of demand for our products, ourrevenues could be adversely affected which may prevent us from achieving ourmargin targets. We cannot assure you that we will complete our plans timely,that the ramp-up of the expanded facilities will occur effectively and withouterror or delay, or that sufficient third party sources would be available tosatisfy our ability to meet customer demand. Even if we fully execute andimplement our plans, we cannot guarantee that we will have sufficient worldwidewafer fabrication and assembly manufacturing capacities to meet demand andthere may be other unforeseen factors that could adversely impact our operatingresults.

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***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 revenue 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 in the appropriate mix do not increaseproportionately, or in the event of a decline in demand for some or all of ourproducts.

***If we are unable to implement our business strategy,our revenue 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, including our plan for thepotential sale of our entire Non-Focus Products business. We cannot assure youthat we 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 product lines that are not consistent with our business objectives,and replace those revenues with higher-margin product sales could adverselyaffect our operating results.***

We are actively considering a sale of our entire, or asignificant portion of our, Non-Focus Product business (fiscal year 2006revenues of $280 million), and certain complementary products of our FocusProduct segments (fiscal year 2006 revenues of approximately $22 million) (the “Divestiture”).If the Divestiture is completed, it is our goal that within the next couple ofyears, the remaining revenues will grow faster and the remaining business willbe more profitable.  We do not believethat the completion of the Divestiture will substantially alter the customerbase that we serve or the competition that we face currently. However, toachieve our goals, for a few quarters following a successful completion of theDivestiture, we plan to more fully develop our Focus Product segments byrealigning our sales, distribution and product development functions. We willalso configure our manufacturing and support infrastructure to address at leastinitially lower revenue levels. Despite our plans and efforts, we cannot assureyou that we will be successful in achieving our goals or carrying out plans forrealignment.  

Completion of the Divestiture may require us to beinvolved in a significant transition of the divested business and assets withthe buyer.  We anticipate that the buyermay require manufacturing, sales and marketing and administrative supportservices, although we do not yet know the length of time the complete scope ofsupport services that may be required. The activities involved with the divestiture could involve changes tovarious aspects of our business which could have a material adverse effect onour profitability to an extent we have not anticipated.  Even if we fully execute and implement ourplans, there may be unforeseen factors that could have a material adverseimpact on our operating results.

***The failure to implement and complete ourrestructuring programs and accomplish planned 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 and de-emphasize our commodity business. Therestructuring includes consolidating and closing certain manufacturing sites,upgrading equipment and 

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processes in designatedfacilities and discontinuing production in a number of others that cannotsupport more advanced technology platforms or products. The restructuring alsoincludes lowering overhead costs across our support organization. We havesubstantially completed our restructuring plan and anticipate $1 million to $2million in remaining charges. However, there may be unforeseen factors thatcould result in additional amount of charges to be taken or otherwise adverselyimpact our profitability and business.

***Our products may be found to be defective and, as aresult, product claims may be asserted against us, which may harm our businessand our reputation with our customers and significantly adversely affect ourresults and financial condition.***

Our products are typically sold at prices that aresignificantly lower than the cost of the equipment or other goods in which theyare incorporated. Although we maintain rigorous quality control systems, weshipped large quantities of semiconductor devices in fiscal year 2006 to a widerange of customers around the world, in a variety of high profile and criticalapplications, and continue to do so. In the ordinary course of our business wereceive warranty claims for some of these products that are defective, or thatdo not perform to published specifications. Since a defect or failure in ourproducts could give rise to failures in the end products that incorporate them(and consequential claims for damages against our customers from theircustomers depending on applicable law and contract), we often need to defendagainst claims for damages that are disproportionate to the revenue and profitwe receive from the products involved. In addition, our ability to reduce suchliabilities may be limited by the laws or the customary business practices ofthe countries where we do business. Even in cases where we do not believe wehave legal liability for such claims, we may choose to pay for them to retain acustomer’s business or goodwill or to settle claims to avoid protractedlitigation. Our results of operations and business would be adversely affectedas a result of a significant alleged quality or performance issues in ourproducts, if we are required or choose to pay for the damages that result. Inaddition, in our Aerospace and Defense segment, we are sometimes subject togovernment procurement regulations and other laws that could result in costlyinvestigations and other legal proceedings as a consequence of allegedlydefective products or other actions. Although we currently have productliability and other types of insurance, we have certain deductibles and exclusionsto such policies and may not have sufficient insurance coverage. We also maynot have sufficient resources to satisfy all possible product liability orother types of product claims. In addition, any perception that our productsare defective would likely result in reduced sales of our products, loss ofcustomers and harm to our business and reputation.

***While we attempt to monitor the credit worthiness ofour customers, we may from time to time be at risk due to the adverse financialcondition of one or more customers.***

We have established procedures for the review andmonitoring of the credit worthiness of our customers and/or significant amountsowing from customers. However, from time to time, we may find that, despite ourefforts, one or more of our customers become insolvent or face bankruptcyproceedings (Delphi is currently one such customer). Such events could have anadverse effect on our operating results if our receivables applicable to thatcustomer become uncollectible in whole or in part, or if our customers’financial situation result in reductions in whole or in part of our ability tocontinue to sell our products or services to such customers at the same levelsor at all.

***If some original equipment manufacturers (“OEMs”) donot design our products into their equipment or convert design or program winsto actual sales, a portion of our revenue may be adversely affected.***

A “design win” or program award from a customer doesnot guarantee that the design or program win will become future sales to thatcustomer. For example, in our Computing and Communications segment, we haveannounced new design or program wins in next generation game stations, and ourother segments have had other design or program wins. We also are unable toguarantee that we will be able to convert design or program wins into sales forthe life of any particular program, or at all, or that the revenue from suchwins would be significant. We also cannot guarantee that we will achieve thesame level of design or 

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program wins as we have inthe past, or at all. Without design or program wins from OEMs, we would only beable to sell our products to these OEMs as a second source, if at all. Once anOEM designs another supplier’s semiconductor into one of its product platforms,it is more difficult for us to achieve future design or program wins with thatOEM’s product platform because changing suppliers involves significant cost,time, effort and risk. Achieving a design or program win with a customer doesnot ensure that we will receive significant revenue from that customer and wemay be unable to convert design or program wins into actual sales.

***Corporate investment and expenditures in theInformation Technology sector and in Information Technology purchases may notmaterialize as we have planned.***

Our revenue 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 projectionsof these expenditures fail to materialize, whether due to increased oil prices,change in market conditions, or otherwise, our revenue and gross margin couldbe 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 revenue and a loss of market share toour competitors. Rapidly changing technologies and industry standards, alongwith frequent new product introductions, characterize the semiconductorindustry. As a result, we must devote significant resources to research and development.Our financial performance depends on our ability to design, develop,manufacture, assemble, test, market and support new products and enhancementson a timely and cost-effective basis. We cannot assure you that we willsuccessfully identify new product opportunities and develop and bring newproducts to market in a timely and cost-effective manner, or that products ortechnologies developed by others will not render our products or technologiesobsolete or noncompetitive. A fundamental shift in technologies in our productmarkets could have a material adverse effect on our competitive position withinthe industry. In addition, to remain competitive, we must continue to reducedie sizes and improve manufacturing yields. We cannot assure you that we canaccomplish these goals.

***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 

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acceptable terms or theoccurrence of related litigation itself could have a material adverse effect onour operating results and financial condition.

***Our ongoing protection and reliance on ourintellectual property assets expose us to risks and continued levels of revenuein our IP segment is subject to our ability to maintain current licenses,licensee and market factors not within our control and our ability to obtainnew licenses.***

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 2006 and 2010, although our broadest MOSFET patents expire in 2007 and2008.

Our royalty income is largely dependent on thefollowing factors: the remaining terms of our MOSFET patents; the continuingintroduction and acceptance of products that are not covered by our patents;remaining covered under unexpired MOSFET patents; the defensibility andenforceability of our patents; changes in our licensees’ unit sales, prices ordie sizes; the terms, if any, upon which expiring license agreements arerenegotiated; and our ability to obtain revenue from new licensingopportunities. Market conditions and mix of licensee products, as well as salesof non-infringing devices can significantly adversely affect royalty income. Wealso cannot guarantee that we can obtain new licenses to offset reductions inroyalties from existing licenses. While we try to predict the effects of thesefactors and efforts, often there are variations or factors that cansignificantly affect results different from that predicted. Accordingly, wecannot guarantee that our predictions of our IP segment revenue will beconsistent with actual results. We also cannot guarantee that our royaltyincome will continue at levels consistent with prior periods. Any decrease inour royalty income could have a material adverse effect on our operatingresults and financial condition.

***Our international operations expose us to materialrisks.***

We expect revenue from foreign markets to continue torepresent a significant portion of total revenue. 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.

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***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 process technologies,any of which could result in a loss of future revenue. Our operating resultscould also be adversely affected by the increase in fixed costs and operatingexpenses related to increases in production capacity if revenue does notincrease proportionately.

We have transferred manufacturing from our Krefeld,Germany to our Swansea, Wales and Tijuana, Mexico facilities. We are ramping upour Newport, Wales facility. We have experienced some delays and/or technicalproblems in moving our various facilities. Continued delays and/or technicalproblems in completing the remaining transfers could lead to increased costs,reduced yields, delays in product deliveries, order cancellations and/or lostrevenue.

***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 from our thirdparty suppliers or if the costs of materials, parts or equipment increasesignificantly. From time to time, suppliers may discontinue products, extendlead times, limit supplies or increase prices due to capacity constraints orother factors. We have a limited number of suppliers or sole suppliers for somematerials, parts and equipment, and any interruption could materially impairour operations and adversely affect our customer relations.

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 weredisrupted or terminated.

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***We must commitresources to product manufacturing prior to receipt of purchase commitments andcould lose some or all of the associated 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 revenue from asmall number of customers and distributors.***

Historically, a significant portion of our revenue hascome from a relatively small number of customers and distributors. The loss orfinancial failure of any significant customer or distributor, any reduction inorders by any of our significant customers or distributors, or the cancellationof a significant order, could materially and adversely affect our business.

***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 have acquired and may continue to acquire othercompanies and may be unable to successfully integrate such companies with ouroperations.***

We have acquired several companies over the past fewyears. 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 our common stock has fluctuated widely inthe past and may fluctuate widely in the future.***

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 in certain securities expose us tomarket 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 

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(“Nihon”). While we havesold 7.8 percent of our previous holdings in Nihon, we have retained a 9.7 percentinterest. The value of our investments is subject to market fluctuations, whichif adverse, could have a material adverse effect on our financial position andif sold at the down turn, could have a material adverse effect on our operatingresults.

***If we fail to maintain an effective system of internalcontrol over financial reporting or discover material weaknesses in ourinternal control over financial reporting or financial reporting practices, wemay not be able to report our financial results accurately or detect fraud,which could harm our business and the trading price of 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. As noted with the material weakness that wedisclosed and remediated in fiscal year 2006, while management evaluates theeffectiveness of our internal controls on a regular basis, we cannot provideabsolute assurance that these controls will always be effective or anyassurance that the controls, accounting processes, procedures and underlyingassumptions will not be subject to revision. There are also inherentlimitations on the effectiveness of internal controls and financial reportingpractices, including collusion, management override, and failure of humanjudgment. Because of this, control procedures and financial reporting practicesare designed to reduce rather than eliminate business risks. If we fail to maintainan effective system of internal control over financial reporting or if and forso long as management or our independent registered public accounting firm wereto discover material weaknesses in our internal control over financialreporting (or if our system of controls and audits result in a change ofpractices or new information or conclusions about our financial reporting) likethe disclosed material weakness, we may be unable to produce reliable financialreports or prevent fraud and it could harm our financial condition and resultsof operations and result in loss of investor confidence and a decline in ourstock price.

***Large potential environmental liabilities, includingthose relating to a former operating subsidiary, may adversely impact ourfinancial 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, and onthe operation of our facilities and equipment. We believe we use reasonableefforts to maintain a system of compliance and controls for these laws andregulations. However, we cannot provide absolute assurance that these controlswill always be effective or that issues with respect to these matters will notfrom time to time occur. There are also inherent limitations on theeffectiveness of controls including the failure of human judgment.

Under some laws and regulations, we could be heldfinancially responsible for remedial measures if our properties arecontaminated or if we send waste to a landfill or recycling facility thatbecomes contaminated, even if we did not cause the contamination. Under otherlaws, we may be subject to fines and penalties if facilities or equipment arenot operated in technical compliance with permit conditions or if requiredreports are not timely filed with applicable agencies. Also, we may be subjectto common law claims if we release substances that damage or harm thirdparties. Further, we cannot assure you that changes in environmental laws orregulations will not require additional investments in capital equipment or theimplementation of additional compliance programs in the future. Additionally,as we prepare for the contemplated divestiture of certain of our facilities,such facilities may undergo further environmental review and investigationwhich may lead to previously unknown environmental liabilities. Any present orprior failure to comply with environmental laws or regulations could subject usto serious liabilities and could have a material adverse effect on ouroperating results and financial condition.

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

Our corporate headquarters, one of our manufacturingfacilities, 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.

***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. We are also attemptingto add the appropriate level and mix of capacity to meet our customers’ futuredemand. There can be no assurance that we will have sufficient capitalresources to make necessary investments in manufacturing technology andequipment. Although we believe that anticipated cash flows from operations,existing cash reserves and other equity or debt financings that we may obtainwill be sufficient to satisfy our future capital expenditure requirements,there can be no assurance that this will be the case or that alternativesources of capital will be available to us on favorable terms or at all.

***The maturity of our outstanding ConvertibleSubordinated Notes due in July 2007 may expose us to risks.***

We have outstanding in principal $550 million of ConvertibleSubordinated Notes due in July 2007. While we intend to refinance or paydown such notes prior to maturity, if we decide to refinance such notes, inwhole or in part, we cannot guarantee that the terms, including interest rateand costs, would be comparable to the current interest rates and costs, and ifhigher, could adversely affect our future results. Additionally, if we elect inwhole or in part to pay down such notes, it would lower the amount of funds wehave available for operations or investment.

***A failure to renew or replace our existing $150Million revolving credit facility may expose us to risks.***

Our $150 million revolving credit facility with BNP Paribasas administrative agent expires in November 2006. While we currently intend toreplace such facility with another facility of at least comparable size, wecannot guarantee that the size and terms (including interest rate and costs),would be comparable to those under the current facility, and if adverselydifferent, could adversely affect our future results. Additionally, if we donot replace or fail to replace such facility it would lower the amount ofreadily available funds for operations or investment.

***Unforeseen changes in market conditions, tax laws andother factors could impact our judgment about the realizability of our deferredtax 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.

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***Our Aerospace andDefense segment is subject to governmental regulation that exposes us toadditional risks.***

Our Aerospace and Defense segment manufactures andsells certain products that are subject to US export control laws andregulations. The Aerospace and Defense segment also manufactures and sellsproducts that are sold directly or indirectly to the US government and maysubject us to certain government procurement regulations, investigations orreview. While we maintain a system of control of such products and compliancewith such laws and regulations, we cannot provide absolute assurance that thesecontrols will always be effective. There are also inherent limitations on theeffectiveness of controls including the failure of human judgment. If we failto maintain an effective system of control or are otherwise found non-compliantwith applicable laws and regulations, violations could lead to governmentalinvestigations, fines, penalties and limitations on our ability to exportproduct, all of which could have a material affect on our results.

***Final outcomes from the various tax authorities’audits are difficult to predict and an unfavorable finding may negativelyimpact 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 settlements may require additional use of cash and negativelyimpact our financial position or results of operations.

***Terrorist attacks, such as those that took place on September 11,2001, or threats or occurrences of other terrorist activities whether in theUnited States or internationally may affect the markets in which our commonstock trades, the markets 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.

***Natural disasters, like those related to HurricanesKatrina and Wilma, or occurrences of other natural disasters whether in theUnited States or internationally may affect the markets in which our commonstock trades, the markets in which we operate and our profitability.***

Natural disasters, likethose related to Hurricanes Katrina and Wilma, or threats or occurrences ofother 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, and impair our ability toproduce and deliver our products. While we do not have facilities located nearthe affected areas, such activities could affect physical facilities, primarilyfor raw materials and process chemicals and gases of our suppliers orcustomers, and make transportation of our supplies and products more difficultor cost prohibitive. Due to the broad and uncertain effects that natural eventshave had on financial and economic markets generally, we cannot provide anyestimate of how these activities might affect our future results.

**Item 1B. UnresolvedStaff Comments**

We have not received written comments from thecommission staff regarding our periodic or current reports under the SecuritiesExchange Act of 1934 that remain unresolved.

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**Section 303A.12 ofNew York Stock Exchange Listed Company Manual Disclosure**

Pursuant to Rule303A.12(A) of the New York Stock Exchange (“NYSE”) Listed Company Manual, wesubmitted to the NYSE last year a Section 303A.12(a) Chief Executive Officer(“CEO”) Certification as required by such rule. We also filed with theSecurities 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 2006 fiscal year and ourForm 10-K filed last year with respect to our 2005 fiscal year. All of theabove certifications were provided without qualification.

**Item 2. Properties**

Wemaintain manufacturing and office facilities around the world. Our majorfacilities, as of September 15, 2006, are in the following locations andused by the following business 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 |   |   |   |   |   |   | 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 |   |   |   |   |   |   | C&C, ESP |   |
| Reigate, 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 |   |   | 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         |

 

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We believe our facilitiesare adequate for current and anticipated near-term operating needs. During thefiscal year ended June 30, 2006, we operated at over 90 percent of ourworldwide in-house wafer fabrication and assembly manufacturing capacities,without considering subcontract or foundry capacity. During the fiscal year2006, our revenues were negatively affected by wafer fabrication constraintsfor certain fast growing Focus Products. In order to meet the high demand forour Focus Products, we accelerated our capital expansion plans and addedcapacity to our wafer fabrication manufacturing facility in Newport, Wales. Incalendar year 2006, we expect we will have added incremental productioncapacity of $200 million to $300 million in annual revenue from this facility,although we cannot assure you that capacity constraints will not affect revenuegrowth in the future. We plan to use this fabrication capacity almostexclusively for our Focus Products.

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.

*Potential Divestiture.**  *We are activelyconsidering a sale of our entire, or a significant portion of our, Non-FocusProduct business (with fiscal year 2006 revenues of approximately $280 million),and certain complementary products of our Focus Product segments (with fiscalyear 2006 revenues of approximately $22 million) (the “Divestiture”). At June 30,2006, our Board of Directors had not yet committed to a definitive plan tosell, but we had prepared a variety of strategic options for consideration. Anyultimate sale transaction will also require our Board of Directors’ approval,and is currently contemplated to include operations at our Mumbai, India;Borgaro, Italy; Xian, China; Krefeld, Germany; Swansea, Wales; and Halifax,Canada sites. The Divestiture will also include certain wafer manufacturing,product assembly and research and development equipment currently located atour Temecula, California; Tijuana, Mexico; and El Segundo, California locationsrelated to our Non-Focus Products. If the contemplated Divestiture iscompleted, we will continue to retain the manufacturing facilities primarilyused for our Focus Products.

**Item3. Legal Proceedings**

In June 2000, wefiled suit in Federal District Court in Los Angeles, California against IXYS Corporation,alleging infringement of our key U.S. patents 4,959,699; 5,008,725 and5,130,767. The suit sought damages and other relief customary in such matters. TheFederal District Court entered a permanent injunction, effective on June 5,2002, barring IXYS from making, using, offering to sell or selling in, orimporting 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 Courtof Appeals for the Federal Circuit stayed that injunction, pending appeal onthe merits. In that same year, following trial on damages issues, a FederalDistrict 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 areentitled to an additional award of reasonable attorney’s fees for a totalmonetary judgment of about $29.5 million. In March 2004, the U.S. Court ofAppeals for the Federal Circuit reversed the summary judgment granted to us bythe Federal 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. On October 6,2005, the jury awarded us $6.2 million in damages. Based on the jury’sverdict, on February 14, 2006, the District Court entered its finaljudgment (including permanent injunctions prohibiting IXYS from furtherinfringing sales for the 

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remaininglife of the 4,959,699 patent) and found that we are entitled to $6.2 million incompensatory damages for infringement through September 30, 2005, plus anadditional 6.5 percent of infringing sales after September 30, 2005. OnJuly 14, 2006, the Federal Circuit entered an order vacating that judgmentand remanded the *IR v. IXYS* action so that theDistrict Court could consider whether to reissue a permanent injunction inlight of the Supreme Court’s decision in *eBay Inc. v. MercExchange,L.L.C.*, __ U.S. __, 126 S.Ct. 1837, 164 L.Ed.2d 641 (2006). We thenrequested that the District Court re-enter the final judgment (and permanentinjunction). On September 14, 2006, the District Court granted our motionand re-entered the final judgment. Even though we expect IXYS to appeal thejudgment, we believe that it is reasonably assured that the value of thejudgment is at least $2.5 million and accordingly, for the fiscal year ended June 30,2006, we recognized $2.5 million by releasing a previous allowance related tothe royalty income.

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

Notapplicable.

**Additional Item. Executive Officers of the Registrant**

Our executive officersserve at the discretion of the Board of Directors. Mr. Eric Lidow’semployment with IR is subject to the provisions of an executive employmentagreement 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        |   | 93 |   | Chairman of the Board                                           |
|-------------------|--------|----|--------|-----------------------------------------------------------------|
| Alexander Lidow   |   | 51 |   | Chief Executive Officer                                         |
| Michael P. McGee  |   | 47 |   | Executive Vice President  and Chief Financial Officer           |
| Robert Grant      |   | 43 |   | Executive Vice  President, Global Sales and Corporate Marketing |
| Walter Lifsey     |   | 48 |   | Executive Vice  President, Operations                           |
| Michael A. Briere |   | 44 |   | Executive Vice  President, Research and Development             |
| Donald R. Dancer  |   | 55 |   | Executive Vice President, Secretary and General  Counsel        |

 

Eric Lidow, the founder ofthe Company, has been a director since our inception in 1947 and was ChiefExecutive Officer from inception until March 1995. Mr. Lidowcontinues as Chairman of the Board.

Alexander Lidow, Ph.D.,has been employed by us since 1977. He was elected a director in September 1994and Chief Executive Officer in March 1995. Dr. Lidow serves on theBoard of Trustees of the California Institute of Technology. Dr. Lidow isa son of Eric Lidow.

Michael P. McGee joined usin 1990. He became Vice President and Chief Financial Officer in 1993. In November 1998,Mr. McGee was elected Executive Vice President. From June 2000 to June 2005,he was also Chairman of Nihon Inter Electronics Corporation, a publicly-heldJapanese corporation. From June 2000 to June 2003, he was alsoCo-Chief Executive Officer of that company.

Robert Grant joined us in1992 as Director, Worldwide Customer Operations. In October 1998, Mr. Grantbecame Senior Vice President, Customer Service and Sales Systems, and in October 1999became Senior 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 beenemployed by us since 1999. His most recent assignment was as Senior VicePresident, Corporate Development before being appointed Executive VicePresident, Operations in April 2002. Prior to joining us, he held seniormanagement positions at AMP, Inc. and TRW Inc.

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

Donald R. Dancer joined us in August 2002and was promoted to Executive Vice President in November 2005. Prior tojoining us, Mr. Dancer served 22 years in various senior legal positionswith the General Electric Company and most recently was General Counsel for GEIndustrial Systems Solutions.

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**PART II**

**Item 5. Market for the Registrants’ Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities**

**Price Range of Common Stock**

**(ClosingPrices in Dollars)**

| ** **           | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|----------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| **Fiscal Year** | ** ** | ** **             | ** ** | **High**                | ** ** | **Low**                | ** ** | **High**                | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| 2006                 |       | 55.82                  |       | 43.17                   |       | 45.44                  |       | 27.86                   |       | 41.81 |   | 33.02 |   | 48.54 |   | 38.92 |   |
| 2005                 |       | 39.20                  |       | 31.39                   |       | 44.98                  |       | 34.23                   |       | 47.30 |   | 35.29 |   | 49.64 |   | 40.34 |   |
|                      |            |                        |            |                         |            |                        |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

Our common stock is traded on The New York StockExchange under the symbol “IRF.” There were 1,564 holders of record of ourcommon stock as of September 8, 2006. On September 8, 2006, theclosing sale price of the common stock on The New York Stock Exchange was$34.93. Shareholders are urged to obtain current market quotations for thecommon stock.

No cash dividends have been declared to stockholdersduring the past two years, and we do not expect to declare cash dividends inthe foreseeable future. The payment of dividends is within the discretion of ourBoard of Directors, and will depend upon, among other things, our earnings,financial condition, capital requirements, and general business conditions. Inaddition, our bank credit agreement currently includes covenants puttinglimitations on certain dividend payments.

As of fiscal year ended June 30, 2006, 15.8million common stock shares are reserved for issuance under our stock optionplans, of which 12.1 million stock options and restricted stock units areoutstanding and 3.7 million are available for future grants. As of fiscal yearended June 30, 2006, 10.8 million stock option and restricted stock unitsare exercisable at an average exercise price of $39.85.

On November 1, 2005,our Board of Directors authorized a stock repurchase program, under which up to$100 million of our common shares may be repurchased without prior notice,through block trades or otherwise. No shares have been repurchased under theprogram, which expired on June 30, 2006.

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**Item 6. SelectedFinancial Data**

The selected consolidatedfinancial data as of June 30, 2006 and 2005 and for the fiscal years endedJune 30, 2006, 2005 and 2004, are derived from our audited consolidatedfinancial statements and should be read in conjunction with our auditedconsolidated financial statements and notes beginning on page 58. Theselected consolidated financial data as of June 30, 2004, 2003 and 2002,and for the fiscal years ended June 30, 2003 and 2002, are derived fromour audited consolidated financial statements which are not included in thisdocument.

| ** **                                                                  | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Statements of Operations Data (1)  (In thousands except per share data)** |       |                                               |       |   |   |   |   |   |   |   |   |
| Revenues                                                                    |       | $                                                  | 1,171,118  |   | $ | 1,174,424 |   | $ | 1,060,500 |   | $ | 864,443 |   | $ | 720,229 |   |
| Gross profit                                                                |       | 469,039                                            |       | 510,523 |   | 411,094 |   | 287,810 |   | 256,859 |   |
| Gross profit  margin (2)                                                    |       | 40.1                                               | %          | 43.5 | % | 38.8 | % | 33.3 | % | 35.7 | % |
| Selling and administrative expense                                          |       | 193,436                                            |       | 173,037 |   | 164,723 |   | 142,499 |   | 125,578 |   |
| Selling and  administrative as a percent  of revenues (3)                   |       | 16.5                                               | %          | 14.7 | % | 15.5 | % | 16.5 | % | 17.4 | % |
| Research and development expense                                            |       | 111,418                                            |       | 104,876 |   | 92,156 |   | 78,904 |   | 69,775 |   |
| Research and  development as a percent of revenues                          |       | 9.5                                                | %          | 8.9 | % | 8.7 | % | 9.1 | % | 9.7 | % |
| Impairment of assets, restructuring and severance  charges (4)              |       | 15,912                                             |       | 33,952 |   | 33,534 |   | 187,890 |   | — |   |
| Income (loss) before income taxes (5)                                       |       | 158,750                                            |       | 184,068 |   | 118,284 |   | (126,198 | ) | 65,811 |   |
| Provision for  (benefit from) income  taxes (6)                             |       | 51,594                                             |       | 46,608 |   | 28,514 |   | (36,559 | ) | 17,111 |   |
| Tax rate  (benefit) (6)                                                     |       | 32.5                                               | %          | 25.3 | % | 24.1 | % | (29.0 | )% | 26.0 | % |
| Income (loss) from continuing  operations                                   |       | 107,156                                            |       | 137,460 |   | 89,770 |   | (89,639 | ) | 48,700 |   |
| Net income (loss)  per common share:                                        |       |                                               |       |   |   |   |   |   |   |   |   |
| Basic (7)                                                                   |       | $                                                  | 1.51       |   | $ | 2.03 |   | $ | 1.37 |   | $ | (1.40 | ) | $ | 0.77 |   |
| Diluted (7)(8)                                                              |       | $                                                  | 1.49       |   | $ | 1.91 |   | $ | 1.31 |   | $ | (1.40 | ) | $ | 0.75 |   |

 

| ** **                                  | ** ** | **At June 30,** | ** ** |
|---------------------------------------------|------------|---------------------------|------------|
| ** **                                  | ** ** | **2006**                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Balance Sheet Data (In thousands)**       | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  investments                  |       | $                         | 1,092,628  |   | $ | 940,720 |   | $ | 836,209 |   | $ | 721,492 |   | $ | 671,312 |   |
| Total assets                                |       | 2,505,023                 |       | 2,223,544 |   | 2,017,006 |   | 1,821,852 |   | 1,813,182 |   |
| Long-term debt,  less current maturities    |       | 617,540                   |       | 547,259 |   | 560,019 |   | 579,379 |   | 566,841 |   |
| **Cash Flows Data (In thousands) (1)** | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash provided by  operating  activities     |       | $                         | 159,926    |   | $ | 221,664 |   | $ | 162,973 |   | $ | 129,491 |   | $ | 43,353 |   |
| Cash used in investing  activities (9)      |       | (174,975                  | )          | (277,035 | ) | (79,899 | ) | (68,236 | ) | (212,899 | ) |
| Cash provided by financing  activities (10) |       | 133,758                   |       | 75,666 |   | 43,365 |   | 2,635 |   | 14,201 |   |

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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 

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investingactivities. Previously, our investments in auction rate preferred securitieswere recorded in cash and cash equivalents rather than short-term cashinvestments. We reclassified auction rate preferred securities from cash andcash equivalents to short-term investments because the underlying instrumentshave contractual maturity dates exceeding ninety days. As a result of thereclassifications, our net cash used in investing activities increased by $33.4million 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. At June 30,2006 and 2005, we had $4.5 million and $0 invested in auction rate securities.

(2)          Fiscalyear 2006 gross profit margin was negatively impacted primarily due to highermanufacturing costs at our Newport, Wales facility, including higher fixedcosts associated with the new capacity addition which is not yet fullyutilized, and new profit sharing and stock option expense. Fiscal year 2003gross profit margin was negatively impacted from a $6.0 million write-down ofraw material and work-in-process inventory related to our restructuringinitiatives.

(3)          Fiscalyear 2006 selling and administrative expense as a percent of revenues increasedprimarily related to the new profit sharing and stock option expense, andhigher incentive bonuses and employee fringe benefit expenses.

(4)          Impairment of assets,restructuring and severance charges of $15.9 million, $34.0 million, $33.5million and $187.9 million for the fiscal years ended June 30, 2006, 2005,2004 and 2003, respectively, comprised of: (1) impairment of assets, plantclosure and other charges of $8.2 million, $25.3 million, $15.2 million and$169.7 million for fiscal years 2006, 2005, 2004 and 2003, respectively, and (2) severance-relatedcharges of $7.7 million, $8.7 million, $18.3 million and $18.2 million infiscal years 2006, 2005, 2004 and 2003, respectively. Fiscal years 2003 through2006 charges were associated with our restructuring initiatives announced inthe quarter ended December 31, 2002, which included asset impairment,plant closure costs and severance charges related to the elimination ofmanufacturing, operating and company-wide administrative personnel.

(5)          Incomebefore income taxes for the fiscal year ended June 30, 2006 included $15.9million of restructuring-related charges, $13.6 million gain from the sale ofan equity investment, and $1.4 million incremental legal and accountingexpenses associated with a proposed convertible debt offering which wassubsequently withdrawn and the special dividend repatriation under the AmericanJobs Creation Act of 2004. Income before income taxes for the fiscal year endedJune 30, 2005 included $34.0 million of restructuring-related charges and$6.0 million charge associated with the accelerated vesting of stock options. Incomebefore income taxes for the fiscal year ended June 30, 2004 included $33.5million of restructuring-related charges and $5.9 million Hitachi netsettlement gain related to patent infringement. Loss before income taxes forthe fiscal year ended June 30, 2003 included $193.9 millionrestructuring-related charges, including inventory impairment of $6.0 million,and $2.4 million, of non-recurring net gains recorded as a result of aninsurance settlement related to certain damaged fabrication equipment. Fiscalyear 2002 included a $7.4 million net insurance gain which was partially offsetby $3.7 million of non-recurring litigation and claims settlement expenses.

(6)          Provisionfor income taxes for the fiscal year ended June 30, 2006 included anadditional tax expense associated with the special dividend repatriation underthe American Jobs Creation Act of 2004, which negatively impacted the tax rateby five percent.

(7)          Net income per common share, basic and diluted, for fiscal yearended June 30, 2006 included (1) $0.15 charge from the impairment ofassets, restructuring and severance charges, (2) $0.11 income from thegain related to the sale of an equity investment, and (3) $0.01 chargefrom the incremental expenses from the proposed convertible debt offering,subsequently withdrawn, and the special dividend repatriation under theAmerican Jobs Creation Act of 2004. Net incomeper common share, 

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basic and diluted,for fiscal year ended June 30, 2005 included (1) $0.38 charge fromthe impairment of assets, restructuring and severance charges and (2) $0.07charge from the accelerated vesting of stock options. Net income per common share, basic and diluted, for fiscal yearended June 30, 2004 included (1) $0.39 charge from the impairment ofassets, restructuring and severance charges and (2) $0.07 income from theone-time Hitachi settlement gain related to patent infringement for fiscal year2004. Net loss per common share, basic and diluted, for fiscal year 2003included (1) $2.16 charge from the impairment of assets, restructuring andseverance charges and (2) $0.03 income from the net insurance gain. Netincome per common share, basic and diluted, for the fiscal year 2002 included (1) $0.09income from the one-time net insurance gains and (2) $0.04 charge fromlitigation and claims settlement.

(8)          Netincome per common share, diluted for the fiscal year ended June 30, 2005included the dilutive effect from the conversion of our outstanding convertiblesubordinated notes into 7,439,000 shares of common stock (the “Effect”) of($0.06). Net income (loss) per common share, diluted for other periodspresented 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 percommon share—diluted” calculation, since including those shares would have beenanti-dilutive.

(9)          Cashflows used in investing activities primarily reflected net cash used topurchase cash investments and capital expenditures for all years presented. Cashflows used in investing activities in fiscal years ended June 30, 2006,2005 and 2002, included acquisitions of certain assets and technologies, net ofcash, of $3.5 million, $51.1 million and $169.6 million, respectively.

(10)   Cashflows provided by financing activities for the fiscal years ended June 30,2006, 2005, 2004, 2003 and 2002 reflected $57.9 million, $75.1 million, $44.2million, $8.1 million and $11.2 million, respectively, for the exercise ofstock options and from sales of stock under our employee stock participationplan. Cash flows provided by financing activities in fiscal year 2006 included$81.0 million of proceeds from a new bank loan and $6.0 million of excess taxbenefit from options exercised classified in accordance with the adoption ofStatement of Financial Accounting Standards 123(R), “Share-Based Payment”.

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**Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

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 designer, manufacturer and marketer of powermanagement product devices which use power semiconductors. Power semiconductorsaddress core challenges of power management, power performance and powerconservation, by increasing system efficiency, allowing more compactend-products, improving features and functionality, increasing fuel efficiency,and extending battery life. Our products are used in a variety of endapplications, including computers, communications networking, consumerelectronics, energy-efficient appliances, lighting, satellites, launchvehicles, aircraft and automotive diesel injection. In addition, we license ourintellectual property to third parties.

According toiSuppli, a market research firm, the market for power management semiconductorsin calendar year 2006 will be approximately $24 billion. Our products addressapproximately $17 billion, or over approximately 72 percent, of this market incalendar year 2006. We believe current demand for our products is drivenlargely 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 powermanagement technology

Our products consist of Power Management IntegratedCircuits, or Power Management ICs, Power Components and Power Systems. Wereport our results in six segments that generally reflect the products’end-markets and our decision making for our company about allocating resources,including the focus of research and development activities, and in assessingperformance. We also generate revenues by licensing and other activitiesrelated to the enforcement of our patents and other intellectual property.

We summarize our segments in 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”). (Seealso Note 7 to the 

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Consolidated FinancialStatements, “Segment and Geographic Information” for further details aboutour segments.)

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, includingfield application engineers and technical sales support staff who are able tobetter address our customers’ requirements. For customers in the Non-FocusProduct segments, we primarily sell through distributors. No single OEM customer, distributor or subcontractmanufacturer accounted for more than ten percent of our consolidated revenuefor the fiscal year ended June 30, 2006.

Our research and development program focuses on PowerManagement ICs and the advancement and diversification of our HEXFET, power FETand IGBT product lines. We have beendeveloping and introducing some of the most advanced power management productsand new architectures for the next-generation of applications, includingthe new game stations, digital televisions, high-performance services, hybridvehicles and energy-efficient appliances. We continue to commit toresearch and development to generate new patents and other intellectual propertyand concentrate on incorporating our technologies into our Focus Products. In the fiscal years ended June 30, 2006, 2005and 2004, we spent $111.4 million (9.5 percent of revenue), $104.9 million (8.9percent of revenue) and $92.2 million (8.7 percent of revenue), 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 provide uswith capacity flexibility. During fiscal year 2006, we ramped up our 8-inch..25 micron-capable wafer manufacturing facility in Newport, Wales (UnitedKingdom), to support our most advanced analog and mixed-signal ICs and trenchMOSFETs. In calendar year 2006, we expect we will have added incrementalproduction capacity of $200 million to $300 million in annual revenue from thisfacility. We plan to use this fabrication capacity almost exclusively for ourFocus Products.

*PotentialDivestiture.**  *Weregularly review our products and technology portfolio to determine whetherthey are aligned with our long-term strategic objectives. We are activelyconsidering a sale of our entire, or a significant portion of our, Non-FocusProduct business (with fiscal year 2006 revenues of approximately $280million), and certain complementary products of our Focus Product segments (withfiscal year 2006 revenues of approximately $22 million) (the “Divestiture”). AtJune 30, 2006, our Board of Directors had not yet committed to adefinitive plan to sell, but we had prepared a variety of strategic options forconsideration. Any ultimate sale transaction will also require our Board ofDirectors’ approval, and is currently contemplated to include operations at ourMumbai, India; Borgaro, Italy; Xian, China; Krefeld, Germany; Swansea, Wales;and Halifax, Canada sites. The Divestiture will also include certain wafermanufacturing, product assembly and research and development equipmentcurrently located at our Temecula, California; Tijuana, Mexico; and El Segundo,California locations.

If the Divestiture is completed, we plan to continueour strategy of growing our Focus Products business and achieving greaterprofitability. We do not believe that the completion of the Divestiture willsubstantially alter the customer base that we serve or the competition that weface currently. For a few quarters following a successful completion of theDivestiture, we plan to realign our sales, distribution and product developmentfunctions to a business based solely on our Focus Products. We also plan to configureour manufacturing and support infrastructure to address the initially lowerrevenue levels following the Divestiture.

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As part of the Divestiturewe anticipate that we will provide certain manufacturing, sales, marketing andadministrative support services to the buyer. We do not yet know the length oftime or level of all of the support services that may be required. Because thenature, timing, costs and reimbursements related to these services and otheraffects of the Divestiture are not finalized, we cannot determine their impacton our financial performance or position.

**Overview of FiscalYear 2006 Results**

Our revenues were $1.17 billion and $1.17 billion forthe fiscal years ended June 30, 2006 and 2005, respectively. Revenues as apercentage of total product revenues based on sales location were approximately28 percent, 49 percent and 23 percent for the United States, Asia and Europe,respectively, compared to 32 percent, 45 percent and 23 percent for the UnitedSates, Asia and Europe, respectively, for the prior fiscal year ended June 30,2005. Gross profit margin was 40.1 percent for the fiscal year ended June 30,2006, compared to 43.5 percent in the prior fiscal year, primarily reflectinghigher manufacturing costs at our Newport, Wales facility, including higherfixed costs associated with the new capacity addition which is not yet fullyutilized, and new profit sharing and stock option expense.

Revenues from our FocusProduct segments increased to $891.4 million for the fiscal year ended June 30,2006, from $857.6 million for the fiscal year ended June 30, 2005,reflecting growth in our Computing and Communications, Energy-Saving Productsand Aerospace and Defense segments. Focus Product revenues increased to 76.1percent of our consolidated revenues for the fiscal year ended June 30, 2006,from 73.0 percent for the prior fiscal year ended. Gross profit margin for ourFocus Product segments was 47.6 percent for the fiscal year ended June 30,2006 and 50.6 percent for the prior fiscal year ended June 30, 2005. Thegross profit margin decline primarily reflected higher manufacturing costs atour Newport, Wales facility, including higher fixed costs associated with thenew capacity addition, and new profit sharing and stock option expense.

In our Non-Focus Product segments, revenues were$280.0 million and $316.8 million for the fiscal years ended June 30, 2006and 2005, respectively. Non-Focus Product segments decreased to 23.9 percent ofour consolidated revenues for the fiscal year ended June 30, 2006, from27.0 percent in the prior fiscal year. Gross profit margin for Non-FocusProduct segments was 15.9 percent for the fiscal year ended June 30, 2006and 24.1 percent for the prior fiscal year ended June 30, 2005, primarilyreflecting a lower average selling price and new profit sharing and stockoption expense.

For the fiscal year ended June 30, 2006, sellingand administrative expense was $193.4 million (16.5 percent of revenues),compared to $173.0 million (14.7 percent of revenues) in the twelve monthsended June 30, 2005, reflecting primarily new profit sharing and stockoptions and higher incentive bonuses and employee fringe benefit expense infiscal year 2006.

For the fiscal year ended June 30, 2006 and 2005,research and development expense was $111.4 million and $104.9 million(9.5 percent and 8.9 percent of revenues, respectively), primarily reflectingincreased spending for ICs and new profit sharing and stock options expense infiscal year 2006. Our research and development program focused on PowerManagement ICs and the advancement and diversification of our HEXFET, power FETand IGBT product lines. We have beendeveloping and introducing some of the most advanced power management productsand new architectures for the next-generation of applications, includingnew game stations, digital televisions, high-performance services, hybridvehicles and energy-efficient appliances.

For the fiscal years ended June 30, 2006 and2005, we operated at over 90 percent of our worldwide in-house waferfabrication and assembly manufacturing capacities, without consideringsubcontract or foundry capacity. During the fiscal year 2006, our revenues werenegatively affected by wafer fabrication constraints for certain fast growingFocus Products. In order to meet the high demand for our Focus Products, weaccelerated our capital expansion plans and added capacity to our waferfabrication 

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manufacturing facility inNewport, Wales. For the fiscal year ended June 30, 2006, our capitalexpenditures were $158.5 million, up 17 percent over the prior fiscal yearended June 30, 2005. In calendar year 2006, we expect we will have addedincremental production capacity of $200 million to $300 million in annualrevenue from this facility, although we cannot assure you that capacityconstraints will not affect revenue growth in the future. We plan to use thisfabrication capacity almost exclusively for our Focus Products.

As of fiscal year ended June 30, 2006, we havesubstantially completed our restructuring activities previously announced incalendar years 2001 and 2002 which included reorganizing certain business unitsin the fourth quarter of fiscal 2005, based on the products’ end-markets orstrategic application. For the fiscal year ended June 30, 2006, werecorded $15.9 million in total restructuring-related charges, consisting of:$8.2 million for asset impairment, plant closure costs and other charges and$7.7 million for severance-related costs, compared to $34.0 million inthe prior fiscal year ended June 30, 2005, consisting of: $25.3 millionfor asset impairment, plant closure costs and other charges and $8.7 million ofseverance-related costs. We estimate that total charges associated withthe restructuring will be approximately $279 million. These charges willconsist of approximately $220 million for asset impairment, plant closure costsand other charges, $6 million of raw material and work-in-process inventory,and approximately $53 million for severance. Of the $279 million in totalcharges, we expect cash charges to be approximately $106 million. As of the fiscal yearended June 30, 2006, we have realized savings of approximately $80 millionfrom the restructuring activities.

We adopted Statement of Financial Accounting StandardsNo. 123(R), “Share-Based Payment” (SFAS No. 123(R)) that becameeffective for us at the beginning of fiscal year 2006. SFAS No. 123(R)requires that we recognize the fair value of equity awards granted to ouremployees as compensation expense in the income statement over the requisiteservice period. For the fiscal year ended June 30, 2006, we recognized$3.5 million in stock compensation expense, which lowered our basic and dilutedearnings per share by $0.04. In the prioryear fiscal fourth quarter ended June 30, 2005, we accelerated the vestingof all then outstanding equity awards, including employee stock options andrestricted stock units, in anticipation of the adoption of SFAS No. 123(R).We will avoid approximately $108 million in future compensation expenseassociated with our equity awards, of which approximately $60 million wouldhave been in fiscal year 2006. (Refer to Note 5 of Notes to ConsolidatedFinancial Statements, “Stock-Based Compensation” for further details about ourstock option plans.)

During the fiscal year ended June 30, 2006, werepatriated $142 million in special dividends of earnings from our controlledforeign subsidiaries under the American Jobs Creation Act of 2004, whichincreased our income tax rate by five percent for the fiscal year ended June 30,2006.

At June 30, 2006, wehad cash and cash equivalent balances of $482.9 million and investments inmarketable debt securities of $609.7 million. Our cash, cash equivalents,investments in marketable debt securities and unused credit facilities of$137.9 million, totaled $1.2 billion. During the fiscal year ended June 30,2006, operating activities generated cash flow of $159.9 million compared to$221.7 million in the prior fiscal year. Cash flow from operating activitiesexcluded $6.0 million of excess tax benefit from options exercised as a resultof the adoption of SFAS No. 123(R). Our cash, cash equivalents and cashinvestments totaled $1.1 billion at fiscal year ended June 30, 2006. Our$550 million convertible subordinated notes are due in July 2007. Weanticipate that these notes will be refinanced through public or privateofferings of debt or equity, or be paid down with our existing cash and cashinvestments.

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**Results ofOperations**

Thefollowing table sets forth certain items included in selected financial data asa percentage of revenues (in millions except percentages):

| ** **                                                 | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                   |       | $                                                   | 1,171.1    |   | 100.0 | % | $ | 1,174.4 |   | 100.0 | % | $ | 1,060.5 |   | 100.0 | % |
| Cost of sales                                              |       | 702.1                                               |       | 59.9 |   | 663.9 |   | 56.5 |   | 649.4 |   | 61.2 |   |
| Gross profit                                               |       | 469.0                                               |       | 40.1 |   | 510.5 |   | 43.5 |   | 411.1 |   | 38.8 |   |
| Selling and  administrative expense                        |       | 193.4                                               |       | 16.5 |   | 173.0 |   | 14.7 |   | 164.7 |   | 15.5 |   |
| Research and  development expense                          |       | 111.4                                               |       | 9.5 |   | 104.9 |   | 8.9 |   | 92.2 |   | 8.7 |   |
| Amortization of  acquisition-related intangible assets     |       | 5.2                                                 |       | 0.5 |   | 5.9 |   | 0.5 |   | 5.6 |   | 0.5 |   |
| Impairment of  assets, restructuring and severance charges |       | 15.9                                                |       | 1.4 |   | 33.9 |   | 2.9 |   | 33.5 |   | 3.2 |   |
| Other expense  (income), net                               |       | (9.0                                                | )          | (0.8 | ) | 7.4 |   | 0.7 |   | (5.0 | ) | (0.5 | ) |
| Interest expense  (income), net                            |       | (6.7                                                | )          | (0.6 | ) | 1.3 |   | 0.1 |   | 1.8 |   | 0.2 |   |
| Income before income taxes                                 |       | 158.8                                               |       | 13.6 |   | 184.1 |   | 15.7 |   | 118.3 |   | 11.2 |   |
| Provision for  income taxes                                |       | 51.6                                                |       | 4.4 |   | 46.6 |   | 4.0 |   | 28.5 |   | 2.7 |   |
| Net income                                                 |       | 107.2                                               |       | 9.2 | % | $ | 137.5 |   | 11.7 | % | $ | 89.8 |   | 8.5 | % |

 

**Fiscal 2006Compared with Fiscal 2005**

*Revenues and GrossMargin*

Our revenues were $1.17 billion and $1.17 billion forthe fiscal years ended June 30, 2006 and 2005, respectively. Revenues as apercentage of total product revenues based on sales location were approximately28 percent, 49 percent and 23 percent for the United States, Asia and Europe,respectively, compared to 32 percent, 45 percent and 23 percent for the UnitedStates, Asia and Europe, respectively, for the prior fiscal year ended June 30,2005. Gross profit margin was 40.1 percent for the fiscal year ended June 30,2006, compared to 43.5 percent in the prior fiscal year, primarily reflectinghigher manufacturing costs at our Newport, Wales facility, including higherfixed costs associated with the new capacity addition which is not yet fullyutilized, and new profit sharing and stock option expense.

Revenues from our FocusProduct segments increased to $891.4 million for the fiscal year ended June 30,2006, from $857.6 million for the fiscal year ended June 30, 2005,reflecting growth in our Computing and Communications, Energy-Saving Productsand Aerospace and Defense segments. Focus Product revenues increased to 76.1percent of our consolidated revenues for the fiscal year ended June 30, 2006,from 73.0 percent for the prior fiscal year ended. Gross profit margin for ourFocus Product segments was 47.6 percent for the fiscal year ended June 30,2006 and 50.6 percent for the prior fiscal year ended June 30, 2005. Grossprofit margin decline primarily reflected higher manufacturing costs at ourNewport, Wales facility, including higher fixed costs associated with the newcapacity addition, and new profit sharing and stock option expense.

In our Non-Focus Product segments, revenues were$280.0 million and $316.8 million for the fiscal years ended June 30, 2006and 2005, respectively. Non-Focus Product segments decreased to 23.9 percent ofour consolidated revenues for the fiscal year ended June 30, 2006, from27.0 percent in the prior fiscal year ended. Gross profit margin for Non-FocusProduct segments was 15.9 percent for the fiscal year ended June 30, 2006and 24.1 percent for the prior fiscal year ended June 30, 2005, primarilyreflecting a lower average selling price and new profit sharing and stockoption expense.

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As of June 30, 2006, our twelve-month backlog oforders was $566.0 million compared to $393.7 million as of June 30,2005. The increase in backlog is primarily related to the Computing andCommunications and Energy-Saving Product segments, reflecting major newprograms in game stations, servers, digital televisions and appliances.

Revenuesand gross margin by business segments are as follows (in thousands exceptpercentages):

| ** **                                          | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Business Segment**                           | ** ** | ** **                  | ** ** | **Revenues**                | ** ** | **Percentage  of Total** | ** ** | **Gross  Margin** | ** ** | **Revenues** | ** ** | **Percentage  of Total** | ** ** | **Gross  Margin** | ** ** |
| Computing and  Communications (“C&C”) |       | $                           | 403,213    |                        |       | 34.4 | % |   |   | 40.6 | % |   | $ | 386,662 |   |   | 32.9 | % |   |   | 44.6 | % |   |
| Energy-Saving  Products (“ESP”)           |       | 310,118                     |       |                        | 26.5       |   |   |   | 49.6 |   |   | 300,521 |   |   | 25.6 |   |   |   | 55.0 |   |   |
| Aerospace and  Defense (“A&D”)        |       | 137,223                     |       |                        | 11.7       |   |   |   | 48.2 |   |   | 129,295 |   |   | 11.0 |   |   |   | 42.8 |   |   |
| Intellectual  Property (“IP”)             |       | 40,877                      |       |                        | 3.5        |   |   |   | 100.0 |   |   | 41,160 |   |   | 3.5 |   |   |   | 100.0 |   |   |
| Subtotal Focus Products                             |       | 891,431                     |       |                        | 76.1       |   |   |   | 47.6 |   |   | 857,638 |   |   | 73.0 |   |   |   | 50.6 |   |   |
| Commodity Products (“CP”)                 |       | 172,203                     |       |                        | 14.7       |   |   |   | 19.0 |   |   | 206,226 |   |   | 17.6 |   |   |   | 28.6 |   |   |
| Non-Aligned  Products (“NAP”)             |       | 107,484                     |       |                        | 9.2        |   |   |   | 10.9 |   |   | 110,560 |   |   | 9.4 |   |   |   | 15.9 |   |   |
| Subtotal Non-Focus Products                         |       | 279,687                     |       |                        | 23.9       |   |   |   | 15.9 |   |   | 316,786 |   |   | 27.0 |   |   |   | 24.1 |   |   |
| Consolidated  Total                                 |       | $                           | 1,171,118  |                        |       | 100.0 | % |   |   | 40.1 | % |   | $ | 1,174,424 |   |   | 100.0 | % |   |   | 43.5 | % |   |
|                                                     |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*PotentialDivestiture.**  *Weregularly review our products and technology portfolio to determine whetherthey are aligned with our long-term strategic objectives. We are activelyconsidering a sale of our entire, or a significant portion of our, Non-FocusProduct business (with fiscal year 2006 revenues of $280 million), and certaincomplementary products of our Focus Product segments (with fiscal year 2006revenues of approximately $22 million) (the “Divestiture”). At June 30,2006, our Board of Directors had not yet committed to a definitive plan tosell, but we had prepared a variety of strategic options for consideration. Anyultimate sale transaction will also require our Board of Directors’ approval,and is currently contemplated to include operations at our Mumbai, India;Borgaro, Italy; Xian, China; Krefeld, Germany; Swansea, Wales; and Halifax,Canada sites. The Divestiture will also include certain wafer manufacturing,product assembly and research and development equipment currently located atour Temecula, California; Tijuana, Mexico; and El Segundo, Californialocations.

If the Divestiture is completed, we plan to continueour strategy of growing our Focus Products business and achieving greaterprofitability. We do not believe that the completion of the Divestiture willsubstantially alter the customer base that we serve or the competition that weface currently. For a few quarters following a successful completion of theDivestiture, we plan to realign our sales, distribution and product developmentfunctions to a business based solely on our Focus Products. We also plan to configureour manufacturing and support infrastructure to address the initially lowerrevenue levels following the Divestiture.

As part of the Divestiturewe anticipate that we will provide certain manufacturing, sales, marketing andadministrative support services to the buyer. We do not yet know the length oftime or level of all of the support services that may be required. Because thenature, timing, costs and reimbursements related to these and other affects ofthe Divestiture services are not finalized, we cannot determine their impact onour financial performance or position.

*Computing andCommunications*

The Computing and Communication segment is comprisedof our Power Management ICs, including iPowirTM multi-chip modules and DirectFETTMsolutions, and Power Components, primarily HEXFET Power Components, that areused in servers and high-end desktops, notebooks, communications 

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networking, anddigitally-oriented consumer products like game consoles. Our 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.

Revenue increased by four percent compared to theprior fiscal year, primarily reflecting growth in our game stations and serverbusiness. Gross margin for the C&C segment decreased to 40.6 percent forthe fiscal year ended June 30, 2006, from 44.6 percent for the priorfiscal year, primarily reflecting higher manufacturing costs at our Newport,Wales facility and the new profit sharing and stock options expenses in fiscalyear 2006.

*Energy-SavingProducts*

The Energy-Saving Product segment is comprised of ourPower Management ICs and Power Components, primarily HEXFET and IGBT PowerComponents, that provide solutions for variable speed motion control inenergy-saving appliances (such as washing machines, refrigerators and airconditioners), and 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).

Revenue increased by three percent, reflecting growthof our energy-efficient appliance and digital televisions businesses,offset by a decline in our domestic automotive business. Gross margin forthe ESP segment was 49.6 percent for the fiscal year ended June 30, 2006,compared to 55.0 percent in the prior fiscal year. The decrease was primarilydue to higher manufacturing costs at our Newport, Wales facility, includingcosts associated with the new capacity addition not yet fully utilized, and newprofit sharing and stock options expense in fiscal year 2006.

*Aerospace andDefense*

The Aerospace and Defense segment is comprised ofadvanced power management solutions, such as radiation-hardened powermanagement modules, radiation-hardened Power Components, and other high-reliabilityPower Components that address power management requirements in satellites,launch vehicles, aircrafts, ships, submarines and other defense andhigh-reliability applications.

Revenue for the fiscal year ended June 30, 2006increased by six percent from the fiscal year ended June 30, 2005,reflecting growth in our commercial and military surveillance satellite programs.Gross margin for the A&D segment increased to 48.2 percent for the fiscalyear ended June 30, 2006, from 42.8 percent in the prior fiscal year,primarily reflecting saleof a higher-margin product mix, manufacturing efficiencies and restructuringcost savings.

*IntellectualProperty*

The Intellectual Propertysegment reports ongoing and one-time royalty income from licensing and activitiesrelated to the enforcement of our patents and other intellectual property, whichmay include claim settlements from successful defense of our licenses. IPrevenue was $40.9 million for the fiscal year ended June 30, 2006 comparedto $41.2 million for the prior fiscal year ended. Our licensed MOSFET patentsexpire between 2006 and 2010, with the broadest remaining in effect until 2007and 2008.

*Commodity Products*

The Commodity Product segment is comprised primarilyof older-generation Power Components that have widespread use throughout thepower management industry, but are typically commodity in nature and sold withmargins generally below our strategic targets.

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For the fiscal year ended June 30, 2006, revenuewas $172.2 million, down 17 percent from $206.2 million in the fiscal yearended June 30, 2005, as we continued to withdraw from certain low marginbusiness opportunities in fiscal year 2006. Gross margin for our CP segmentdecreased to 19.0 percent for the fiscal year ended June 30, 2006, from28.6 percent in the prior fiscal year, reflecting a lower average selling priceand new profit sharing and stock options expense in fiscal year 2006.

*Non-AlignedProducts*

The Non-Aligned Product segment includes businesses,product lines or products that we are targeting for realignment, whether bydivestiture or otherwise. Currently, product lines reported in this segmentinclude certain modules (including the Company’s automotive system products),rectifiers, diodes and thyristors used in the automotive, industrial, weldingand motor control applications.

NAP revenue for the fiscal year ended June 30,2006 was $107.5 million, decreasing three percent from $110.6 million in thefiscal year ended June 30, 2005. Gross margin for our NAP segmentdecreased to 10.9 percent for the fiscal year ended June 30, 2006, from15.9 percent in the prior fiscal year, reflecting primarily new profit sharingand stock options expense in fiscal year 2006.

We are activelyconsidering a sale of our entire, or a significant portion of our, Non-FocusProduct business consisting of CP and NAP segments (with fiscal year 2006revenues of approximately $280 million), and certain complementary products ofour Focus Product segments (with fiscal year 2006 revenues of approximately $22million). At June 30, 2006, our Board of Directors had not yet committedto a definitive plan to sell, but we had prepared a variety of strategicoptions for consideration.

*Selling andAdministrative Expense*

For the fiscal year endedJune 30, 2006, selling and administrative expense was $193.4 million (16.5 percentof revenues), compared to $173.0 million (14.7 percent of revenues) for thefiscal year ended June 30, 2005, reflecting primarily new profit sharingand stock options expenses, and higher incentive bonuses and employee fringebenefit expenses, in fiscal year 2006.

*Research andDevelopment Expense*

For the fiscal year endedJune 30, 2006 and 2005 research and development expense was $111.4 millionand $104.9 million (9.5 percent and 8.9 percent of revenues), respectively,primarily reflecting increased research and development spending for ICs andnew profit sharing and stock options expense in fiscal year 2006.

*Impairment ofAssets, Restructuring and Severance Charges*

During fiscal year 2003 second quarter endedDecember 31, 2002, we announced our restructuring initiatives. Under theserestructuring initiatives, our goal was to reposition us to better fit themarket conditions and de-emphasize the commodity business. 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. We havesubstantially completed these restructuring activities as of June 30,2006.

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We estimate that total charges associated with therestructuring will be approximately $279 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 $53 million for severance. Of the $279 million in total charges,we expect cash charges to be approximately $106 million. As of fiscal year endedJune 30, 2006, we have realized savings of approximately $80 million fromthe restructuring activities.

For the fiscal year ended June 30, 2006, werecorded $15.9 million in total restructuring-related charges, consisting of:$8.2 million for asset impairment, plant closure costs and other charges and$7.7 million for severance-related costs. For the fiscal year ended June 30,2005, we 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.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 30,2006, we had recorded $277.3 million in total charges, consisting of: $218.4million for asset impairment, plant closure costs and other charges, $6.0million for raw material and work-in-process inventory charges, and $52.9million for severance-related costs. Components of the $218.4 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 futurerevenue stream from our less advanced facility in El Segundo, California todecrease significantly. This facility had a net book value of $59.5 million andwas written 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.

·       Aswe emphasize more advanced generation Schottky products, we expect the futurerevenue stream from our less advanced facility in Borgaro, Italy to decreasesignificantly. This facility had a net book value of $20.5 million and waswritten down by $13.9 million. It is expected that this facility will continuein use until approximately December 2007 and the remaining basis is beingdepreciated over units of production during this period. It is assumed thatsalvage value will 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 

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have also moved theproduction from our Venaria, Italy facility to our Borgaro, Italy and Mumbai,India facilities, 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 have also transitioned the assembly and test of non-spacePower Components from our Leominster, Massachusetts facility to our Tijuana,Mexico facility, as of December 31, 2005. Associated with this reductionin manufacturing activities, certain assets with a net book value of $4.0million were written down by $2.1 million.

·       $59.3million in other miscellaneous items were charged, including $50.1 million inrelocation costs and other impaired asset charges and $9.2 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 to their net realizable value,with a carrying value of $98.2 million, by $6.0 million. For the fiscal yearsended June 30, 2006, 2005 and 2004, we had disposed of $1.1 million, $1.8million and $0.4 million, respectively, of these inventories, which did nothave a material impact on gross margin for the fiscal years then ended. As of June 30,2006, $0.1 million of these inventories remained to be disposed.

Ourrestructuring activities were expected to result in severance charges ofapproximately $53 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                                |       | $10  million |
| Santa Clara, California  and Leominster, Massachusetts |       | Eliminate certain manufacturing activities                    |       | 4  million   |
| Oxted, England                                         |       | Close manufacturing  facility                                 |       | 13  million  |
| Veneria, Italy                                         |       | Move manufacturing to  India and discontinue certain products |       | 11  million  |
| Company-wide                                           |       | Realign business  processes                                   |       | 15  million  |
| Total                                                  |       |                                                          |       | $53 million  |

 

To date, of the $53 million noted above, we haverecorded $52.9 million in severance-related charges: $44.4 million in severancetermination costs related to approximately 1,300 administrative, operating andmanufacturing positions, and $8.5 million in pension termination costs at ourmanufacturing facility in Oxted, England. For the fiscal years ended June 30,2006 and 2005, we recorded $4.3 million and $8.5 million, respectively, inseverance termination costs and $3.4 million and $0, respectively, in pensiontermination costs. The severance charges associated with the elimination ofpositions, which included the 1,300 employees notified to date, had been andwill continue to be recognized ratably over the future service period, asapplicable, in accordance with SFAS No. 146, “Accounting for the CostsAssociated with Exit or Disposal Activities”. We measured the total terminationbenefits at the communication date based on the fair value of the liability asof the termination date. A change resulting from a revision to either thetiming or the amount of estimated cash over the future service period will bemeasured using the credit-adjusted risk-free rate that was used to initiallymeasure the liability. The cumulative effect of the change will be recognizedas an adjustment to the liability in the period of the change.

In fiscal 2002, we had recorded an estimated $5.1million in severance costs associated with the acquisition of TechnoFusion GmbHin Krefeld, Germany. In fiscal 2003, we finalized our plan and 

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determined that totalseverance would be approximately $10 million, and accordingly, we adjustedpurchased goodwill by $4.8 million. We communicated the plan and theelimination of approximately 250 positions primarily in manufacturing to itsaffected employees at that time. We have completed the restructuring of ourKrefeld facility as of December 31, 2005, and determined that$0.7 million of the severance reserve was excess. Accordingly, wedecreased TechnoFusion purchased goodwill by $0.7 million.

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, 2006, 2005 and 2004.Severance activity related to the elimination of 29 administrative andoperating personnel as part of the June 2001 restructuring is alsodisclosed. The remaining June 2001 severance relates primarily to certainlegal accruals associated with that restructuring, which will be paid orreleased as the outcome is determined (in thousands):

| ** **                                                                                          | ** ** | **June  2001  Restructuring** | ** ** | **December  2002  Restructuring** | ** ** | **TechnoFusion  Severance  Liability** | ** ** | **Total  Severance  Liability** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| 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 |   |
| Costs incurred or  charged to “impairment of assets, restructuring and severance charges” |       |                          | —     |                              |       |                                   | 4,290      |                            |       |   | — |   |   | 4,290 |   |
| Purchase price  adjustment                                                                          |       |                          | —     |                              |       |                                   | —     |                            |       |   | (708 | ) |   | (708 | ) |
| Costs paid                                                                                          |       |                          | (136       | )                                 |       |                                   | (6,019     | )                               |       |   | (1,116 | ) |   | (7,271 | ) |
| Foreign exchange  impact                                                                            |       |                          | —     |                              |       |                                   | 143        |                            |       |   | (1 | ) |   | 142 |   |
| Accrued  severance, June 30, 2006                                                              |       |                          | $          | 235                               |       |                                   |       | $                               | 6,538      |   |   |   | $ | 282 |   |   | $ | 7,055 |   |

 

*Other Income andExpense*

Other income (expense) was$9.0 million and ($7.4) million for the fiscal years ended June 30, 2006and 2005, respectively. For the fiscal year ended June 30, 2006, werecognized $13.6 million of gain from thesale of an equity investment, and $1.4 million of incremental legal andaccounting expenses associated with a proposed convertible debt offering,subsequently withdrawn, and the special dividend repatriation under theAmerican Jobs Creation Act of 2004. Forthe fiscal year ended June 30, 2005, we recorded $6.0million of charges associated with the accelerated vesting of stock options andrestricted stock units (see Note 5 of Notes to the Consolidated FinancialStatements, “Stock-Based Compensation” for further details regarding theaccelerated vesting).

*Interest Income andExpense*

Interest income was $33.2 million and $18.0 millionfor the fiscal years ended June 30, 2006 and 2005, respectively. Theincrease in income reflected higher prevailing interest rates and a higheraverage cash and cash investment balance during the fiscal year 2006.

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Interest expense was $26.5million and $19.2 million for the fiscal years ended June 30, 2006 and2005, respectively. The increase in current period expense primarily reflecteda higher effective interest rate payable on our $550 million convertiblesubordinated notes outstanding (see Note 4, “Bank Loans and Long-Term Debt”regarding the modification of the effective interest payable on our convertiblenotes).

*Income Taxes*

Our effective tax rate forthe fiscal years ended June 30, 2006 and 2005, was 32.5 percent and 25.3 percent,respectively, rather than the expected U.S. federal statutory tax rate of 35percent, as a result of lower statutory tax rates in certain foreignjurisdictions, the benefit of foreign tax credits and research and developmentcredits; partially offset by state taxes and certain foreign losses without aforeign tax benefit. Tax provision for the fiscal year ended June 30, 2006included an additional tax expense associated with the special dividendrepatriation from our controlled foreign subsidiaries under the American JobsCreation Act of 2004, which increased the tax rate by five percent. 

**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 the priorfiscal year ended June 30, 2004. The increase reflected the growth in sales ofour Focus Products and the overall improved industry and economic conditions. Royaltiescontributed $41.2 million to fiscal year 2005 revenues, compared to $41.9million 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 comprised 73 percent oftotal revenues for fiscal year 2005, compared to 69 percent for fiscal year2004. The revenue increase from our Focus Products was partially offset bydecrease from sales of our Non-Focus Products. Non-Focus Products revenuesdecreased by four percent to $316.8 million in fiscal 2005 from $330.9 millionin fiscal 2004. 

Revenues as a percentage of total product revenuesbased on sales location were approximately 32 percent, 45 percent and 23percent for the United States, Asia and Europe, respectively, for the fiscalyear ended June 30, 2005. Revenues as a percentage of total product revenueswere approximately 30 percent, 46 percent and 24 percent for the UnitedStates, 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 2004to help address the price pressures faced by the commodity components containedin our Focus Products 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.

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Revenuesand gross margin by business segments are as follows (in thousands except percentages):

| ** **                                          | ** ** | **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 | % |   |   | 37.2 | % |   |
| Energy-Saving  Products (“ESP”)           |       | 300,521                     |       |                        | 25.6       |   |   |   | 55.0 |   |   | 250,763 |   |   | 23.6 |   |   |   | 49.8 |   |   |
| 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 |   |   |   | 45.2 |   |   |
| Commodity Products (“CP”)                 |       | 206,226                     |       |                        | 17.6       |   |   |   | 28.6 |   |   | 217,856 |   |   | 20.5 |   |   |   | 30.0 |   |   |
| 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 |   |   |   | 24.6 |   |   |
| Consolidated  Total                                 |       | $                           | 1,174,424  |                        |       | 100.0 | % |   |   | 43.5 | % |   | $ | 1,060,500 |   |   | 100.0 | % |   |   | 38.8 | % |   |
|                                                     |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Computing andCommunications*

C&C revenue increased by 18 percent compared tothe prior fiscal year, reflecting more units sold as a result of increasingdemands for greater computing power and improved communications. We believe wewill continue to grow our server market share and we expect an increase in ourcommunications and networking business, whose orders for the fiscal quarterended June 30, 2005, were up 28 percent compared to the fiscal quarter endedMarch 31, 2005. 

Gross margin for theC&C segment improved to 44.6 percent for the fiscal year ended June 30,2005, from 37.2 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*

ESP revenue increased by 20 percent, which isattributed to more units sold as a result of energy shortages driving demandfor greater efficiency across various end-market applications. The stronghousing industry worldwide is increasing demand for our energy-efficientappliance business. At the same time, developing economies such as China andIndia are contributing to the growth in our lighting business. Our applianceand lighting revenues increased by 41 percent during the fiscal year ended June30, 2005 compared to the prior fiscal year.

Gross margin for the ESPsegment improved to 55.0 percent for the fiscal year ended June 30, 2005, from49.8 percent in the prior fiscal year, reflecting revenue growth as indicatedabove, sales of higher margin product lines, such as our energy-savingappliance modules, greater manufacturing efficiency from increased capacityutilization, and restructuring cost savings. 

*Aerospace andDefense*

A&D revenue for the fiscal year ended June 30,2005 increased by 19 percent from the fiscal year ended June 30, 2004. Sales ofnew logic level radiation-hardened MOSFET products, additional sales intocustomer in-house DC-DC markets, and increased market share for more efficientand intelligent power management solutions contributed to the 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 

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highermargin product lines, such as the radiation-hardened power management modules,higher average selling price for certain products and restructuring costsavings. 

*IntellectualProperty*

IP revenue for the fiscalyear ended June 30, 2005 were fairly consistent with the prior fiscal year at$41.2 million for the fiscal year ended June 30, 2005 compared to $41.9 millionfor the prior fiscal year ended. Our licensed MOSFET patents expire between2005 and 2010, with the broadest remaining in effect until 2007 and 2008. 

*Commodity Products*

For the fiscal year ended June 30, 2005, CP revenuewas $206.2 million, down five percent from $217.9 million in the fiscal yearended June 30, 2004, as we continued to discontinue certain low margin businessopportunities in fiscal year 2005. 

Gross margin for our CPsegment was 28.6 percent for the fiscal year ended June 30, 2005, and 30.0percent in the prior fiscal year. 

*Non-AlignedProducts*

NAP revenue for the fiscal year ended June 30, 2005was $110.6 million, decreasing two percent from $113.0 million in the fiscalyear ended June 30, 2004. 

Gross margin for our NAPsegment improved to 15.9 percent for the fiscal year ended June 30, 2005, from14.1 percent in the prior fiscal year, reflecting greater manufacturingefficiency from increased capacity utilization and restructuring cost savings. 

*Selling andAdministrative Expense*

For the fiscal year endedJune 30, 2005, selling and administrative expense was $173.0 million (14.7 percentof revenues), compared to $164.7 million (15.5 percent of revenues) for thefiscal year 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 endedJune 30, 2005 and 2004, research and development expense was $104.9 millionand $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.**Approximately90 percent of the fiscal year 2005 spending was related to new technology andproduct development for our Focus Products across our C&C, ESP and A&Dsegments. 

*Impairment ofAssets, Restructuring and Severance Charges*

For the fiscal year ended June 30, 2005, we recorded$34.0 million in total restructuring-related charges, consisting of: $25.3million for asset impairment, plant closure costs and other charges and $8.7 millionfor severance-related costs. For the fiscal year ended June 30, 2004, werecorded $33.5 million in total restructuring-related charges, consisting of:$15.2 million for asset impairment, plant closure costs and other charges and$18.3 million for severance-related costs.

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For additional informationabout our restructuring charges, refer to “Fiscal 2006 Compared with Fiscal2005—*Impairment of Assets, Restructuring andSeverance Charges”* above. 

*Other Income andExpense*

Other (expense) income was($7.4) million and $5.0 million for the fiscal years ended June 30, 2005 and2004, respectively. For the fiscal year ended June 30, 2005, we recordedone-time $6.0 million charge associated with the accelerated vesting of stockoptions in order to avoid approximately $108 million of future compensationexpense associated with our previously issued stock options and restrictedstock units, as a result of the adoption of SFAS No. 123R. For the fiscal yearended June 30, 2004, we recognized $5.9 million in one-time pretax gains fromthe Hitachi settlement, net of legal costs and related expenses.

*Interest Income andExpense*

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

Interest expense was $19.2 million and $16.0 millionfor the twelve months ended June 30, 2005 and 2004, respectively. The increasein current period expense primarily reflected higher effective interest ratepayable on our $550 million convertible subordinated notes outstanding (seeNote 4 of the Notes to the Consolidated Financial Statements, “Bank Loans andLong-Term Debt” regarding the modification of the effective interest payable onour convertible notes).

*Income Taxes*

Our effective tax rate forthe twelve months ended June 30, 2005 and 2004, was 25.3 percent and 24.1 percent,respectively, rather than the expected U.S. federal statutory tax rate of 35percent, as a result of lower statutory tax rates in certain foreignjurisdictions, the benefit of foreign tax credits and research and developmentcredits; partially offset by state taxes and certain foreign losses withoutforeign tax benefit.

**Liquidity andCapital Resources**

At June 30, 2006, we had cash and cash equivalentbalances of $482.9 million and cash investments of $609.7 million. Our cash,cash equivalents, cash investments and unused credit facilities of $137.9million, totaled $1.2 billion. As of June 30, 2006 our investmentportfolio consists of available-for-sale fixed income and investment-gradesecurities.

During the fiscal year ended June 30, 2006,operating activities generated cash flow of $159.9 million compared to $221.7million generated in the prior fiscal year. Cash flow from operations included$88.0 million of depreciation and amortization and $12.0 million of taxbenefit from options exercised for the twelve months ended. Cash flow fromoperations excluded $6.0 million of excess tax benefit from options exercisedas a result of the adoption of SFAS No. 123(R). Changes in operating assetsand liabilities decreased cash by $36.0 million. The increase in workingcapital was primarily attributable to an increase in inventory as we preparefor the record order and backlog as of the fiscal year ended June 30,2006, and a higher accounts receivable balance primarily due to averageextended payment terms in Japan, partially offset by increases in accountspayable, accrued salaries and wages, and accrued taxes due to timing of cashpayments.

During the fiscal year ended June 30, 2006, cashused in investing activities totaled $175.0 million. Proceeds from sales ormaturities of cash investments were $750.3 million, while purchases were $787.9million for the twelve months ended June 30, 2006. As discussed in Note14, “Related Party Transactions”, we sold 2.6 million shares of our investmentin Nihon Inter Electronics Corporation, which contributed 

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$19.1 million. We invested$158.5 million in capital expenditures, reflecting an increase of 17 percentover the prior fiscal year ended June 30, 2005. For the fiscal years endedJune 30, 2006 and 2005, we operated at over 90 percent of our worldwidein-house wafer fabrication and assembly manufacturing capacities, withoutconsidering subcontractor or foundry capacity. During the first half of ourfiscal year 2006, our revenues were negatively affected by wafer fabricationconstraints for certain fast growing Focus Products. In order to meet the highdemand for our Focus Products, we accelerated our capital expansion plans andadded capacity to our wafer fabrication manufacturing facility in Newport,Wales. In calendar year 2006, we expect we will have added incrementalproduction capacity of $200 million to $300 million in annual revenue fromthis facility, although we cannot assure you that capacity constraints will notaffect revenue growth in the future. We plan to use this fabrication capacityalmost exclusively for our Focus Products.

At June 30, 2006, we had purchase commitments forcapital expenditures of approximately $21.6 million, the majority of whichis at our Newport facility. We intend to fund capital expenditures and workingcapital requirements through cash and cash equivalents on hand, anticipatedcash flow from operations and available credit facilities.

Financing activities during thefiscal year ended June 30, 2006 generated $133.8 million. Asdiscussed in Note 4, “Bank Loans and Long-Term Debt”, in June 2006, oursubsidiary in Singapore entered into a Credit Agreement with Bank of America,N.A. (“BoA”). Proceeds from the Credit Agreement contributed $81 million. Proceeds from the issuance of common stock andthe exercise of stock options contributed $57.9 million. Cash flows fromfinancing activities included $6.0 million of excess tax benefit from optionsexercised as a result of the adoption of the SFAS No. 123(R). As ofJune 30, 2006, we had revolving, equipment and foreign credit facilitiesof $169.5 million, against which $31.5 million had been used.

As discussed in Note 3,“Derivative Financial Instruments”, we are required to obtain irrevocablestandby letters of credit in favor of JP Morgan Chase Bank, for $7.5 millionplus the collateral requirement for the December 2002 and April 2004interest rate swap transactions, as determined periodically. At June 30,2006, $20.7 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, 2006, our letter of credit commitmentwould have increased by $3.0 million to $23.7 million.

We donot have any off balance sheet arrangements as of June 30, 2006. As ofJune 30, 2006, the following lists our contractual obligations for thenext 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                          |       | $          | 639,112    |                                      |       | $ | 7,128 |   |   | $ | 631,326 |   | $ | 53 |   | $ | 54 |   | $ | 56 |   |   | $ | 495 |   |   |
| Interest payable  on convertible notes  |       | 34,760     |       |                                      | 34,760     |   |   | — |   | — |   | — |   | — |   |   | — |   |   |
| Operating leases                        |       | 20,602     |       |                                      | 4,220      |   |   | 4,124 |   | 3,258 |   | 3,002 |   | 3,100 |   |   | 2,898 |   |   |
| Capital equipment  purchase commitments |       | 21,600     |       |                                      | 21,600     |   |   | — |   | — |   | — |   | — |   |   | — |   |   |
| Total                                   |       | $          | 716,074    |                                      |       | $ | 67,708 |   |   | $ | 635,450 |   | $ | 3,311 |   | $ | 3,056 |   | $ | 3,156 |   |   | $ | 3,393 |   |   |
|                                         |            |            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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We believe that our current cash and cash investmentbalances, cash flows from operations and borrowing capacity, including unusedamounts under the $150 million Credit Facility with BNP Paribas (see Note 4 ofthe Notes to the Consolidated Financial Statements, “Bank Loans and Long-TermDebt”), will be sufficient to meet our currently foreseeable operating cashrequirements and to take advantage of strategic opportunities as they occur inthe next twelve months. The Credit Facility with BNP Paribas will expire inNovember 2006 and we intend to replace this with another $150 millionfacility.

Our $550 millionconvertible subordinated notes are due in July 2007. We anticipate thatthese notes will be refinanced through public or private offerings of debt orequity, or be paid down with our existing cash and cash investments. The CreditAgreement entered into by our Singapore subsidiary with Bank of America, N.A.is due in June 2008, which we anticipate may be refinanced or be paid downwith the existing cash and cash investments at that time. Although we believethat our current financial resources will be sufficient for normal operatingactivities, we may also consider the use of funds from other external sources,including, but not limited to, public or private offerings of debt or equity.

**Recent AccountingPronouncement**

In July 2006, theFASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109”(“FIN No. 48”). FIN No. 48 clarifies the accounting for income taxesby prescribing the minimum recognition threshold an uncertain tax position isrequired to meet before being recognized in the financial statements. ThisInterpretation requires that the impact of a tax position be recognized if itis more likely than not of being sustained in an audit, based on the technicalmerits of the position. FIN No. 48 also provides guidance onde-recognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. In addition, FIN No. 48excludes income taxes from the scope of SFAS No. 5, “Accounting forContingencies”. FIN No. 48 is effective beginning with our fiscal firstquarter ended September 30, 2007 of fiscal year 2008. We arecurrently assessing the impact of FIN No. 48.

**Critical AccountingPolicies and Estimates**

*Revenue Recognitionand Allowances*

In accordance with Staff Accounting Bulletin No. 104,“Revenue Recognition”, we recognize revenue when the evidence of an arrangementexists, pricing is fixed and determinable, collection is reasonably assured,and delivery or performance of service has occurred. We recognize the majorityof revenues upon shipment for product sales to all customers, includingdistributors, with provisions for estimated returns and allowances recorded atthe time of shipment. Certain customers have limited rights of returns andprice protection programs. We continuously monitor product returns andpotential price adjustments and records a provision for these based on knowncredits and historical experience. While such credits have historically beenwithin our expectations and the provisions established, we cannot guaranteethat we will continue to experience the same predictability in estimatingreturns and allowances. If the historical data and estimates we used tocalculate these provisions do not properly reflect future activity, our netsales, gross profit, net income and earnings per share could be 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 ofconformance to customer specifications. We also maintain allowances for doubtfulaccounts for estimated losses resulting from the inability of our customers tomake required 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.

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*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 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 that we believe do not meet the “morelikely than not” criteria established by SFAS No. 109. Judgments regardingfuture taxable income may be revised due to changes in market conditions, taxlaws, or other factors. If our assumptions and estimates change in the future,then the valuation allowances established may be increased, resulting inincreased income tax expense. Conversely, if we are ultimately able to use allor a portion of the deferred tax assets for which a valuation allowance hasbeen established, then the related portion of the valuation allowance will bereleased to income as a credit to income tax expense. Income tax expense is the tax payable for the period and the changeduring the period in deferred tax assets and liabilities.

We recognize certain tax liabilities for anticipatedtax audit findings in the U.S. and other tax jurisdictions based on ourestimate of whether, and the extent to which additional taxes would be due, inaccordance with SFAS No. 5, “Accounting for Contingencies”. If the auditfindings result in actual taxes owed more or less than what we had anticipated,our income tax expense would be increased or decreased, accordingly, in theperiod of the determination.

U.S. income taxes have notbeen provided on approximately $225.9 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”, requiresthat we provide an allowance for the estimated loss from a loss contingencysuch as a legal proceeding or claim, if it is probable that an asset has beenimpaired or a liability has been incurred and the amount of the loss can bereasonably estimated. SFAS No. 5 requires that we disclose material losscontingencies if there is at least a reasonable possibility that a loss hasbeen incurred. In determining whether a loss should be accrued, we evaluate,among other factors, the degree of probability of an unfavorable outcome andwhether we can reasonably estimate the amount of the loss. We regularlyevaluate current information available to us to assess whether such accrualsshould be adjusted. If the actual outcome of the legal proceeding or claimdiffers from our assessment, our financial position, results of operations orcash flows could be materially impacted.

*Stock-BasedCompensation*

Effective at the beginningof our fiscal year 2006, we adopted the provisions of Statement of FinancialAccounting Standards No. 123 “Share-Based Payment” (“SFAS No. 123(R)”)to account for stock-based compensation. Under SFAS No. 123(R), weestimate the fair value of stock options granted using the Black-Scholes optionpricing model. The fair value for awards that are expected to vest is then amortizedon a straight-line basis over the requisite service period of the award, whichis generally the option vesting term. The amount of expense attributed is basedon an estimated forfeiture rate, which is updated as 

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appropriate.This option pricing model requires the input of highly subjective assumptions,including the expected volatility of our common stock, pre-vesting forfeiturerate and an option’s expected life. The financial statements include amountsthat are based on our best estimates and judgments.

*Derivatives*

Our primary objectives for holding derivativefinancial instruments are to (1) hedge non-U.S. currency risks and (2) minimizeU.S. interest rate risk. We have entered into short and long-term foreignexchange forward contracts with various banks, to hedge the variability in cashflows from foreign currency fluctuations. We have not designated the short-termforward contracts as accounting hedges and their unrealized gains or losses areincluded in the current period’s other income or expense. The fair values ofthe forward contracts are based on Reuters published rates on the trade date. Weanticipate that the settlement and the mark-to-market of the short-term forwardcontracts will offset the income statement impact from revaluing the underlyingforeign currency denominated assets and liabilities. To the extent the notionalamount of our foreign currency forward contracts are materially different thanthe balance of the underlying foreign currency denominated assets andliabilities, our operating results, financial position and cash flows may bematerially impacted.

To reduce the effect of exchange rate fluctuations on$5 million of quarterly forecasted intercompany purchases by our Japansubsidiary, we have entered into a five-year forward contract with BNP Paribasin May 2006. This contract replaced the March 2001 five-year forwardcontract that expired in March 2006, which hedged $11 million of quarterlyforecasted intercompany purchases by our Japan subsidiary. The forwardcontracts qualified and were designed as cash flow hedges under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”, which requiredthat the mark-to-market adjustments be recorded in other comprehensive income,a separate component of stockholders’ equity, until the forecasted transactionsare recorded in earnings. We evaluate the effectiveness of the cash flow hedgesbased on updated forecasts of intercompany purchases by our Japan subsidiarythrough the contract expiration date. Based on this test, if we determine thatthe original hedged transaction will probably not occur as anticipated, and thecash flow hedge is to be discontinued, any unrealized gains or lossesaccumulated in other comprehensive income would be reclassified into earnings. Ourforecasted intercompany purchases by our Japan subsidiary is dependent on anumber of factors, including sale of certain products and maintaining certaincustomer relationships, which if different from originally forecasted, maycause the cash flow hedge to be materially ineffective, and thereby, have amaterial impact on our operating results, financial position and cash flows.

We have entered intocertain interest rate swap agreements to modify the effective interest payableon our $550 million convertible notes from a fixed coupon rate of 4.25 percentto a variable rate that is based on the London InterBank Offered Rate. The swaptransactions qualified and were designated as fair value hedges, which requiredthat the swaps and the convertible notes be marked to market through interestexpense. We use a regression analysis to measure the effectiveness of theinterest rate swaps, and the changes in the fair value of the swaps ismaterially offset by the mark-to-market adjustments on the debt. Our $550 millionconvertible notes mature in July 2007, and we anticipate that the notesmay be refinanced through public or private debt or equity offering or be paiddown with our available cash and cash investments. We plan that the interestrate swaps would be terminated at the same time the underlying debt isterminated. However, the timing of the debt and swap terminations may besubject to certain events outside of our control, which could result inmaterial impact on our operating results, financial position and cash flows.

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*Long-LivedAssets*

Long-lived assetsare property, plant and equipment and purchased or internally-developedsoftware. We test long-lived assets for impairment whenever events or changesin circumstances indicate that their carrying amount may not be recoverable. Suchevents 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.

We evaluate therecoverability of long-lived assets based on the expected undiscounted cashflows for their asset group as determined in accordance with SFAS No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets”, without regard totaxes. Impairments, if any, are recognized based upon the fair value of theassets. Fair value is based upon a discounted cash flow analysis. We use theundiscounted cash flows and apply an appropriate discount rate that isrepresentative of the discount rate used when evaluating potential acquisitions.In developing the cash flow projections, we use revenue and cost assumptionsbased on current levels adjusted for anticipated future market conditions. Ifthese market conditions do not materialize, the cash flow forecasts could bematerially impacted.

*Goodwill andAcquisition-Related Intangible Assets*

We classify the difference between the purchase priceand the fair value of net assets acquired at the date of acquisition asgoodwill.  We classify intangible assetsapart from goodwill if the assets have contractual or other legal rights or ifthe assets can be separated and sold, transferred, licensed, rented orexchanged. Depending on the nature of the assets acquired, the amortizationperiod may range from four to twelve years for those acquisition-relatedintangible assets subject to amortization.

We evaluate the carrying value of goodwill andacquisition-related intangible assets, including the related amortizationperiod, in the fourth quarter of each fiscal year. In evaluating goodwill andintangible assets not subject to amortization, we complete the two-stepgoodwill impairment test as required by SFAS No. 142, “Goodwill andOther Intangible Assets”. We identify the reporting units and determine thecarrying value of each reporting unit by assigning the assets and liabilities,including the existing goodwill and intangible assets, to those reportingunits, in order to assess goodwill for impairment.

In the first of a two-step impairment test, wedetermine the fair value of these reporting units using a discounted cash flowvaluation model, and assume certainrevenues and costs based on current levels adjusted for anticipated futuremarket conditions. We have also assumed fair values based on currentmarket bids for certain of our reporting units, which may differ significantlyfrom the actual sale amount if we are to sell the reporting units. Any significant negative variances in actualresults from our assumptions could potentially indicate impairment of goodwilland acquisition-related intangible assets at one or more of our reportingunits.

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**Item 7A.** Quantitative and QualitativeDisclosures about 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, variable-rate convertible notes andbank loan, credit facilities and interest rate swaps. Our primary objective isto preserve principal while maximizing net investment yield withoutsignificantly increasing risk. At June 30, 2006, we evaluated the effectthat near-term changes in interest rates would have had on these transactions. Achange of as much as ten percent in the London InterBank Offered Rate (“LIBOR”)would have had an annualized favorable impact of approximately $1.5 million onnet interest income/expense since the interest income on our cash and cashinvestments would have outweighed additional interest expense on ourvariable-rate debt.

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 ofour $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 2.91percent, compared to a coupon of 4.25 percent on the Debt. During the fiscalyear ended June 30, 2006, these arrangements increased interest expense by$1.6 million. During the fiscal years ended June 30, 2005 and 2004, thesearrangements reduced interest expense by $8.0 million and $12.9 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 discount the estimated cash flows by the LIBOR swaprate that corresponds to the Debt’s expected maturity date. In addition, ourability to call the Debt was considered in assessing the effectiveness of thehedging relationship. For those years that were projected to include at least aportion of redemption of the convertible debentures, we employed a valuationmodel known as a Monte Carlo simulation. This simulation allows us to projectprobability-weighted contractual cash flows discounted at the LIBOR swap ratethat corresponded to the Debt’s expected maturity date.

The market value of the December 2001 Transactionwas a $7.0 million liability and a $0.3 million liability at June 30, 2006and 2005, respectively. The market value of the April 2004 Transaction wasa $4.6 million liability and a $3.4 million liability at June 30,2006 and 2005, respectively. At June 30, 2006, we had $20.7 million inletters of credit outstanding as part of the collateral requirement on 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 

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stock price occurred atthe close of the fiscal quarter ended June 30, 2006, our letter of creditcommitment would have increased by $3.0 million to $23.7 million.

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, 2006 and2005, was $0.6 million and $0.1 million, respectively, and was included inother long-term assets. Interest expense was decreased by mark-to-market gainsof $0.5 million for the fiscal year ended June 30, 2006 and increased bymark-to-market losses of $0.8 million and $0.5 million, for the fiscalyears ended June 30, 2005 and 2004, respectively.  As of June 30,2006, an increase of ten percent in interest rates would have had a favorableimpact of $1.8 million, and a decrease of ten percent in interest rates wouldhave had an adverse impact of $(0.5) million, on net interest income/expense.

*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 Yen-basedmanufacturing costs. We have established a foreign-currency hedging programusing foreign exchange forward contracts, including the Forward Contractdescribed below, to hedge certain foreign currency transaction exposures. Toprotect against reductions in value and volatility of future cash flows causedby changes in currency exchange rates, we have established revenue, expense andbalance sheet hedging programs. Currency forward contracts and local Yen andEuro borrowings are used in these hedging programs. Our hedging programsreduce, but do not always eliminate, the impact of currency exchange ratemovements. We considered an adverse near-term change in exchange rates of tenpercent for the British Pound Sterling, the Euro and the Japanese Yen. Such anadverse change, after taking into account our derivative financial instrumentsand offsetting positions, would have resulted in an annualized favorable impacton income before taxes of $3.2 million for the fiscal year ended June 30,2006.

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 intercompanypurchases by our subsidiary in Japan which expired in March 2006. Wedesignated the Forward Contract as a cash flow hedge under which mark-to-marketadjustments were 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, we were requiredto exchange 1.2 billion yen for $11.0 million on a quarterly basis from June 2001to March 2006. The mark-to-market gains (losses), net of tax, of $0.7million and ($4.0) million for the fiscal years ended June 30, 2005 and2004, respectively, were included in other comprehensive income.

In May 2006, following the expiration of our March 2001forward contract in March 2006, we entered into another five-year foreignexchange forward contract with BNP Paribas (the “May 2006 Forward Contract”)for the purpose of reducing the effect of exchange rate fluctuations onforecasted intercompany purchases by our Japan subsidiary. We have designatedthe May 2006 Forward Contract as a cash flow hedge. Under the terms of theMay 2006 Forward Contract, we are required to exchange 507.5 million Yenfor $5.0 million on a quarterly basis starting in June 2006 and expiringin March 2011. At June 30, 2006, 19 quarterly payments of 507.5million Yen remained to be swapped at a forward exchange rate of 101.5 Yenper U.S. dollar. The market value of the May 2006 Forward Contract was$1.2 million, included 

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in other assets, at June 30,2006 and the mark-to-market gains, net of tax, of $0.8 million for the fiscalyear ended June 30, 2006, were included in other comprehensive income. Basedon effectiveness tests comparing forecasted transactions through the May 2006Forward Contract expiration date to its cash flow requirements, we do notexpect to incur a material charge to income during the next twelve months as aresult of the May 2006 Forward Contract.

We had approximately $103.1 million and $75.9 millionin notional amounts of forward contracts which were not designated asaccounting hedges under SFAS No. 133 at June 30, 2006 and 2005,respectively. Net realized and unrealizedforeign-currency gains recognized in earnings were $2.3 million for the fiscalyear ended June 30, 2006, $1.4 million for the fiscal year ended June 30,2005 and less than $1 million for the fiscal year ended June 30,2004.

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**Item 8. Financial Statements and Supplementary Data**

**Indexto Consolidated Financial Statements and Financial Statement Schedule**
|                                                                                                                                                     | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent  Registered Public Accounting Firm                                                                                            |       | 58       |       |
| Financial Statements                                                                                                                                |       |     |       |
| Consolidated  Statements of Income for the Fiscal Years Ended June 30, 2006, 2005 and  2004                                                    |       | 60       |       |
| Consolidated  Balance Sheets as of June 30, 2006 and 2005                                                                                      |       | 61       |       |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the  Fiscal Years Ended June 30, 2006, 2005 and 2004 |       | 62       |       |
| Consolidated  Statements of Cash Flows for the Fiscal Years Ended June 30, 2006, 2005  and 2004                                                |       | 63       |       |
| Notes  to Consolidated Financial Statements                                                                                                         |       | 64       |       |

 

SupportingFinancial Statement Schedule:
| Schedule No.                                                                                                                      | ** ** | ** ** | ** ** | **Page** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| II Valuation and Qualifying Accounts and Reserves  for the Fiscal Years Ended June 30, 2006, 2005 and 2004    |       | 102        |       |

 

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

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Shareholders ofInternational Rectifier Corporation

We have completedintegrated audits of International Rectifier Corporation’s fiscal year 2006 and2005 consolidated financial statements and of its internal control overfinancial reporting as of June 30, 2006, and an audit of its 2004consolidated financial statements in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Our opinions, based on our audits, arepresented below.

**Consolidated financial statementsand financial statement schedule**

In our opinion, the consolidated financial statementslisted in the accompanying index present fairly, in all material respects,the financial position of International Rectifier Corporation and itssubsidiaries (the Company) at June 30, 2006 and 2005, and the results oftheir operations and their cash flows for each of the three years in the periodended June 30, 2006 in conformity with accounting principles generallyaccepted in the United States of America. In addition, in our opinion, thefinancial statement schedule listed in the accompanying indexpresents fairly, in allmaterial respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements. These financial statementsand financial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits. We conductedour audits of these statements in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe 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 theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

As discussed in Note 1 tothe financial statements, the Company changed the manner in which it accountsfor share-based compensation in fiscal 2006.

**Internal control over financialreporting**

Also, in our opinion, management’s assessment,included in Management’s Report on Internal Control over Financial Reportingappearing under Item 9A, that the Company maintained effective internal controlover financial reporting as of June 30, 2006, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), is fairly stated, in all material respects, based on those criteria.Furthermore, in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of June 30, 2006,based on criteria established in *Internal Control—IntegratedFramework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother 

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procedures as we considernecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinions.

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, 2006         |   |   |

 

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**INTERNATIONALRECTIFIER CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(In thousands except per share amounts)**

| ** **                                                                          | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                                            |       | $                                                   | 1,171,118  |   | $ | 1,174,424 |   | $ | 1,060,500 |   |
| Cost of sales                                                                       |       | 702,079                                             |       | 663,901 |   | 649,406 |   |
| Gross profit                                                                        |       | 469,039                                             |       | 510,523 |   | 411,094 |   |
| Selling and  administrative expense                                                 |       | 193,436                                             |       | 173,037 |   | 164,723 |   |
| Research and  development expense                                                   |       | 111,418                                             |       | 104,876 |   | 92,156 |   |
| Amortization of  acquisition-related intangible assets                              |       | 5,250                                               |       | 5,939 |   | 5,623 |   |
| Impairment of  assets, restructuring, severance and other charges                   |       | 15,912                                              |       | 33,952 |   | 33,534 |   |
| Other (income)  expense, net                                                        |       | (9,023                                              | )          | 7,377 |   | (5,038 | ) |
| Interest (income)  expense, net                                                     |       | (6,704                                              | )          | 1,274 |   | 1,812 |   |
| Income before income taxes                                                          |       | 158,750                                             |       | 184,068 |   | 118,284 |   |
| Provision for  income taxes                                                         |       | 51,594                                              |       | 46,608 |   | 28,514 |   |
| Net income                                                                          |       | $                                                   | 107,156    |   | $ | 137,460 |   | $ | 89,770 |   |
| Net income per common  share:                                                       |       |                                                |       |   |   |   |   |
| Net income per  common share—basic                                             |       | $                                                   | 1.51       |   | $ | 2.03 |   | $ | 1.37 |   |
| Net income per common share—diluted                                            |       | $                                                   | 1.49       |   | $ | 1.91 |   | $ | 1.31 |   |
| Average common shares outstanding—basic                                        |       | 70,914                                              |       | 67,621 |   | 65,459 |   |
| Average common  shares and potentially dilutive securities outstanding—diluted |       | 71,753                                              |       | 77,089 |   | 68,363 |   |

 

The accompanying notes are an integral part of this statement.

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**INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands except share amounts)**

| ** **                                                                                                                              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                                                              | ** ** | **2006**          | ** ** | **2005**          | ** ** |
| **ASSETS**                                                                                                                              |       |              |       |              |       |
| Current assets:                                                                                                                         |       |              |       |              |       |
| Cash and cash  equivalents                                                                                                              |       | $                 | 482,907    |              | $          | 359,978 |   |
| Short-term cash  investments                                                                                                            |       | 120,872           |       | 278,157           |       |
| Trade accounts  receivable, less allowance for doubtful accounts ($2,498 in 2006 and $412 in  2005)                                     |       | 182,774           |       | 158,510           |       |
| Inventories, net                                                                                                                        |       | 214,094           |       | 177,560           |       |
| Current deferred income  taxes                                                                                                          |       | 23,353            |       | 34,784            |       |
| Prepaid expenses and  other receivables                                                                                                 |       | 51,456            |       | 53,387            |       |
| Total current assets                                                                                                                    |       | 1,075,456         |       | 1,062,376         |       |
| Long-term cash  investments                                                                                                             |       | 488,849           |       | 302,585           |       |
| Property, plant and  equipment, at cost, less accumulated depreciation ($590,052 in 2006 and  $520,335 in 2005)                         |       | 576,380           |       | 488,204           |       |
| Goodwill                                                                                                                                |       | 155,148           |       | 152,457           |       |
| Acquisition-related  intangible assets, less accumulated amortization ($29,753 in 2006 and $24,291  in 2005)                            |       | 31,994            |       | 35,354            |       |
| Long-term deferred  income taxes                                                                                                        |       | 85,754            |       | 76,158            |       |
| Other assets                                                                                                                            |       | 91,442            |       | 106,410           |       |
| Total assets                                                                                                                            |       | $                 | 2,505,023  |              | $          | 2,223,544 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                          |       |              |       |              |       |
| Current liabilities:                                                                                                                    |       |              |       |              |       |
| Bank loans                                                                                                                              |       | $                 | 6,501      |              | $          | 18,168 |   |
| Long-term debt,  due within one year                                                                                                    |       | 627               |       | 163               |       |
| Accounts payable                                                                                                                        |       | 85,009            |       | 81,893            |       |
| Accrued salaries, wages  and commissions                                                                                                |       | 57,643            |       | 33,344            |       |
| Other accrued expenses                                                                                                                  |       | 104,870           |       | 91,328            |       |
| Total current  liabilities                                                                                                              |       | 254,650           |       | 224,896           |       |
| Long-term debt,  less current maturities                                                                                                |       | 617,540           |       | 547,259           |       |
| Other long-term  liabilities                                                                                                            |       | 28,501            |       | 26,186            |       |
| Total liabilities                                                                                                                       |       | 900,691           |       | 798,341           |       |
| Commitments and contingencies (Notes 10, 11 and  12)                                                                               |       |              |       |              |       |
| Stockholders’ equity:                                                                                                              |       |              |       |              |       |
| Common shares, $1 par  value, authorized: 330,000,000; issued and outstanding: 71,987,728 shares in  2006 and 69,826,428 shares in 2005 |       | 71,988            |       | 69,826            |       |
| Preferred shares, $1 par  value, authorized: 1,000,000; issued and outstanding: none in 2006 and 2005                                   |       | —            |       | —            |       |
| Capital contributed in  excess of par value of shares                                                                                   |       | 925,603           |       | 854,045           |       |
| Retained earnings                                                                                                                       |       | 542,301           |       | 435,145           |       |
| Accumulated other  comprehensive income                                                                                                 |       | 64,440            |       | 66,187            |       |
| Total stockholders’  equity                                                                                                        |       | 1,604,332         |       | 1,425,203         |       |
| Total liabilities and stockholders’ equity                                                                                         |       | $                 | 2,505,023  |              | $          | 2,223,544 |   |

 

The accompanying notes are an integral part of this statement.

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**INTERNATIONAL RECTIFIERCORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME (LOSS)**

**(In thousands except shareamounts)**

| ** **                                                                                                                                                      | ** ** | **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, 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 participation plan                                                                                                                           |       |               | 296        |                                                                             |       |                   | 5,282      |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 5,578 |   |
| Tax benefit from exercise of stock options and stock  participation 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 | ) |   | — |   |
| Add: 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      |                                                                             |       |                   | 63,582     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 66,796 |   |
| 254,260—stock participation plan                                                                                                                           |       |               | 254        |                                                                             |       |                   | 8,011      |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 8,265 |   |
| Tax benefit from exercise of stock options and stock  participation plan                                                                                        |       |               | —     |                                                                             |       |                   | 18,572     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 18,572 |   |
| Stock-based compensation cost                                                                                                                                   |       |               | —     |                                                                             |       |                   | 6,711      |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 6,711 |   |
| **Balance, June 30, 2005**                                                                                                                                 |       |               | 69,826     |                                                                             |       |                   | 854,045    |                                                      |       |                                  | 435,145    |      |       |   | 66,187 |   |   |   | — |   |   | 1,425,203 |   |
| Net income for the year ended June 30, 2006                                                                                                                |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | 107,156    |      |       |   | — |   |   |   | 107,156 |   |   | 107,156 |   |
| Other comprehensive  income, net of tax:                                                                                                                        |       |               |       |                                                                             |       |                   |       |                                                      |       |                                  |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation adjustments                                                                                                                        |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | 9,296 |   |   | — |   |
| Unrealized gains on foreign currency forward  contract, net of deferred tax provision of ($425)                                                            |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | 789 |   |   | — |   |
| Net unrealized gains on available-for-sale  securities, net of deferred tax benefit of $1,532                                                              |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | (2,842 | ) |   | — |   |
| Less: Reclassification adjustments of gain on  available-for-sale securities and foreign currency forward contract, net of tax  provision of $4,841        |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | (8,990 | ) |   | — |   |
| Other comprehensive loss                                                                                                                                        |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | (1,747 | ) |   |   | (1,747 | ) |   | (1,747 | ) |
| Comprehensive income                                                                                                                                            |       |               | —     |                                                                             |       |                   | —     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | 105,409 |   |   | — |   |
| Issuance of common  shares:                                                                                                                                     | ** ** |               |       |                                                                             |       |                   |       |                                                      |       |                                  |       |      |       |   |   |   |   |   |   |   | ** ** | ** ** | ** ** |
| 2,156,766—exercise of stock options                                                                                                                        |       |               | 2,158      |                                                                             |       |                   | 55,540     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 57,698 |   |
| 4,234—stock participation plan                                                                                                                             |       |               | 4          |                                                                             |       |                   | 172        |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 176 |   |
| Tax benefit from exercise of stock options                                                                                                                      |       |               | —     |                                                                             |       |                   | 11,955     |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 11,955 |   |
| Stock-based compensation cost                                                                                                                                   |       |               | —     |                                                                             |       |                   | 3,891      |                                                      |       |                                  | —     |      |       |   | — |   |   |   | — |   |   | 3,891 |   |
| **Balance,  June 30, 2006**                                                                                                                                |       |               | $          | 71,988                                                                           |       |                   |       | $                                                         | 925,603    |                                  |       |      | $          | 542,301 |   |   |   | $ | 64,440 |   |   |   | — |   |   | $ | 1,604,332 |   |

 

The accompanying notes are an integral part of this statement.

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**INTERNATIONALRECTIFIER CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                                         | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                            | ** ** | ** ** | **2005** | ** ** | ** ** | **2004** | ** ** |
| Cash flow from operating  activities:                                              |       |                                                |       |   |   |   |   |   |   |
| Net income                                                                         |       | $                                                   | 107,156    |   |   | $ | 137,460 |   |   | $ | 89,770 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                |       |   |   |   |   |   |   |
| Depreciation and amortization                                                      |       | 82,738                                              |       |   | 70,338 |   |   | 56,915 |   |
| Amortization of acquisition-related intangible  assets                             |       | 5,250                                               |       |   | 5,939 |   |   | 5,623 |   |
| Stock compensation expense                                                         |       | 3,891                                               |       |   | 6,711 |   |   | — |   |
| Gain on sale of equity investment                                                  |       | (13,629                                             | )          |   | — |   |   | — |   |
| Unrealized gains on derivative transactions                                        |       | (3,678                                              | )          |   | (955 | ) |   | (860 | ) |
| Deferred income taxes                                                              |       | 8,217                                               |       |   | 18,650 |   |   | (14,638 | ) |
| Tax benefit from options exercised                                                 |       | 11,955                                              |       |   | 18,572 |   |   | 15,684 |   |
| Excess tax benefit from options exercised                                          |       | (6,016                                              | )          |   | — |   |   | — |   |
| Change in operating assets and liabilities, net  (Note 1)                          |       | (35,958                                             | )          |   | (35,051 | ) |   | 10,479 |   |
| Net cash provided by operating activities                                          |       | 159,926                                             |       |   | 221,664 |   |   | 162,973 |   |
| Cash flow from  investing activities:                                              |       |                                                |       |   |   |   |   |   |   |
| Additions to property, plant and equipment                                         |       | (158,502                                            | )          |   | (135,133 | ) |   | (86,170 | ) |
| Proceeds from sale of property, plant and equipment                                |       | 1,317                                               |       |   | 265 |   |   | 891 |   |
| Proceeds from sale of equity investment                                            |       | 19,068                                              |       |   | — |   |   | — |   |
| Acquisition of technologies                                                        |       | (3,500                                              | )          |   | (11,500 | ) |   | — |   |
| Acquisition of certain business assets and  businesses, net of cash acquired       |       | —                                              |       |   | (39,633 | ) |   | — |   |
| Sale or maturities of cash investments                                             |       | 750,297                                             |       |   | 387,513 |   |   | 567,562 |   |
| Purchase of cash investments                                                       |       | (787,873                                            | )          |   | (471,020 | ) |   | (566,000 | ) |
| Other, net                                                                         |       | 4,218                                               |       |   | (7,527 | ) |   | 3,818 |   |
| Net cash used in investing activities                                              |       | (174,975                                            | )          |   | (277,035 | ) |   | (79,899 | ) |
| Cash flow from  financing activities:                                              |       |                                                |       |   |   |   |   |   |   |
| (Repayments of) proceeds from short-term debt                                      |       | (11,406                                             | )          |   | (539 | ) |   | 544 |   |
| Proceeds from long-term debt                                                       |       | 81,090                                              |       |   | — |   |   | — |   |
| Repayments of long-term debt                                                       |       | —                                              |       |   | (165 | ) |   | (120 | ) |
| Repayments of capital lease obligations                                            |       | (332                                                | )          |   | (288 | ) |   | (888 | ) |
| Proceeds from exercise of stock options and stock  participation plan              |       | 57,874                                              |       |   | 75,061 |   |   | 44,211 |   |
| Excess tax benefit from options exercised                                          |       | 6,016                                               |       |   | — |   |   | — |   |
| Other, net                                                                         |       | 516                                                 |       |   | 1,597 |   |   | (382 | ) |
| Net cash provided by financing activities                                          |       | 133,758                                             |       |   | 75,666 |   |   | 43,365 |   |
| Effect of exchange rate changes on cash and cash  equivalents                      |       | 4,220                                               |       |   | 659 |   |   | (4,238 | ) |
| Net increase in  cash and cash equivalents                                         |       | 122,929                                             |       |   | 20,954 |   |   | 122,201 |   |
| Cash and cash  equivalents, beginning of year                                      |       | 359,978                                             |       |   | 339,024 |   |   | 216,823 |   |
| Cash and cash  equivalents, end of year                                            |       | $                                                   | 482,907    |   |   | $ | 359,978 |   |   | $ | 339,024 |   |

 

The accompanying notes are an integral part of this statement.

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**INTERNATIONALRECTIFIER CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

*Business*

International Rectifier Corporation (“IR” or the “Company”)is a designer, manufacturer and marketer of power management product deviceswhich use power semiconductors. Power semiconductors address 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’s products are used in a variety of endapplications, including computers, communications networking, consumerelectronics, energy-efficient appliances, lighting, satellites, launchvehicles, aircraft and automotive diesel injection. In addition, the Companylicenses its intellectual property to third parties.

According to iSuppli, aleading industry source for market information, the market for power managementsemiconductors will be approximately $24 billion in calendar year 2006. TheCompany’s products address approximately $17 billion or approximately 72percent of this market in calendar year 2006.

*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. Fiscal year 2006 consisted of 52 weeks ending July 2,2006, fiscal year 2005 consisted of 52 weeks ending July 3, 2005, and fiscalyear 2004 consisted of 52 weeks ending July 4, 2004. For ease ofpresenting the accompanying consolidated financial statements, the fiscal yearend for all periods presented is shown as June 30.

*Revenue Recognition*

In accordance with Staff Accounting Bulletin No. 104,“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 records aprovision for these based on notification received of pending credits andhistorical experience. While such credits have historically been within theCompany’s expectations and the provisions established, the Company cannotguarantee that it will continue to experience the same rate of returns andallowances. If the historical data and estimates used to calculate theseprovisions do not properly reflect future activity, the Company’s revenues,gross profit, net income and net income per common share could be impacted. 

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 

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inabilityof its customers to make required payments. If the financial condition of itscustomers was to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances might be required.

*Advertising Costs*

Advertising costs areexpensed as incurred. Advertising expense for the fiscal years ended June 30, 2006,2005 and 2004 was $4.0 million, $4.4 million and $3.1 million, respectively.

*Research andDevelopment Costs*

Research and developmentcosts, including salaries and departmental general overhead and allocated expenses,are expensed as incurred. 

*Environmental Costs*

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

*Interest (Income)Expense*

Interest(income) expense for the fiscal years ended June 30, 2006, 2005 and 2004are as follows (in thousands):

| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income                 |       | $        | (33,156    | )        | $          | (17,956  | )          | $ | (14,217 | ) |
| Interest expense                |       | 26,452   |       | 19,230   |       | 16,029   |       |
| Interest (income)  expense, net |       | $        | (6,704     | )        | $          | 1,274    |       | $ | 1,812 |   |

 

Interest expensecapitalized as part of construction-in-progress for the fiscal years ended June 30, 2006,2005 and 2004 was $4.5 million, $2.3 million and $1.4 million, respectively.

*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 that the Company believes do not meetthe “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 that is more or less than what theCompany had anticipated, its income tax expense would be increased or decreased,accordingly, in the period of the determination. 

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U.S. income taxes have notbeen provided on approximately $225.9 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.

*Net Income perCommon Share*

Net income per common share—basic is computed bydividing net income available to common stockholders (the numerator) by theweighted average number of common shares outstanding (the denominator) duringthe period. The computation of net income per common share—diluted is similarto the computation of net income per common share—basic except that thedenominator is increased to include the number of additional common shares thatwould have been outstanding for the exercise of stock options using thetreasury stock method and the conversion of the Company’s convertiblesubordinated notes using the if-converted method. The Company’s use of thetreasury stock method reduces the gross number of dilutive shares by the numberof shares purchasable from the proceeds of the options assumed to be exercised.The Company’s use of the if-converted method increases reported net income bythe interest expense related to the convertible subordinated notes whencomputing net income per common share—diluted.

At the beginning of fiscalyear 2006, the Company adopted SFAS No. 123(R) on a modifiedprospective basis. Assumed proceeds from the in-the-money outstanding optionsas of fiscal year ended June 30, 2006, include the windfall tax benefits,net of shortfalls, calculated under the “as-if” method as prescribed by SFAS No. 123(R).

*Statements of CashFlows*

Componentsin the change of operating assets and liabilities, net of effects ofacquisitions, for the fiscal years ended June 30, 2006, 2005 and 2004 werecomprised of the following (in thousands):

| ** **                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Trade accounts  receivable                      |       | $        | (26,517    | )        | $          | (4,195   | )          | $ | (11,106 | ) |
| Inventories, net                                |       | (37,092  | )          | (16,234  | )          | 15,184   |       |
| Prepaid expenses  and other receivables         |       | (9,601   | )          | (12,787  | )          | 76       |       |
| Accounts payable                                |       | 3,280    |       | 4,347    |       | (13,874  | )          |
| Accrued salaries,  wages and commissions        |       | 22,954   |       | (3,242   | )          | 6,907    |       |
| Other accrued  expenses                         |       | 11,018   |       | (2,940   | )          | 13,292   |       |
| Change in operating assets and liabilities, net |       | $        | (35,958    | )        | $          | (35,051  | )          | $ | 10,479 |   |

 

Supplementaldisclosures of cash flow information (in thousands):

| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash paid during the  year for: |       |     |       |     |       |     |       |
| Interest                        |       | $        | 19,030     |     | $          | 16,566   |       | $ | 14,211 |   |
| Income taxes                    |       | 22,960   |       | 13,925   |       | 11,395   |       |
|                                 |            |          |            |          |            |          |            |  |  |  |

 

*Fair Value ofFinancial 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 

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assumptions,which are inherently subjective in nature, are required to interpret marketdata in developing the estimates of fair value. Accordingly, the estimated fairvalues may not necessarily be realized in an immediate sale or settlement ofthe instrument in a current market exchange. The disclosure requirements ofSFAS No. 107 exclude certain financial instruments (e.g., leases) and allnon-financial instruments (e.g., fixed assets, intangibles). Accordingly,the aggregate amount presented does not reflect the underlying value of theCompany. The Company’s financial instruments, including cash, cash equivalents,accounts receivable, accounts payable and accrued liabilities are carried atcost, which approximates their fair value because of the short-term nature ofthese investments.

*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 their fair value. The Company invests excess cash in marketablesecurities consisting primarily of commercial papers, corporate notes and bondsand U.S. government securities. At June 30, 2006 and 2005, 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, 2006 and 2005 aresummarized as follows (in thousands):

| ** **                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Cash and cash  equivalents                         |       | $        | 482,907    |     | $          | 359,978 |   |
| Short-term cash  investments                       |       | 120,872  |       | 278,157  |       |
| Long-term cash  investments                        |       | 488,849  |       | 302,585  |       |
| Total cash, cash  equivalents and cash investments |       | $        | 1,092,628  |     | $          | 940,720 |   |

 

*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, 2006 and 2005 were comprised of thefollowing (in thousands):

| ** **      | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 37,268     |     | $          | 33,328 |   |
| Work-in-process |       | 93,534   |       | 82,802   |       |
| Finished goods  |       | 83,292   |       | 61,430   |       |
|            |       | $        | 214,094    |     | $          | 177,560 |   |

 

*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 other (income) expense.Depreciation is provided using the straight-line method, based on theestimated useful lives of the assets, ranging from three to 40 years, or theunits of production method based upon the estimated output of the equipment.Depreciation and amortization expense for the fiscal years ended June 30,2006, 2005 and 2004 was $71.0 million, $62.7 million and $51.5 million, 

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respectively. Property, plant and equipment at June 30,2006 and 2005 were comprised of the following (in thousands):

| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Range of**    | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Useful Life** | ** ** |
| Building and  improvements                      |       | $          | 126,504    |       | $          | 121,823              |       |   | 3-40 |   |   |
| Equipment                                       |       | 899,716    |       | 754,776    |       |                 | 3-15       |   |   |
| Construction-in-progress                        |       | 121,040    |       | 112,206    |       |                 |       |   |   |
| Less accumulated  depreciation and amortization |       | (590,052   | )          | (520,335   | )          |                 |       |   |   |
|                                            |       | 557,208    |       | 468,470    |       |                 |       |   |   |
| Land                                            |       | 19,172     |       | 19,734     |       |                 |       |   |   |
|                                            |       | $          | 576,380    |       | $          | 488,204              |       |   |   |   |   |

 

Amortization of improvements to leased premises isprovided using 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 30,2006 and 2005.

Repairs and maintenancecosts are charged to expense. In the fiscal years ended June 30, 2006,2005 and 2004, repairs and maintenance costs were $38.7 million, $35.2 millionand $26.6 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 be recoverable.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.

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 of acquisitionas goodwill. The Company classifies intangible assets apart from goodwill ifthe assets have contractual or other legal rights or if the assets can beseparated and sold, transferred, licensed, rented or exchanged. Depending onthe nature of the assets acquired, the 

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amortization period mayrange from four to twelve years for those acquisition-related intangible assetssubject 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 identifies its reporting units anddetermines 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.

In the first of a two-step impairment test, theCompany determines the fair value of these reporting units using a discountedcash flow valuation model. The Company compares 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 stepcompares 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, 2006. In developing the cash flow projections, theCompany used on certain assumptionsabout revenues and costs that were based on current levels adjusted foranticipated future market conditions. The Company also assumed fairvalues based on current market bids for certain of its reporting units, whichmay differ significantly from the actual sale amount if it was to sell thereporting units. Any significantnegative variances in actual results from the Company’s assumptions couldpotentially indicate impairment of goodwill and acquisition-relatedintangible assets at one or more of its reporting units.

AtJune 30, 2006 and 2005, acquisition-related intangible assets are asfollows (in thousands):

| ** **                                   | ** ** | ** **                         | ** **  | **2006**                    | ** ** | **2005**                      | ** ** |
|----------------------------------------------|------------|------------------------------------|-------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **Amortization  Periods  (Years)** | ** **  | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Complete  technology                         |       |                               | 4 – 12 |                        |       | $                             | 38,324     |   |   | $ | (14,881 | ) |   | $ | 36,665 |   |   | $ | (11,859 | ) |   |
| Distribution rights  and customer lists      |       |                               | 5 – 12 |                        |       | 15,446                        |       |   | (8,744 | ) |   | 15,667 |   |   | (7,243 | ) |   |
| Intellectual  property and other             |       |                               | 5 – 12 |                        |       | 7,963                         |       |   | (6,114 | ) |   | 7,313 |   |   | (5,189 | ) |   |
| Total  acquisition-related intangible assets |       |                               |        |                        |       | $                             | 61,733     |   |   | $ | (29,739 | ) |   | $ | 59,645 |   |   | $ | (24,291 | ) |   |

 

As of June 30, 2006, estimated amortizationexpense for the next five years is as follows (in thousands): fiscal 2007: $2.9million; fiscal 2008: $2.6 million; fiscal 2009: $2.5 million; fiscal 2010:$2.5 million and fiscal 2011: $1.7 million.

Thecarrying amount of goodwill by segment as of fiscal year ended June 30,2006, is as follows (in thousands):

| Energy-Saving  Products              |   | $      | 48,326  |   |
|--------------------------------------|--------|--------|---------|--------|
| Computing and  Communications        |   | 43,002 |    |
| Aerospace and  Defense               |   | 18,959 |    |
| Intellectual  Property               |   | 20,074 |    |
| Commodity  Products                  |   | 15,245 |    |
| Non-Aligned  Products                |   | 9,542  |    |
| Goodwill balance, June 30, 2006 |   | $      | 155,148 |   |

 

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As of June 30, 2006, $43.3 million of goodwill isdeductible for income tax purposes for which $3.0 million, $2.9 millionand $2.1 million were deducted in the fiscal years ended June 30, 2006,2005 and 2004, respectively.

Thechanges in the carrying amount of goodwill for the fiscal years ended June 30,2006 and 2005 are as follows (in thousands):

| ** **                   | ** ** | **Goodwill** | ** ** |
|------------------------------|------------|--------------|------------|
| Balance,  June 30, 2004 |       | $            | 139,919    |   |
| New acquisition              |       | 12,958       |       |
| Foreign exchange  impact     |       | (420         | )          |
| Balance, June 30, 2005  |       | 152,457      |       |
| Foreign exchange  impact     |       | 2,691        |       |
| Balance, June 30, 2006  |       | $            | 155,148    |   |

 

New acquisition 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”. The goodwillassociated with this acquisition has been assigned to the segments based ontheir relative fair value.

*Other AccruedExpenses*

Otheraccrued expenses at June 30, 2006 and 2005 were comprised of the following(in thousands):

| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Accrued taxes                   |       | $        | 54,497     |     | $          | 46,704 |   |
| Accrued interest                |       | 14,579   |       | 9,289    |       |
| Short-term  severance liability |       | 7,055    |       | 10,988   |       |
| Other accrued  expenses         |       | 28,739   |       | 24,347   |       |
| Total accrued expenses          |       | $        | 104,870    |     | $          | 91,328 |   |

 

*DerivativeFinancial Instruments*

The Company’s primary objectives for holdingderivative financial instruments are to (1) hedge non-U.S. currencyrisks and (2) minimize U.S. interest rate risk. The Company’s derivativeinstruments are recorded at fair value and are included in other currentassets, other long-term assets or other long-term liabilities. The Company’saccounting policies for derivative financial instruments are based on thecriteria for designation as hedging transactions, either as cash flow or fairvalue hedges as defined by SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” SFAS No. 138, “Accounting for CertainDerivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133”,and SFAS No. 149, “Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities”. A cash flow hedge refers to the hedge of the exposureto variability in the cash flows of an asset or a liability, or of a forecastedtransaction. A fair value hedge refers to the hedge of the exposure to changesin fair value of an asset or a liability, or of an unrecognized firm commitment.The criteria for designating a derivative as a hedge include the instrument’seffectiveness in risk reduction and, in most cases, a one-to-one matching ofthe derivative instrument to its underlying transaction. The Company recognizesgains and losses on derivatives that are not designated as hedges foraccounting purposes currently in earnings. These gains and losses generallyoffset changes in the values of hedged assets or 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. For 

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interest rate swaps, theCompany measures the effectiveness using regression analysis, which offsets thechange in fair value of the long-term debt with the change in fair value of theinterest 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, 2006and 2005 were as follows (in thousands): 

| ** **                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|
| Foreign currency  translation adjustments                   |       | $        | 46,993     |     | $          | 37,697 |   |
| Net unrealized  gains on foreign currency forward contracts |       | 788      |       | 84       |       |
| Net unrealized  gains on available-for-sale securities      |       | 16,659   |       | 28,406   |       |
| Accumulated other  comprehensive income                     |       | $        | 64,440     |     | $          | 66,187 |   |

 

*Stock-BasedCompensation*

Effective at the beginningof fiscal year 2006, the Company adopted the provisions of Statement ofFinancial Accounting Standards No. 123 “Share-Based Payment” (“SFAS No. 123(R)”)to account for stock-based compensation. Under SFAS No. 123(R), theCompany estimates the fair value of stock options granted using theBlack-Scholes option pricing model. The fair value for awards that are expectedto vest is then amortized on a straight-line basis over the requisite serviceperiod of the award, which is generally the option vesting term. The amount ofexpense attributed is based on estimated forfeiture rate, which is updatedbased on actual forfeitures as appropriate. This option pricing model requiresthe input of highly subjective assumptions, including the expected volatilityof our common stock, pre-vesting forfeiture rate and an option’s expected life.The financial statements include amounts that are based on the Company’s bestestimates and judgments. Prior to fiscal year 2006, the Company accounted forstock-based compensation plans using the intrinsic value methodprescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees. See Note 5, “Stock-Based Compensation”. The effects of applying SFAS No. 123 in thispro forma disclosure are not indicative of future amounts. SFAS No. 123does 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-UpActivities.”

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*Legal Costs*

The Company expenses legalcosts incurred related to loss contingencies. The Company capitalizes legalcosts associated with filing and maintaining successful U.S. and foreign patentapplications. The Company also capitalizes legal costs related to the defenseand enforcement of issued patents for which success is deemed probable, andthese costs are amortized over the estimated useful lives of the patents. Suchdeferred costs are reviewed for impairment and recoverability periodically. Capitalizedlegal patent costs, net of accumulated amortization at June 30, 2006 and2005 were approximately $15.3 million and $14.7 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 the disclosure of contingent assets andliabilities at the date of the financial statements, and the reported revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

*Reclassification*

Certainreclassifications have been made to previously reported amounts to conform tothe current year presentation. Certain reclassifications have been madeto June 30, 2004 cash flows from investing activities. Previously, theCompany’s investments in auction rate preferred securities were recorded incash and cash equivalents rather than short-term cash investments. The Companyreclassified auction rate preferred securities from cash and cash equivalentsto short-term investments because the underlying instruments have contractualmaturity dates exceeding ninety days. As a result of the reclassifications, theCompany’s net cash used for the purchase of cash investments increased by $33.4million and net change in cash and cash equivalents decreased by $33.4 millionfor the fiscal year ended June 30, 2004. The reclassifications had noimpact on the Company’s total current assets, stockholders’ equity, cash flowsprovided by operating activities or total consolidated results reported.

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**2.   Investments**

Available-for-salesecurities as of June 30, 2006 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                               |       | $                   | 66,233     |                        |       | $                                    | —     | ** **                |       |              | $          | (551 | ) |   |   | $ | (551 | ) |   | $ | 65,682 |   |
| U.S. government  and agency obligations      |       | 50,914              |       |                        | —     | ** **                           |       |                      | (492       | )                 |       |   | (492 | ) |   | 50,422 |   |
| Corporate auction  rate preferred securities |       | 4,508               |       |                        | —     | ** **                           |       |                      | —     |              |       |   | — |   |   | 4,508 |   |
| Other debt                                   |       | 260                 |       |                        | —     | ** **                           |       |                      | —     |              |       |   | — |   |   | 260 |   |
| Total short-term cash investments            |       | $                   | 121,915    |                        |       | $                                    | —     | ** **                |       |              | $          | (1,043 | ) |   |   | $ | (1,043 | ) |   | $ | 120,872 |   |
| Long-Term Cash Investments:                  |       |                |       |                        |       | ** **                           |       |                      |       |              |       |   |   |   |   |   |   |
| Corporate debt                               |       | $                   | 165,598    |                        |       | $                                    | 40         | ** **                |       |              | $          | (1,973 | ) |   |   | $ | (1,933 | ) |   | $ | 163,665 |   |
| U.S. government  and agency obligations      |       | 184,882             |       |                        | —     | ** **                           |       |                      | (3,125     | )                 |       |   | (3,125 | ) |   | 181,757 |   |
| Other debt                                   |       | 144,457             |       |                        | 37         | ** **                           |       |                      | (1,067     | )                 |       |   | (1,030 | ) |   | 143,427 |   |
| Total long-term  cash investments            |       | $                   | 494,937    |                        |       | $                                    | 77         | ** **                |       |              | $          | (6,165 | ) |   |   | $ | (6,088 | ) |   | $ | 488,849 |   |

 

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  Gain** | ** ** | **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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(1)          Noinvestment has been in a material loss position for greater than one year.

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. Dividend income from the two companies was $0.5million and $0.5 million during the fiscal years ended June 30, 2006 and2005, respectively. In June 2006, the Company sold 2.6 million shares inNihon for net proceeds of $19.1 million and recognized $13.6 million ofpretax gains in other income. The market values of the equity investmentsincluded in other long-term assets at June 30, 2006 and 2005 were $52.9million and $71.2 million, respectively, compared to their purchase costof $18.8 million. Mark-to-market (losses) gains, net of tax, for the fiscalyears ended June 30, 2006 and 2005, were $0.5 million and ($14.4) million,respectively, and were included in other comprehensive income.

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Theamortized cost and estimated fair value of cash investments at June 30,2006, by contractual maturity, are as follows (in thousands):

| ** **              | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
|-------------------------|------------|---------------------|------------|--------------------------------|------------|
| Due in 1 year or  less  |       | $                   | 117,439    |                           | $          | 116,396 |   |
| Due in 1-2  years       |       | 139,920             |       | 138,076                        |       |
| Due in 2-5  years       |       | 199,655             |       | 197,029                        |       |
| Due after 5 years       |       | 159,838             |       | 158,220                        |       |
| Total cash  investments |       | $                   | 616,852    |                           | $          | 609,721 |   |

 

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.

Gross realized gains and(losses) were $0.2 million and $(1.9) million, respectively, for the year endedJune 30, 2006. Gross realized gains and (losses) were $0.04 million and$(0.05) million, respectively, for the year ended June 30, 2005. Grossrealized gains and (losses) were $2.6 million and $(0.3) million, respectively,for the year ended June 30, 2004. 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 into aninterest 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 2.91 percent, compared to a coupon of 4.25 percent onthe Debt. During the fiscal year ended June 30, 2006, these arrangementsincreased interest expense by $1.6 million. During fiscal years ended June 30, 2005and 2004, these arrangements reduced interest expense by $8.0 million and $12.9million, respectively. Accounted for as a fair value hedge under SFAS No. 133,the mark-to-market adjustments of the Transaction and April 2004 Transactionwere offset by the mark-to-market adjustments on the Debt, resulting in nomaterial impact to earnings. The market value of the Transaction was a $7.0million liability and a $0.3 million liability position at June 30, 2006and 2005, respectively. The market value of the April 2004 Transaction wasa $4.6 million and a $3.4 million liability position at June 30, 2006and 2005, respectively.

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Both transactionsterminate on July 15, 2007 (“Termination Date”), subject to certain earlytermination provisions. On or after July 18, 2003 and prior to July 14,2007, if the ten-day average closing price of the Company’s common stock equalsor exceeds $77.63, the Transaction and the April 2004 Transaction willterminate. Depending on the timing of the early termination event, the Bankwould be obligated to pay the Company an amount equal to the redemption premiumcalled for under the terms of the Debt.

In support of the Company’sobligation under the two transactions, the Company is required to obtainirrevocable standby letters of credit in favor of the Bank, totaling $7.5million plus a collateral requirement for the Transaction and April 2004Transaction, as determined periodically. At June 30, 2006, $20.7 millionin letters of credit were outstanding related to both transactions.

The Transaction and the April 2004Transaction qualify as fair value hedges under SFAS No. 133. To testeffectiveness of the hedges, regression analyses are performed quarterlycomparing the change in fair value of the two transactions and the Debt. Thefair values of the transactions and the Debt are calculated quarterly as thepresent value of the contractual cash flows to the expected maturity date,where the expected maturity date is based on probability-weighted analyses ofinterest rates relating to the five-year LIBOR curve and the Company’s stockprices. For the fiscal years ended June 30, 2006, 2005 and 2004, thehedges were highly effective and the ineffective portion did not have amaterial impact on earnings.

In April 2002, the Companyentered 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, the Company has the option to receive a payout from Lehman coveringour exposure to LIBOR fluctuations between 5.5 percent and 7.5 percent for anyfour designated quarters. The market value of the Contract at June 30,2006 and 2005 was $0.6 million and $0.1 million, respectively, and was includedin other long-term assets. Interest expense was decreased by mark-to-marketgains of $0.5 million for the fiscal year ended June 30, 2006 andincreased by mark-to-market losses of $0.8 million and $0.5 million for thefiscal years ended June 30, 2005 and 2004, respectively.

*Foreign Currency Risk*

The Company conductsbusiness on a global basis in several foreign currencies, and at various times,is exposed to fluctuations with the British Pound Sterling, the Euro and theJapanese Yen. The Company’s risk to the European currencies is partially offsetby the natural hedge of manufacturing and selling goods in both U.S. dollarsand the European currencies. Considering its specific foreign currencyexposures, the Company has the greatest exposure to the Japanese Yen, since ithas significant Yen-based revenues without the Yen-based manufacturing costs. TheCompany has established a foreign-currency hedging program using foreignexchange forward contracts, including the Forward Contract described below, tohedge certain foreign currency transaction exposures. To protect againstreductions in value and volatility of future cash flows caused by changes incurrency exchange rates, it has established revenue, expense and balance sheethedging programs. Currency forward contracts and local Yen and Euro borrowingsare used in these hedging programs. The Company’s hedging programs reduce, butdo not always eliminate, the impact of currency exchange rate movements.

In March 2001, theCompany entered into a five-year foreign exchange forward contract (the “ForwardContract”) for the purpose of reducing the effect of exchange rate fluctuationson forecasted intercompany purchases by its subsidiary in Japan. The Companyhas designated the Forward Contract as a cash flow hedge under whichmark-to-market adjustments are recorded in accumulated other comprehensiveincome, a separate component of stockholders’ equity, until the forecastedtransactions are recorded in earnings. Under the terms of the Forward Contract,the Company is required to exchange 1.2 billion yen for $11.0 million on aquarterly basis from June 2001 to March 2006. At June 30, 2005,three quarterly payments of 1.2 billion yen remained to be swapped at a forwardexchange rate of 109.32 yen per 

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U.S.dollar. The market value of the forward contract was a $0.1 million asset at June 30,2005 and the mark-to-market gains (losses), net of tax, of $0.7 million and(4.0) million for the fiscal years ended June 30, 2005 and 2004,respectively, were included in other comprehensive income.

Following the expirationof the Forward Contract in May 2006, the Company entered into anotherfive-year foreign exchange forward contract with BNP Paribas (the “May 2006Forward Contract”) for the purpose of reducing the effect of exchange ratefluctuations on forecasted intercompany purchases by its Japan subsidiary. TheCompany has designated the May 2006 Forward Contract as a cash flow hedge.Under the terms of the May 2006 Forward Contract, the Company is requiredto exchange 507.5 million Yen for $5.0 million on a quarterly basis starting inJune 2006 and expiring in the March 2011. At June 30, 2006, 19quarterly payments of 507.5 million Yen remained to be swapped at a forwardexchange rate of 101.5 Yen per U.S. dollar. The market value of the May 2006Forward Contract was $1.2 million, included in other assets at June 30,2006, and the mark-to-market gains, net of tax, of $0.8 million for the fiscalyear ended June 30, 2006, were included in other comprehensive income. Basedon effectiveness tests comparing forecasted transactions through the May 2006Forward Contract expiration date to its cash flow requirements, the Companydoes not expect to incur a material charge to income during the next twelvemonths as a result of the May 2006 Forward Contract.

The Company hadapproximately $103.1 million and $75.9 million in notional amounts of forwardcontracts not designated as accounting hedges under SFAS No. 133 at June 30,2006 and 2005, respectively. Net realizedand unrealized foreign currency gains recognized in earnings were $2.3 millionfor the fiscal year ended June 30, 2006, $1.4 million for the fiscal yearended June 30, 2005, and less than $1 million for the fiscal yearended June 30, 2004.

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

Thefollowing is a summary of the Company’s long-term debt and other loans atJune 30, 2006 and 2005 (in thousands):

| ** **                                                                                                                                                                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Convertible subordinated  notes at 4.25 percent due in July 2007 ($550,000 principal amount,  plus accumulated fair value adjustment of ($14,443) and ($3,360) at  June 30, 2006 and 2005, respectively) |       | $        | 535,557    |     | $          | 546,640 |   |
| Other loans and  capitalized lease obligations                                                                                                                                                                                    |       | 82,610   |       | 782      |       |
| Debt, including current  portion of long-term debt ($627 in 2006 and $163 in  2005)                                                                                                                                               |       | 618,167  |       | 547,422  |       |
| Credit facility and  other foreign revolving bank loans at rates from 1.12% to  3.88%                                                                                                                                             |       | 6,501    |       | 18,168   |       |
| Total debt                                                                                                                                                                                                                        |       | $        | 624,668    |     | $          | 565,590 |   |

 

In July 2000, theCompany sold $550 million in principal amount of 4.25 percent ConvertibleSubordinated Notes due July 2007. The interest rate is 4.25 percent peryear on the principal amount, payable in cash in arrears semi-annually on January 15and July 15. The notes are convertible into shares of the Company’s commonstock at any time on or before July 15, 2007, at a conversion price of$73.935 per share, subject to certain adjustments. The notes are subordinatedto all of the Company’s existing and future debt. The Company may redeem any ofthe notes, in whole or in part, subject to certain call premiums on or after July 18,2003, as specified in the notes and related indenture agreement. In December 2001and April 2004, the Company entered into transactions with the JP MorganChase Bank for $412.5 million and $137.5 million notional, respectively, whichhad the effect of converting the interest rate to variable and required thatconvertible notes be marked to market (see Note 3, “Derivative FinancialInstruments”).

The Company entered into athree-year syndicated multi-currency revolving credit facility, led by BNPParibas, expiring in November 2006 (the “Facility”). The Facility providesa credit line of $150 million of 

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which upto $150 million may be used for standby letters of credit. The Facility bearsinterest at (i) local currency rates plus (ii) a margin between 0.75percent and 2.0 percent for base rate advances and a margin of between 1.75percent and 3.0 percent for Euro-currency rate advances. Other advances bearinterest as set forth in the credit agreement. The annual commitment fee forthe 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, 2006. TheCompany pledged as collateral shares of certain of its subsidiaries. At June 30,2006, the Company had no borrowings and $25.0 million in letters of creditoutstanding under the Facility. At June 30, 2005, the Company had $17.1million in borrowings and $16.4 million in letters of credit outstanding underthe Facility. Of the letters of credit outstanding, $20.7 million and $12.0 millionwere related to the interest rate swap transactions (see Note 3) at June 30,2006 and 2005, respectively.

In June 2006, theCompany’s subsidiary in Singapore entered into a Credit Agreement with Bank ofAmerica, N.A. (“BoA”). Pursuant to the Credit Agreement, BoA loaned $81 millionto the Singapore subsidiary. The loan bears an interest rate of LIBOR plus 1.0percent and matures on June 26, 2008. The Credit Agreement containscertain financial and other covenants, with which the Company and its Singaporesubsidiary were in compliance at June 30, 2006. In conjunction with theCredit Agreement, the Company entered into a guaranty in favor of BoA toguarantee the payment and performance of obligations by its Singaporesubsidiary.

At June 30, 2006, theCompany had $169.5 million in total revolving lines of credit, of which $31.5 millionhad been utilized, consisting of $25.0 million in letters of credit and $6.5million in foreign revolving bank loans, which is included in the table above. As of June 30, 2006, scheduled principalpayments on long-term debt are as follows: fiscal 2007: $7.1 million;fiscal 2008: $631.3 million; fiscal 2009: $0.1 million; and fiscal 2010: $0.1million; and thereafter: $0.5 million. For the $550 million of convertiblenotes due in July 2007, the Company anticipates that these notes will berefinanced through public or private offerings of debt or equity, or be paiddown with our existing cash and cash investments.

**5.**                 Stock-BasedCompensation

*Employee Stock Participation Plan*

During the first half offiscal year 2006, the Company suspended employee participation in the 1984Employee Stock Participation Plan (“ESPP”) pending its stockholders approval ofa proposal to amend the ESPP. At its annual meeting in November 2005, theCompany’s stockholders approved the proposal to amend the ESPP. The terms ofthe amended ESPP provide that employees may designate between two and tenpercent of their compensation to purchase shares of the Company’s common stockat a price determined by a Committee appointed by the Board. The Committee willdeclare, prior to the start of a subscription period, that the purchase pricefor that subscription period shall be determined by applying a discount amountnot to exceed 15 percent to either (1) the fair market value of a share ofthe Company’s common stock on the grant date of that subscription period, or(2) the fair market value of a share of common stock on the subscriptiondate of that subscription period, or (3) the lesser of the fair marketvalue of a share of common stock on the grant date or on the subscription dateof that subscription period. The amended ESPP also provides that the subscription period shall be a sixconsecutive month period commencing on each grant date, unless declared by theCommittee in advance of the applicable subscription period to be a shorterperiod. The Committee declared the amended ESPP effective for employeeparticipation beginning in January 2006 for a three-month subscriptionperiod, for purchase of the Company’s common stock at a five percent discountfrom the fair market value on the subscription date. Based on the terms asdeclared by the Committee, the amended ESPP was not compensatory pursuant to SFASNo. 123(R). The maximum number of shares of the Company’s common stockthat may be delivered under this ESPP is 4,500,000 shares. During fiscal year2006, 4,234 shares were issued at weighted average price per share of $41.50,and 4,495,766 remained unissued at June 30, 2006.

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Priorto fiscal year 2006, the Company’s ESPP was compensatory under which employeesmay designate between two and ten percent of their compensation to purchaseshares of the Company’s common stock at 85 percent of the lesser of fair marketvalue at grant date or the subscription date during a six-month subscriptionperiod. During fiscal years ended June 30, 2005 and 2004, 254,260 and296,481 shares were purchased at a weighted average price per share of $32.50and $18.82, respectively. The weighted average per share fair value of ESPPoptions granted in the fiscal years ended June 30, 2005 and 2004, was$14.97 and $13.06 per share, respectively, which were estimated using the Black-Scholesoption pricing model with the following weighted average assumptions:

| ** **             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Expected life  (years) |       | 0.5      |       | 0.5      |       |
| Interest rate          |       | 2.1      | %          | 1.1      | %          |
| Volatility             |       | 46.6     | %          | 75.0     | %          |
| Dividend yield         |       | 0.0      | %          | 0.0      | %          |

 

The Company’s methodologyfor determining the above assumptions is the same as that for stock optionsdiscussed below, except that the expected life is based on the length of timeof the ESPP’s subscription period. For the fiscal years ended June 30,2006, 2005 and 2004, the Company received $0.2 million, $8.3 million, and $5.6million, respectively, from shares issued under the stock participation plan.

*Stock Option Plans*

For the fiscal years ended June 30, 2006 and 2005,stock-based compensation awards were granted under one of two stock optionplans: the 1997 Employee Stock Incentive Plan (“1997 Plan”) and the 2000 IncentivePlan (“2000 Plan”). Options granted before November 22, 2004, generallybecame exercisable in annual installments of 25 percent beginning on the firstanniversary date, and expire after seven years. Options granted after November 22,2004, generally became exercisable in annual installments of 33 percentbeginning on the first anniversary date, and expire after five years.

Under the 1997 Plan, options to purchase shares of theCompany’s common stock may be granted to the Company’s employees and consultants.In addition, other stock-based awards (e.g., restricted stock units (“RSUs”),share appreciation rights (“SARs”) and performance shares) may be granted. Duringthe fiscal year ended June 30, 2006, non-qualified options and RSUs wereissued under the 1997 Plan. As noted below, on November 22, 2004, theCompany’s stockholders approved an amendment to the 2000 Plan to increase theauthorized number of shares from 7,500,000 to 12,000,000, at which point noawards may be granted under the 1997 Plan.

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 1997 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. The amendment changed the options expiration term on future grantsto five years, and contained certain limitations on the maximum number ofshares that may be awarded to an individual. No awards may be granted under the2000 Plan after August 24, 2014. As of June 30, 2006, there were3,695,746 shares available for future grants.

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TheCompany issues new shares to fulfill the obligations under all of itsstock-based compensation awards. The following table summarizes the stockoption activities for the fiscal years ended June 30, 2006, 2005 and 2004(in thousands except per share price data):

| ** **                       | ** ** | **Stock Options  Shares** | ** ** | **Weighted  Average  Option Exercise  Price Per Share** | ** ** | **Weighted  Average  Grant Date Fair  Value Per Share** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------|------------|--------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding,  June 30, 2003 |       |                           | 15,228     |                                                                   |       |                                                                        | $          | 31.23                               |       |   |   | — |   |   |   | $ | 78,476 |   |   |
| Granted                          |       |                           | 3,405      |                                                                   |       |                                                                        | $          | 42.53                               |       |   |   | $ | 26.76 |   |   |   | — |   |   |
| Exercised                        |       |                           | (1,864     | )                                                                      |       |                                                                        | $          | 20.58                               |       |   |   | — |   |   |   | $ | 47,371 |   |   |
| Expired                          |       |                           | (691       | )                                                                      |       |                                                                        | $          | 36.90                               |       |   |   | — |   |   |   | — |   |   |
| Outstanding, June 30, 2004  |       |                           | 16,078     |                                                                   |       |                                                                        | $          | 34.62                               |       |   |   | — |   |   |   | $ | 120,647 |   |   |
| Granted                          |       |                           | 1,207      |                                                                   |       |                                                                        | $          | 42.12                               |       |   |   | $ | 15.47 |   |   |   | — |   |   |
| Exercised                        |       |                           | (3,123     | )                                                                      |       |                                                                        | $          | 21.39                               |       |   |   | — |   |   |   | $ | 64,661 |   |   |
| Expired                          |       |                           | (604       | )                                                                      |       |                                                                        | $          | 39.84                               |       |   |   | — |   |   |   | — |   |   |
| Outstanding, June 30, 2005  |       |                           | 13,558     |                                                                   |       |                                                                        | $          | 38.09                               |       |   |   | — |   |   |   | $ | 149,290 |   |   |
| Granted                          |       |                           | 1,239      |                                                                   |       |                                                                        | $          | 44.30                               |       |   |   | $ | 13.65 |   |   |   | — |   |   |
| Exercised                        |       |                           | (2,157     | )                                                                      |       |                                                                        | $          | 26.75                               |       |   |   | — |   |   |   | $ | 39,883 |   |   |
| Expired                          |       |                           | (565       | )                                                                      |       |                                                                        | $          | 46.90                               |       |   |   | — |   |   |   | — |   |   |
| Outstanding,  June 30, 2006 |       |                           | 12,075     |                                                                   |       |                                                                        | $          | 40.35                               |       |   |   | — |   |   |   | $ | 45,981 |   |   |

 

For the fiscal years ended June 30, 2006, 2005and 2004, the Company received $57.7 million, $66.8 million, and $38.6million, respectively, for stock options exercised. Total tax benefit realizedfor the tax deductions from stock options exercised was $12.0 million, $18.6million, and $15.7 million for the fiscal years ended June 30, 2006, 2005and 2004, respectively.

Thefollowing table summarizes the RSU activities for the fiscal years ended June 30,2006, 2005 and 2004 (in thousands except per share price data):

| ** **                       | ** ** | **Restricted Stock  Units** | ** ** | **Weighted  Average  Grant Date Fair  Value Per Share** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding,  June 30, 2003 |       |                             | 41         |                                                                        |       |                                | $          | 34.21 |   |   |   | $ | 1,155 |   |   |
| Granted                          |       |                             | 12         |                                                                        |       |                                | $          | 40.10 |   |   |   | — |   |   |
| Vested                           |       |                             | (13        | )                                                                           |       |                                | $          | 39.60 |   |   |   | $ | 502 |   |   |
| Expired                          |       |                             | (1         | )                                                                           |       |                                | $          | 31.98 |   |   |   | — |   |   |
| Outstanding, June 30, 2004  |       |                             | 39         |                                                                        |       |                                | $          | 35.95 |   |   |   | $ | 1,466 |   |   |
| Granted                          |       |                             | 76         |                                                                        |       |                                | $          | 39.56 |   |   |   | — |   |   |
| Vested                           |       |                             | (91        | )                                                                           |       |                                | $          | 40.18 |   |   |   | $ | 3,653 |   |   |
| Outstanding, June 30, 2005  |       |                             | 24         |                                                                        |       |                                | $          | 49.44 |   |   |   | $ | 1,123 |   |   |
| Granted                          |       |                             | 6          |                                                                        |       |                                | $          | 48.10 |   |   |   | — |   |   |
| Expired                          |       |                             | (7         | )                                                                           |       |                                | $          | 49.44 |   |   |   | — |   |   |
| Outstanding,  June 30, 2006 |       |                             | 23         |                                                                        |       |                                | $          | 49.09 |   |   |   | $ | 909 |   |   |

 

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Thefollowing table summarizes the stock options and RSUs outstanding at June 30, 2006, and related weighted averageprice and life information (in thousands except year and price data):

| ** **       | ** **                                                 | **June 30, 2006** | ** ** |
|------------------|------------------------------------------------------------|-------------------|------------|
| ** **       | ** **                                                 | **Outstanding**   | ** ** | **Exercisable** | ** ** |
| ** **       | **Range of Exercise  Price per Share** | ** **        | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $0.00 to $15.38  |                                                       |              | 428        |   |   |   | 2.74 |   |   |   | $ | 11.17 |   |   |   | 410 |   |   |   | 2.66 |   |   |   | $ | 11.64 |   |   |
| $15.62 to $25.35 |                                                       |              | 1,476      |   |   |   | 3.06 |   |   |   | $ | 20.65 |   |   |   | 1,476 |   |   |   | 3.06 |   |   |   | $ | 20.65 |   |   |
| $26.00 to $35.90 |                                                       |              | 1,379      |   |   |   | 4.89 |   |   |   | $ | 33.95 |   |   |   | 1,321 |   |   |   | 4.92 |   |   |   | $ | 33.96 |   |   |
| $36.39 to $45.87 |                                                       |              | 6,516      |   |   |   | 3.96 |   |   |   | $ | 42.71 |   |   |   | 5,917 |   |   |   | 3.88 |   |   |   | $ | 42.83 |   |   |
| $46.19 to $54.69 |                                                       |              | 1,391      |   |   |   | 4.10 |   |   |   | $ | 50.39 |   |   |   | 774 |   |   |   | 4.07 |   |   |   | $ | 52.14 |   |   |
| $55.31 to $63.88 |                                                       |              | 915        |   |   |   | 4.42 |   |   |   | $ | 62.29 |   |   |   | 915 |   |   |   | 4.42 |   |   |   | $ | 62.29 |   |   |
|             |                                                       |              | 12,105     |   |   |   | 3.96 |   |   |   | $ | 40.27 |   |   |   | 10,813 |   |   |   | 3.91 |   |   |   | $ | 39.85 |   |   |
|                  |                                                            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Additionalinformation relating to the stock option plans, including employee stockoptions and RSUs, at June 30, 2006 and June 30, 2005 is as follows(in thousands):

| ** **                                                 | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Options  exercisable                                       |       |                    | 10,813     |                    |       |   | 13,422 |   |   |
| Options available  for grant                               |       |                    | 3,696      |                    |       |   | 4,632 |   |   |
| Total reserved common  stock shares for stock option plans |       |                    | 15,794     |                    |       |   | 18,214 |   |   |

 

In the beginning of fiscal year 2006, the Companyadopted SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”) ona modified prospective transition method to account for its employee stockoptions. Under the modified prospective transition method, fair value of new andpreviously granted but unvested equity awards are recognized as compensationexpense in the income statement, and prior period results are not restated. SFASNo. 123(R) requires that forfeitures are estimated at the time ofgrant rather than recorded as the options expire. Based on the Company’shistorical exercise and termination data, a nine percent forfeiture rate isassumed. As a result of the adoption, for the fiscal year ended June 30,2006, the Company’s income from continuing operations, which is the same asincome before income taxes, decreased by $3.5 million, net income was decreasedby $2.5 million, and basic and diluted earnings per share were negativelyimpacted by $0.04. In addition, cash flows related to the classification ofexcess tax benefit from options exercised increased and decreased cash flowsfrom operating and financing activities, respectively, by $6.0 million for thefiscal year ended June 30, 2006. The adoption of SFAS No. 123(R) didnot affect the stock-based compensation expense associated with the Company’sRSUs, which was already based on the market price of the stock at the grantdate and recognized over the service period.

During the prior year fiscal fourth quarter ended June 30,2005, the Company accelerated the vesting of all then outstanding equityawards, including employee stock options and restricted stock units, primarilyto avoid recognizing in its income statement approximately $108 million inassociated compensation expense in future periods, of which approximately $60million would have been recognized in fiscal year 2006 upon the adoption ofSFAS No. 123(R). As a result of the accelerated vesting, the Companyrecorded $6.0 million in compensation charge in fiscal year 2005, of which $3.9million is related to the excess of the intrinsic value over the fair marketvalue of the Company’s stock on the acceleration date of those options thatwould have been forfeited or expired unexercised had the vesting not beenaccelerated, and $2.1 million is related to the recognition of outstandingRSUs, including $0.3 million for the excess of the intrinsic value over thefair market value of the Company’s stock on the acceleration date. 

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In determining theforfeiture rates of the stock options, the Company reviewed the unvestedoptions’ original life time remaining to vest and whether these options wereheld by officers and directors of the Company.

Forthe fiscal years ended June 30, 2006 and 2005, stock-based compensationexpense associated with the Company’s stock options, including the stockoptions accelerated vesting charge recognized during the fiscal fourth quarterended June 30, 2005, is as follows (in thousands):

| ** **                          | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Selling and  administrative expense |       |                    | $          | 2,202                   |       |   |   | $ | — |   |   |
| Research and  development expense   |       |                    | 929        |                    |       |   | — |   |   |
| Cost of sales                       |       |                    | 345        |                    |       |   | — |   |   |
| Other expense                       |       |                    | —     |                    |       |   | 3,840 |   |   |
| Total stock  option expense         |       |                    | $          | 3,476                   |       |   |   | $ | 3,840 |   |   |

 

Forthe fiscal years ended June 30, 2006 and 2005, respectively, stock-basedcompensation expense associated with the Company’s restricted stock units,including the charge associated with the accelerated vesting of RSUs during thefiscal fourth quarter ended June 30, 2005, is as follows (in thousands):

| ** **                              | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Research and  development expense       |       |                    | $          | 207                     |       |   |   | $ | 369 |   |   |
| Selling and  administrative expense     |       |                    | 175        |                    |       |   | 311 |   |   |
| Cost of sales                           |       |                    | 33         |                    |       |   | 59 |   |   |
| Other expense                           |       |                    | —     |                    |       |   | 2,132 |   |   |
| Total stock-based  compensation expense |       |                    | $          | 415                     |       |   |   | $ | 2,871 |   |   |

 

The total unrecognized compensation expense foroutstanding stock options and RSUs was $11.9 million as of June 30, 2006,and will be recognized, in general, over three years. The weighted averagenumber of years to recognize the compensation expense is 1.2 years.

Hadthe Company recorded compensation expense using the accounting methodrecommended by SFAS No. 123 for prior fiscal years ended June 30,2005 and 2004, net income and net income per common share—basic and dilutedwould have approximated the following (in thousands, except per share data):

| ** **                                                                                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income, as  reported                                                                                                  |       | $        | 137,460    |     | $          | 89,770 |   |
| Less total stock-based employee compensation expense  determined under fair value based method for all awards, net of tax |       | (114,003 | )          | (48,667  | )          |
| Pro forma net  income                                                                                                     |       | $        | 23,457     |     | $          | 41,103 |   |
| Net income per common share—basic, as reported                                                                       |       | $        | 2.03       |     | $          | 1.37 |   |
| Net income per  common share—basic, pro forma                                                                        |       | $        | 0.35       |     | $          | 0.63 |   |
| Net income per common share—diluted, as reported                                                                     |       | $        | 1.91       |     | $          | 1.31 |   |
| Net income per common  share—diluted, pro forma                                                                      |       | $        | 0.43       |     | $          | 0.60 |   |

 

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 and RSUs in the fiscalfourth quarter ended June 30, 2005.

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Thefair value of the options associated with the above compensation expense forthe fiscal years ended June 30, 2006, 2005 and 2004, respectively, wasdetermined at the grant date using the Black-Scholes option pricing modelwith the following weighted average assumptions:

| ** **               | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
|--------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| Expected life            |       | 3.5 years               |       | 4.0 years               |       | 5.0 years               |       |
| Risk free  interest rate |       | 4.3                     | %          | 4.0                     | %          | 3.3                     | %          |
| Volatility               |       | 34.3                    | %          | 43.6                    | %          | 75.0                    | %          |
| Dividend yield           |       | 0.0                     | %          | 0.0                     | %          | 0.0                     | %          |

 

Beginning in January 2005, the Company applied StaffAccounting Bulletin No. 107 (“SAB No. 107”) “plain-vanilla” method todetermine the expected life. SAB No. 107 provided a simplified “plain-vanilla”formula for determining expected life in valuing stock options, to the extentthat an entity cannot rely on its historical exercise data. Subsequent to the2000 Plan amendments on November 22, 2004, the Company issued stockoptions with a five-year expiration and generally a three-year annual vestingterm, whereas, prior to that date, the Company granted stock options with aseven or ten-year expiration and generally a four or five-year annual vestingterm. Prior to January 2005, the Company used historical exercise andtermination data to determine the expected life.

The risk-free interest rate is based on U.S. Treasurysecurities with maturities equal to the expected life of the option.

With respect tovolatility, SAB No. 107 clarified that there is not a particular method ofestimating volatility and to the extent that the Company has traded financialinstruments from which it can derive the implied volatility, it may beappropriate to use only implied volatility in its assumptions. The Company hascertain financial instruments that are publicly traded from which it can derivethe implied volatility. Therefore, beginning in January 2005, the Companyhas used market implied volatility of options with similar terms for valuingits stock options, whereas previously, it had used historical volatility. TheCompany believes implied volatility is a better indicator of expectedvolatility because it is generally reflective of both historical volatility andexpectations of how future volatility will differ from historical volatility.

*Shareholder RightsPlan*

On August 2, 1996, the Company’s Board ofDirectors adopted a Shareholder Rights Plan (the “Plan”) under which preferredstock purchase rights (the “Rights”) have been and will continue to be grantedfor each 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. Asof December 15, 1998, the Company amended and restated its Rights Agreement to 

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remove the requirementthat continuing directors vote in board approvals of certain corporatetransactions. On August 11, 2006, the Company attended the expiration date ofthe Rights Agreement from August 14, 2006 to November 21, 2006.

**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 and de-emphasize its commodity business. The Company’s restructuringplan included consolidating and closing certain manufacturing sites, upgradingequipment and processes in designated facilities and discontinuing productionin a number of others that cannot support more advanced technology platforms orproducts within its Focus Product segments. The Company also planned to loweroverhead costs across its support organizations. The Company has substantiallycompleted these restructuring activities as of June 30, 2006.

The Company estimates that total charges associatedwith the restructuring will be approximately $279 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$53 million for severance-related costs.

For the fiscal year ended June 30, 2006, theCompany recorded $15.9 million in total restructuring-related charges,consisting of: $8.2 million for asset impairment, plant closure costs and othercharges, and $7.7 million for severance-related costs. For the fiscal yearended June 30, 2005, the Company recorded $34.0 million in totalrestructuring-related charges, consisting of: $25.3 million for assetimpairment, plant closure costs and other charges, and $8.7 million forseverance-related costs. For the fiscal year ended June 30, 2004, theCompany 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 charged as incurred 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. Indetermining the asset groups, the Company grouped assets at the lowest levelfor which independent identifiable cash flows were available. In determiningwhether an asset was impaired the Company evaluated undiscounted future cashflows and other factors such as changes in strategy and technology. Theundiscounted cash flows from the Company’s initial analyses were less than thecarrying amount for certain of the asset groups, indicating impairment losses. Basedon this, the Company determined the fair value of these asset groups using thepresent value technique, by applying a discount rate to the estimated futurecash flows that is consistent with the rate used when analyzing potentialacquisitions.

As of June 30,2006, the Company had recorded $277.3 million in total charges, consisting of:$218.4 million for asset impairment, plant closure costs and other charges,$6.0 million for raw material and work-in-process inventory charges, and $52.9million for severance-related costs. Components of the $218.4 million assetimpairment, plant closure and other charges included the following 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 

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facility had significantlyreduced production as of fiscal year ended June 30, 2003 and is usedprimarily for research 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 $13.9 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 Mumbai, 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 products previouslymanufactured in this facility. The Company has transitioned the assembly andtest of non-space Power Components from its Leominster, Massachusetts facilityto its Tijuana, Mexico facility, as of December 31, 2005. Associated withthese reductions in manufacturing activities, certain assets with a net bookvalue of $4.0 million were written down by $2.1 million.

·       $59.3million in other miscellaneous items were charged, including $50.1 million inrelocation costs and other impaired asset charges and $9.2 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 the Company wrote down these inventories to their net realizablevalue, with a carrying value of $98.2 million, by $6.0 million. For the fiscalyears ended June 30, 2006, 2005 and 2004, the Company disposed of $1.1million, $1.8 million and $0.4 million, respectively, of these inventories,which did not have a material impact on gross margin for the fiscal years thenended. As of June 30, 2006, $0.1 million of these inventories remained tobe disposed.

As of June 30, 2006, the Company has recorded$52.9 million in severance-related charges: $44.4 million in severancetermination costs related to approximately 1,300 administrative, operating andmanufacturing positions, and $8.5 million in pension termination costs at itsmanufacturing facility in Oxted, England. The severance charges associated withthe elimination of positions, which included the employees notified to date,had been and will continue to be recognized ratably over the future serviceperiod, as applicable, in accordance with SFAS No. 146, “Accounting forthe Costs Associated with Exit or Disposal Activities”. The Company measuredthe total termination benefits at the communication date based on the fairvalue of the liability as of the termination date. A change resulting from arevision to either the timing or the amount of estimated cash over the futureservice period will be measured using the credit-adjusted risk-free rate thatwas used to initially measure the liability. The cumulative effect of thechange will be recognized as an adjustment to the liability in the period ofthe change.

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During fiscal 2002,the Company had recorded an estimated $5.1 million in severance costsassociated with the acquisition of TechnoFusion GmbH in Krefeld, Germany. Infiscal year 2003, the Company finalized its plan and determined that the totalseverance would be approximately $10 million, and accordingly, the Companyadjusted purchased goodwill by $4.8 million. The Company communicated the planand the elimination of approximately 250 positions, primarily in manufacturing,to its affected employees at that time. The Company has completed therestructuring of its Krefeld facility as of December 31, 2005, anddetermined that $0.7 million of the severance reserve was excess.Accordingly, the Company decreased TechnoFusion purchased goodwill by$0.7 million.

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, 2006, 2005 and 2004. Severanceactivity related to the elimination of 29 administrative and operatingpersonnel as part of the June 2001 restructuring is also disclosed. Theremaining June 2001 severance relates primarily to certain legal accrualsassociated with that restructuring, which will be paid or released as theoutcome is determined (in thousands):

| ** **                                                                                          | ** ** | **June  2001  Restructuring** | ** ** | **December  2002  Restructuring** | ** ** | **TechnoFusion  Severance  Liability** | ** ** | **Total  Severance  Liability** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| 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 |   |
| Costs incurred or  charged to “impairment of assets, restructuring and severance charges” |       |                          | —     |                              |       |                                   | 4,290      |                            |       |   | — |   |   | 4,290 |   |
| Purchase price  adjustment                                                                          |       |                          | —     |                              |       |                                   | —     |                            |       |   | (708 | ) |   | (708 | ) |
| Costs paid                                                                                          |       |                          | (136       | )                                 |       |                                   | (6,019     | )                               |       |   | (1,116 | ) |   | (7,271 | ) |
| Foreign exchange  impact                                                                            |       |                          | —     |                              |       |                                   | 143        |                            |       |   | (1 | ) |   | 142 |   |
| Accrued severance,  June 30, 2006                                                              |       |                          | $          | 235                               |       |                                   |       | $                               | 6,538      |   |   |   | $ | 282 |   |   | $ | 7,055 |   |

 

**7.**   Segmentand Geographic Information

The Company is a designer, manufacturer and marketerof power management product devices which use power semiconductors, consistingof Power Management ICs, Power Components, and Power Systems. The Company’sproducts are used in a variety of end applications, including computers,communications networking, consumer electronics, energy-efficient appliances,lighting, satellites, launch vehicles, aircraft and automotive diesel injection.In addition, the Company licenses its intellectual property to third parties.

The Company reports in sixsegments that generally reflect the products’ end-markets. The Company’s ChiefOperating Decision Maker (“CODM”) for financial accounting purposes is theChief Executive Officer who reviews the revenues and gross margin resultsfor each of these segments in making decisions about allocating resources,including the focus of research and development activities, and assessingperformance. The Company does not allocate assets, sales and marketing,information systems, finance and administrative costs to the operatingsegments, as these are not meaningful statistics 

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to theCODM in making resource allocation decisions or in evaluating performance ofthe operating segments. The Company further summarizes its segments in twogroups, Focus Products and Non-Focus Products, to reflect its strategic goalsand the allocation of its critical resources.

TheCompany’s Focus Product segments are:

·       Computingand Communications (“C&C”)—The Computing and Communications segment iscomprised of the Company’s Power Management ICs, including iPowirTM multi-chip modules and DirectFETTM solutions, and Power Components, primarilyHEXFET Power Components, that address servers and high-end desktops, notebooks,communications networking, and digitally-oriented consumer products likegame consoles. The C&C segment products are also used in digitaltelevision, portable handheld devices and cellular phones, and are primarilyused for DC-DC converter type applications.

·       Energy-SavingProducts (“ESP”)—The Energy-Saving Product segment is comprised of the Company’sPower Management ICs and Power Components, primarily HEXFET and IGBT PowerComponents, that provide solutions for variable speed motion control inenergy-saving appliances (such as washing machines, refrigerators and airconditioners) and 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).

·       Aerospaceand Defense (“A&D”)—The Aerospace and Defense segment is comprised of advancedpower management solutions, such as radiation-hardened power managementmodules, radiation-hardened Power Components, and other high-reliability PowerComponents that address power management requirements in satellites, launchvehicles, aircrafts, ships, submarines and other defense and high-reliabilityapplications.

·       IntellectualProperty (“IP”)—The Intellectual Property segment reports ongoing and one-timeroyalty income from licensing and activities related to the enforcement of the Company’spatents and other intellectual property which may include claim settlementsfrom successful defense of its licenses.

TheCompany’s Non-Focus Product segments are:

·       CommodityProducts (“CP”)—The Commodity Product segment is comprised primarily ofolder-generation Power Components that have widespread use throughout the powermanagement products industry, but are typically commodity in nature and aresold with margins generally below the Company’s targets.

·       Non-AlignedProducts (“NAP”)—The Non-Aligned Product segment includes businesses, productlines or products the Company is targeting for realignment, whether bydivestiture or otherwise. Currently, product lines reported in this segmentinclude certain modules (including the Company’s automotive system products),rectifiers, diodes and thyristors used in automotive, industrial, welding andmotor control applications.

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 

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the Company’s methodologyfor cost build up at the product level it is impractical to determine theamount of depreciation and amortization included in each segment’s gross profit.The Company does not discretely allocate assets to its operating segments, nordoes the CODM evaluate operating segments using discrete asset information.

Thesegment results for the fiscal years ended June 30, 2006, 2005 and 2004are as follows (in thousands except percentages):

| ** **                    | ** ** | **2006**   | ** ** | **2005**     | ** ** | **2004**          | ** ** |
|-------------------------------|------------|------------|------------|--------------|------------|-------------------|------------|
| **Business Segment**     | ** ** | ** ** | ** ** | **Revenues** | ** ** | **Gross  Profit** | ** ** | **Revenues** | ** ** | **Gross  Profit** | ** ** | **Revenues** | ** ** | **Gross  Profit** | ** ** |
| Computing and  Communications |       | $          | 403,213    |         | $          | 163,752           |       | $ | 386,662 |   | $ | 172,370 |   | $ | 328,330 |   | $ | 122,238 |   |
| Energy-Saving  Products       |       | 310,118    |       | 153,828      |       | 300,521           |       | 165,149 |   | 250,763 |   | 124,947 |   |
| Aerospace and  Defense        |       | 137,224    |       | 66,092       |       | 129,295           |       | 55,354 |   | 108,610 |   | 40,656 |   |
| Intellectual  Property        |       | 40,877     |       | 40,878       |       | 41,160            |       | 41,160 |   | 41,927 |   | 41,927 |   |
| Subtotal Focus Products       |       | 891,432    |       | 424,550      |       | 857,638           |       | 434,033 |   | 729,630 |   | 329,768 |   |
| Commodity Products            |       | 172,202    |       | 32,780       |       | 206,226           |       | 58,918 |   | 217,856 |   | 65,372 |   |
| Non-Aligned  Products         |       | 107,484    |       | 11,709       |       | 110,560           |       | 17,572 |   | 113,014 |   | 15,954 |   |
| Subtotal Non-Focus Products   |       | 279,686    |       | 44,489       |       | 316,786           |       | 76,490 |   | 330,870 |   | 81,326 |   |
| Consolidated  Total           |       | $          | 1,171,118  |         | $          | 469,039           |       | $ | 1,174,424 |   | $ | 510,523 |   | $ | 1,060,500 |   | $ | 411,094 |   |
|                               |            |            |            |              |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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, 2006, 2005 and 2004 is presented below (inthousands):

| ** **                            | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Revenues from  Unaffiliated Customers |       |      |       |      |       |      |       |
| The United States                     |       | $         | 315,526    |      | $          | 367,801   |       | $ | 309,662 |   |
| Asia                                  |       | 553,643   |       | 510,764   |       | 467,994   |       |
| Europe                                |       | 261,072   |       | 254,699   |       | 240,917   |       |
| Subtotal                              |       | 1,130,241 |       | 1,133,264 |       | 1,018,573 |       |
| Royalties (unallocated)               |       | 40,877    |       | 41,160    |       | 41,927    |       |
| Total                                 |       | 1,171,118 |       | $         | 1,174,424  |      | $          | 1,060,500 |   |
| Long-lived Assets                     |       |      |       |      |       |      |       |
| The United States                     |       | $         | 348,478    |      | $          | 347,892   |       | $ | 358,243 |   |
| Asia                                  |       | 45,061    |       | 23,598    |       | 17,728    |       |
| Europe                                |       | 274,284   |       | 223,124   |       | 168,880   |       |
| Total                                 |       | $         | 667,823    |      | $          | 594,614   |       | $ | 544,851 |   |

 

No single originalequipment manufacturer (“OEM”) customer, distributor or subcontractmanufacturer accounted for more than ten percent of the Company’s consolidatedrevenue for the fiscal years ended June 30, 2006, 2005 or 2004. Themajority of the Company’s products in the Focus Product segments, includingthose in the C&C, ESP and A&D segments, are sold directly to OEMcustomers. However, two distributors, individually accounting for more than tenpercent of C&C’s revenue, accounted for approximately 25 percent of thesegment’s revenue for the fiscal year ended June 30, 2006. One of thedistributors accounted for approximately 15 percent of the Company’s CP revenueand one of the OEM customers accounted for approximately 24 percent of the NAPrevenue for the fiscal year ended June 30, 2006. No single OEM customer,distributor or subcontract manufacturer accounted for more than ten percentof revenues in the Company’s other segments.

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**8.**   Income Taxes

Incomebefore income taxes for the fiscal years ended June 30, 2006, 2005 and2004 is as follows (in thousands):

| ** **                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                         |       | $        | 33,114     |     | $          | 34,280   |       | $ | 10,613 |   |
| Foreign                          |       | 125,636  |       | 149,788  |       | 107,676  |       |
| Total income before income taxes |       | $        | 158,750    |     | $          | 184,068  |       | $ | 118,289 |   |

 

Theprovision for income taxes for the fiscal years ended June 30, 2006, 2005and 2004 is as follows (in thousands):

| ** **             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current income taxes:  |       |     |       |     |       |     |       |
| Domestic               |       | $        | 17,553     |     | $          | 4,774    |       | $ | 17,034 |   |
| Foreign                |       | 25,824   |       | 23,184   |       | 26,118   |       |
|                   |       | 43,377   |       | 27,958   |       | 43,152   |       |
| Deferred income taxes: |       |     |       |     |       |     |       |
| Domestic               |       | 5,891    |       | 18,584   |       | (16,406  | )          |
| Foreign                |       | 2,326    |       | 66       |       | 1,768    |       |
|                   |       | 8,217    |       | 18,650   |       | (14,638  | )          |
| Total provision        |       | $        | 51,594     |     | $          | 46,608   |       | $ | 28,514 |   |

 

The tax benefit from options exercised reduced currentincome taxes payable for 2006, 2005 and 2004 by $12.0 million, $18.6 millionand $15.7 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, 2006, 2005 and2004, as follows:

| ** **                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory tax  rate                      |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| Foreign tax rate  differential           |       | 2.0      |       | (1.7     | )          | (3.0     | )          |
| AJCA HIA Dividend                        |       | 5.0      |       | —   |       | —   |       |
| Foreign tax  credit benefit              |       | (8.1     | )          | (4.7     | )          | (4.0     | )          |
| Research tax  credit benefit             |       | (2.5     | )          | (2.7     | )          | (3.5     | )          |
| State taxes, net  of federal tax benefit |       | 1.7      |       | (0.5     | )          | 0.3      |       |
| Other, net                               |       | (0.6     | )          | (0.1     | )          | (0.7     | )          |
| Effective tax  rate                      |       | 32.5     | %          | 25.3     | %          | 24.1     | %          |

 

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Themajor components of the net deferred tax asset (liability) as of June 30,2006 and 2005 are as follows (in thousands):

| ** **                                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  liabilities:                                   |       |     |       |     |       |
| Depreciation                                                 |       | $        | (33,510    | )        | $          | (31,686 | ) |
| Effect of state taxes                                        |       | (6,474   | )          | (7,386   | )          |
| Mark-to-market adjustments of available-for-sale  securities |       | (10,801  | )          | (17,107  | )          |
| Other                                                        |       | (1,121   | )          | (724     | )          |
| Total deferred tax liabilities                               |       | (51,906  | )          | (56,903  | )          |
| Deferred tax assets:                                         |       |     |       |     |       |
| Financial statement reserves                                 |       | 9,690    |       | 9,772    |       |
| Credit carryovers                                            |       | 107,777  |       | 108,114  |       |
| Impairment of assets, restructuring and severance charges    |       | 68,244   |       | 67,909   |       |
| Net operating loss carryovers                                |       | 19,816   |       | 21,287   |       |
| Other                                                        |       | 6,374    |       | 8,913    |       |
| Total deferred tax assets                                    |       | 211,901  |       | 215,995  |       |
| Valuation allowance                                          |       | (50,888  | )          | (48,150  | )          |
| Net deferred tax  asset                                      |       | $        | 109,107    |     | $          | 110,942 |   |

 

The Company has approximately$15.3 million and $55.6 million of U.S. federal foreign tax credits and U.S.federal research and development tax credit carryforwards, respectively, beforevaluation allowance, available to reduce income taxes otherwise payable, whichexpire from 2012 to 2023. The Company has approximately $2.9 million ofalternative minimum tax credits, which can be carried over indefinitely tooffset regular tax liabilities to the extent of the alternative minimum tax. Beforevaluation allowances, the Company has $34.1 million in state research anddevelopment tax credits that carry forward indefinitely.

The Company has NOLcarryforwards for the United Kingdom and Italy purposes of approximately $55.4million and $9.0 million, respectively. With certain limitations, the UnitedKingdom NOLs can be carried forward indefinitely and the Italy NOLs begin toexpire in 2007.

Pursuant to Sections 382and 383 of the Internal Revenue Code, the utilization of NOLs and other taxattributes may be subject to substantial limitations if certain ownershipchanges occur during a three-year testing period (as defined). The Company doesnot believe an ownership change has occurred as of June 30, 2006, thatwould limit the Company’s utilization of its NOL, credit carry forwards or othertax attributes.

Realization of deferredtax assets is dependent upon generating sufficient taxable income. The Companybelieves that there is a risk that certain deferred tax assets, includingresearch and development credits, foreign operating losses anddepreciation differences, may result in no benefit and, accordingly, hasestablished a valuation allowance of $50.9 million against them. Althoughrealization is not assured for the remaining deferred tax assets, the Companybelieves it is more likely than not that the deferred tax assets will berealized through future taxable earnings or alternative tax strategies.

The American Jobs CreationAct (“AJCA”) was signed into law on October 22, 2004. Among its variousprovisions, AJCA created a temporary incentive for U.S. corporations torepatriate accumulated income earned abroad by providing an 85 percentdividends received deduction for certain dividends from controlled foreigncorporations. In addition, the provisions require that certain foreign tax creditsand other deductions associated with the dividend payments be reducedcommensurate with the level of tax benefit received by U.S. corporations fromthe 85 percent deduction. During the fourth quarter ended June 30, 2006,the Company’s Board of Directors approved a domestic reinvestment plan asrequired by 

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the AJCAwith respect to such repatriated dividends. The Company repatriated $142million in foreign earnings during its fourth quarter ended June 30, 2006under the AJCA. The Company’s tax expense as a consequence of the repatriationof the accumulated foreign earnings under the AJCA is five percent of pre-taxbook earnings.

As a matter of course, theCompany is regularly audited by various taxing authorities. Unfavorablesettlement of any particular issue would require the 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. Whileit is often difficult to predict the final outcome or the timing of theresolution of any particular tax matter, the Company does not expect theresults of these audits to have a material impact on its financial position or resultsof operations.

In July 2006, theFASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109”(“FIN No. 48”). FIN No. 48 clarifies the accounting for income taxesby prescribing the minimum recognition threshold a tax position is required tomeet before being recognized in the financial statements. This Interpretationrequires that the impact of a tax position be recognized if it is more likelythan not of being sustained in an audit, based on the technical merits of theposition. FIN No. 48 also provides guidance on de-recognition,measurement, classification, interest and penalties, accounting in interimperiods, disclosure and transition. In addition, FIN No. 48 excludesincome taxes from the scope of SFAS No. 5, “Accounting for Contingencies”.FIN No. 48 is effective beginning with the Company’s fiscal first quarterended September 30, 2007 of fiscal year 2008. The Company iscurrently assessing the impact of FIN No. 48.

**9.**   Net Income perCommon Share

Thereconciliation of the numerator and denominator of the net income per commonshare—basic and diluted determined in accordance with SFAS No. 128, “Earningsper Share,” for the fiscal years ended June 30, 2006, 2005 and 2004 (inthousands, except per share amounts) is as follows:

| ** **                                | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|---------------------------|------------|----------------------------|------------|
| **June 30, 2006**                    | ** ** |                    | ** ** | ** **                |       |                       | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income per  common share—basic   |       |                    | $          | 107,156                   | ** ** |                       |       | 70,914 | ** ** |   |   | $ | 1.51 |   |   |
| Effect of dilutive  securities:           |       |                    |       | ** **                |       |                       |       | ** ** |   |   |   |   |   |
| Stock options                             |       |                    | —     | ** **                |       |                       | 839        | ** ** |   |   | (0.02 | ) |   |
| Net income per  common share—diluted |       |                    | $          | 107,156                   | ** ** |                       |       | 71,753 | ** ** |   |   | $ | 1.49 |   |   |
| **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 |   |   |
| **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 |   |   |

 

The fiscal year ended June 30,2005 included the effect from the conversion of 7,439,000 shares, of theCompany’s outstanding convertible subordinated notes (“the Effect”), whichnegatively impacted net 

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incomeby $0.06. The fiscal years ended June 30, 2006 and 2004 did not includethe Effect, as the Effect would have been anti-dilutive.

**10.**   EnvironmentalMatters

Federal, state and locallaws and regulations impose various restrictions and controls on the storage,use and discharge of certain materials, chemicals and gases used insemiconductor manufacturing processes, and on the operation of the Company’sfacilities and equipment. The Company believes it uses reasonable efforts tomaintain a system of compliance and controls for these laws and regulations. Despitethe Company’s efforts and controls, from time to time, issues may arise withrespect to these matters. However, the Company does not believe that general compliancewith such laws and regulations as now in effect will have a material adverseeffect on the Company’s results of operations, financial position or cash flows.

Additionally, under someof these laws and regulations, the Company could be held financiallyresponsible for remedial measures if properties are contaminated or if waste issent to a landfill or recycling facility that becomes contaminated. Also, theCompany may be subject to common law claims if it releases substances thatdamage or harm third parties. The Company cannot make assurances that changesin environmental laws and regulations will not require additional investmentsin capital equipment and the implementation of additional compliance programsin the future, which could have a material adverse effect on the Company’sresults of operations, financial position or cash flows, as could any failureby the Company to comply with environmental laws and regulations.

International RectifierCorporation and Rachelle Laboratories, Inc. (“Rachelle”), a formeroperating subsidiary of the Company 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 the Company, for cost recovery andcontribution under the provisions of the Comprehensive Environmental Response,Compensation and Liability Act (“CERCLA”). IR has settled all outstandingclaims that have arisen against it out of the OII Site. No claims againstRachelle have been settled. The Company has taken the position that none of thewastes generated by Rachelle were hazardous.

Counsel for Rachellereceived a letter dated August 2001 from the U.S. Department of Justice,directed to all or substantially all PRPs for the OII Site, offering to settleclaims against such parties for all work performed through and including thefinal 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 the offer.

It remains the position ofRachelle that its wastes were not hazardous. The Company’s insurer has notaccepted liability, although it has made payments for defense costs for thelawsuit against the Company. The Company has made no accrual for potentialloss, if any; however, an adverse outcome could have a material adverse effecton the Company’s results of operations or cash flows.

The Company received aletter in June 2001 from a law firm representing UDT Sensors, Inc.relating to environmental contamination (chlorinated solvents such astrichlorethene) assertedly found in UDT’s properties in Hawthorne, California. Theletter alleges that the Company operated a manufacturing business at thatlocation in the 1970’s and/or 1980’s and that it may have liability inconnection with the claimed contamination. The Company has made no accrual forany potential losses since there has been no assertion of specific facts onwhich to form the basis for determination of liability.

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**11.**   Commitments

As of June 30, 2006,the future minimum lease commitments under non-cancelable operatingleases of equipment and real property are as follows: fiscal 2007: $4.2million; fiscal 2008: $4.1 million; fiscal 2009: $3.3 million; fiscal2010: $3.0 million; fiscal 2011 and thereafter: $6.0 million. Capital leaseobligations were not material as of June 30, 2006.

Total rental expense onall operating leases charged to income was $10.6 million, $12.4 million and$11.6 million in the fiscal years ended June 30, 2006, 2005 and 2004,respectively. The Company had outstanding purchase commitments for capitalexpenditures of approximately $21.6 million at June 30, 2006.

**12.**   Litigation

In June 2000, theCompany filed suit in Federal District Court in Los Angeles, California againstIXYS Corporation, alleging infringement of its key U.S. patents 4,959,699;5,008,725 and 5,130,767. The suit sought damages and other relief customary insuch matters. The Federal District Court entered a permanent injunction,effective on June 5, 2002, barring IXYS from making, using, offering tosell or selling in, or importing into the United States, MOSFETs (includingIGBTs) covered by the Company’s U.S. patents 4,959,699; 5,008,725 and/or5,130,767. In August 2002, the Court of Appeals for the Federal Circuitstayed that injunction, pending appeal on the merits. In that same year,following trial on damages issues, a Federal District Court jury awarded theCompany $9.1 million in compensatory damages. The Federal District Courtsubsequently tripled the damages, increasing the award from $9.1 million toapproximately $27.2 million, and ruled that the Company is entitled to anadditional award of reasonable attorney’s fees for a total monetary judgment ofabout $29.5 million. In March 2004, the U.S. Court of Appeals for theFederal Circuit reversed the summary judgment granted the Company by the FederalDistrict Court in Los Angeles of infringement by IXYS of the Company’s 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 theCompany’s favor regarding the validity and enforceability of the three Companypatents. Following remand, a federal court jury in Los Angeles, California heldon September 15, 2005, that IXYS elongated octagonal MOSFETs and IGBTsinfringed the Company’s 4,959,699 patent but did not infringe the Company’s5,008,725 and 5,130,767 patents. On October 6, 2005 the jury awarded theCompany $6.2 million in damages. Based on the jury’s verdict, on February 14,2006 the District Court entered its final judgment (including permanentinjunctions prohibiting IXYS from further infringing sales for the remaininglife of the 4,959,699 patent) and found that the Company is entitled to $6.2million in compensatory damages for infringement through September 30,2005, plus an additional 6.5 percent of infringing sales after September 30,2005. On July 14, 2006, the Federal Circuit entered an order vacating thatjudgment and remanded the *IR v. IXYS*action so that the District Court could consider whether to reissue a permanentinjunction in light of the Supreme Court’s decision in *eBay Inc. v.MercExchange, L.L.C.*,       U.S.       , 126 S.Ct. 1837, 164 L.Ed.2d641 (2006). We then requested that the District Court re-enter the finaljudgment (and permanent injunction). On September 14, 2006, the DistrictCourt granted the Company’s motion and re-entered the final judgment. Eventhough IXYS is expected to appeal the judgment, the Company believes that it isreasonably assured that the value of the judgment is at least $2.5 millionand accordingly, for the fiscal year ended June 30, 2006, the Companyrecognized $2.5 million by releasing a previous allowance related to the royaltyincome.

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**13.**   Acquisition

In July 2004, theCompany acquired the specialty silicon epitaxial services business fromAdvanced Technology Materials, Inc. (“ATMI”) for $39.6 million in cash,net of claim settlement as described below, in order to lower production costsand to gain certain key intellectual property for epitaxial silicon substratemanufacturing. During the fiscal quarter ended December 31, 2004, theCompany and ATMI settled the claim regarding certain processes transferred aspart of the purchase transaction that failed to qualify in accordance withcontract specifications, and $1.8 million 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 intangibleassets, $0.3 million for other current assets and $12.5 million for goodwill.The financial 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 ended June 30,2006, 2005 and 2004, had the acquisition occurred at the beginning of thoseperiods.

**14.**   RelatedParty Transactions

As discussed in Note 2,the Company holds as strategic investment common stock of Nihon InterElectronics Corporation (“Nihon”), a related party. During the fiscal yearended June 30, 2006, the Company sold 2.6 million shares in Nihon for netproceeds of $19.1 million and recognized $13.6 million of pretax gains recordedin other income. At June 30, 2006 and 2005, the Company owned approximately9.7 percent and 17.5 percent, respectively, of the outstanding shares ofNihon. As previously reported, the Company’s Chief Financial Officer was theChairman of the Board and a director of Nihon until June 28, 2005. Inaddition, the general manager of the Company’s Japan subsidiary is a directorof Nihon. Although the Company has a member on the Board of Directors of Nihon,it does not exercise significant influence, and accordingly, the Companyrecords its interest in Nihon based on readily determinable market values inaccordance with SFAS No. 115 (see Note 2).

**15.   QuarterlyFinancial Data (Unaudited)**

Summarizedquarterly financial data is as follows (in thousands, except per shareamounts):

| ** **    | ** ** | **Revenues** | ** ** | **Gross Profit** | ** ** | **Net  Income (Loss)** | ** ** | **Net Income  (Loss) Per  Common  Share — Basic** | ** ** | **Net Income  (Loss) Per  Common  Share — Diluted (1)** | ** ** |
|---------------|------------|--------------|------------|-----------------------|------------|-----------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **2006 (2)**  | ** ** |         |       |                  |       |                        |       |                                                                       |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |
| 1st Quarter   |       | $            | 272,573    |                  |       | $                           | 110,893    |                                                                       |       |                                                                                  | 26,243     |   |   |   | $ | 0.37 |   |   |   | $ | 0.36 |   |   |
| 2nd Quarter   |       | 278,811      |       |                  | 111,574    |                        |       |                                                                       | 24,256     |                                                                                  |       |   | 0.34 |   |   |   | 0.34 |   |   |
| 3rd Quarter   |       | 297,076      |       |                  | 118,787    |                        |       |                                                                       | 25,654     |                                                                                  |       |   | 0.36 |   |   |   | 0.36 |   |   |
| 4th Quarter   |       | 322,658      |       |                  | 127,784    |                        |       |                                                                       | 31,004     |                                                                                  | ** ** | ** ** | 0.43 | **(3)** |   |   | 0.43 | ** (3)** | ** ** |
| **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 | **(4)** |   |   | 0.35 | ** (4)** | ** ** |
|               |            |              |            |                       |            |                             |            |                                                                            |            |                                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Fiscalfirst quarter 2005 through third quarter 2005 included the dilutive effect fromthe conversion of the Company’s outstanding convertible subordinated notes into7,439,000 shares of common stock (the “Effect”). The conversion effect was notincluded in any of the other quarters, since the Effect would have beenanti-dilutive.

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(2)          Fiscal first quarter 2005 through fourthquarter 2006 included pretax impairment of assets, restructuring andseverance-related charges, as follows (inthousands):

| ** **                                                       | ** ** | **Fiscal 2006** | ** ** | **Fiscal 2005** | ** ** |
|------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                       | ** ** | **1**st  Quarter     | ** ** | **2**nd  Quarter     | ** ** | **3**rd  Quarter | ** ** | **4**th  Quarter | ** ** | **1**st  Quarter | ** ** | **2**nd  Quarter | ** ** | **3**rd  Quarter | ** ** | **4**th  Quarter | ** ** |
| Impairment of assets,  relocation costs and other charges        |       |                 | $          | 3,062                |       |   |   | $ | 2,046 |   |   |   | $ | 1,698 |   |   |   | $ | 1,452 |   |   |   | $ | 4,860 |   |   |   | $ | 5,631 |   |   |   | $ | 6,304 |   |   | $ | 8,480 |   |
| Severance-related                                                |       |                 | 1,231      |                 |       |   | 1,014 |   |   |   | 1,651 |   |   |   | 3,758 |   |   |   | 1,831 |   |   |   | 1,200 |   |   |   | 1,773 |   |   | 3,873 |   |
| Total impairment of assets, restructuring and  severance charges |       |                 | $          | 4,293                |       |   |   | $ | 3,060 |   |   |   | $ | 3,349 |   |   |   | $ | 5,210 |   |   |   | $ | 6,691 |   |   |   | $ | 6,831 |   |   |   | $ | 8,077 |   |   | $ | 12,353 |   |

 

(3)          Fiscal fourth quarter2006 included(1) $0.15 chargefrom the impairment of assets, restructuring and severance charges, (2) $0.11income from the gain on the sale of an equity investment, and (3) $0.01 chargefrom the incremental expenses from the proposed convertible debt offering,subsequently withdrawn, and the special dividend repatriation under theAmerican Jobs Creation Act of 2004.

(4)          Fiscal fourth quarter 2005 included (1) $0.38 charge fromthe impairment of assets, restructuring and severance charges and (2) $0.07charge from the accelerated vesting of stock options.

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

None

**Item9A. Controls and Procedures**

(a)           Evaluationof disclosure controls and procedures

The term “disclosurecontrols and procedures” refers to the controls and other procedures of acompany that are designed to ensure that information required to be disclosedby the company in the reports that it files under the Securities Exchange Actof 1934 (“Exchange Act”) is recorded, processed, summarized and reported,within required time periods. Our management, with the participation of ourChief Executive Officer, Alexander Lidow, and Chief Financial Officer, MichaelP. McGee, carried out an evaluation of the effectiveness of our disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-15(b). Basedon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that, as of the end of the period covered by this report, suchcontrols and procedures are effective at the reasonable assurance level inmaking known to them material information related to us (including ourconsolidated subsidiaries) required to be included in 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’sReport on Internal Control over Financial Reporting

Internal control overfinancial reporting is a process designed by, or under the supervision of, ourchief executive officer and chief financial officer and effected by our boardof directors, management and other personnel to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of theconsolidated financial statements for external purposes in accordance withgenerally accepted accounting principles and includes those policies andprocedures that: (1) pertain to the 

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maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of our assets; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that our receipts and expenditures are being made only inaccordance with authorizations of management and directors; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of our assets that could have a material effecton the consolidated financial statements.

We are responsiblefor establishing and maintaining adequate internal control over financialreporting. We have used the framework set forth in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission to assess ourinternal control over financial reporting. Based upon this assessment, we haveconcluded that our internal control over financial reporting was effective asof June 30, 2006. PricewaterhouseCoopers LLP, an independent registeredpublic accounting firm who audited our financial statements included in thisannual report on Form 10-K, has also audited our assessment of theeffectiveness of our internal control over financial reporting as of June 30,2006.

(c)           Changesin internal control over financial reporting

In the Quarterly Reportson Form 10-Qs for the fiscal quarters ended September 30, 2005and December 31, 2005, we restated the statement of cash flows for thethree and six months then ended, to correctly classify the excess tax benefitsfrom options exercised as cash flows from financing activities rather thanoperating activities, in accordance with the adoption of SFAS No. 123R, “Stock-BasedCompensation”. In connection with the restatements, we identified a materialweakness in our internal control over the preparation, review, presentation anddisclosure of the consolidated statement of cash flows. A material weakness isa control deficiency, or a combination of control deficiencies, that results inmore than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected. At September 30,2005, December 31, 2005 and March 31, 2006, we determined that we didnot maintain effective controls over the preparation, review and disclosure ofthe statement of cash flows.

Subsequentto March 31, 2006, we made the following changes to our internal controlover financial reporting to remediate the material weakness discussed above:

·       Implemented a multi-levelof review over the Form 10-Q and Form 10-K financialstatements preparation, review and disclosure, including additional andupgraded accounting management;

·       Implemented a practice toenhance the technical training on current accounting and reportingpronouncements and issues;

·       Incorporated supplementaldisclosure checklist to include new pronouncements having significant financialstatement impact; and

·       Implemented a practice toconsult with third-party experts on complex accounting and reportingtransactions.

We have completed thedocumentation and testing of the corrective processes and, as of June 30,2006, have concluded that the steps taken have remediated the material weaknessover the preparation, review, presentation and disclosure of the consolidatedstatement of cash flows. Other than the remediation of the material weakness,there was no change in our internal controls during the fiscal fourth quarter2006 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**Item9B. Other Information**

None

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**PART III**

For information called forby Items 10, 11, 12, 13 and 14, reference is made to the items under “Electionof Directors”, “General Information—Security Ownership of PrincipalStockholders 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 20,2006, which will be filed with the Securities and Exchange Commission within120 days after July 2, 2006, and which is incorporated herein byreference. Certain information concerning the executive officers of the Companyis included in Part I. See “Additional Item” on page 29.

**PART IV**

**Item 15. Exhibitsand Financial Statement Schedules**

a.                 FinancialStatements and Financial Statement Schedule being filed as part of this reportare listed in the index on page 58.

b.                Exhibits filed aspart of this report are listed on the Exhibit Index on page 98.

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**EXHIBIT INDEX**

IncorporatedBy 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)        |
| 3(c)             |       | Bylaws as amended of the  Company                                                                                                                                                                                                                                  |       | Form 10-Q filed with  the Securities and Exchange Commission on November 11, 2005.  (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)) |

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| 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)         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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)       |

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| 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)                                                        |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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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| 10(z)   |   | The First Amendment to the Amended and Restated  Rights Agreement dated August 11, 2006                                                                                      |   | Exhibit 10.1 submitted herewith                                                                                                      |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
| 10(aa)  |   | May 8, 2006 Confirmation  between BNP Paribas Paris and International Rectifier Corp. dated as of July  1, 1999, as amended                                                       |   | Exhibit 10.2 submitted  herewith                                                                                                     |
| 10(bb)* |   | Amended and Restated  1984 Stock Participation Plan, effective as of November 21, 2005                                                                                       |   | Form 8-K dated November 21,  2005, filed with the Securities and Exchange Commission on November 21,  2005. (Exhibit 99.1) |
| 10(cc)  |   | Credit Agreement, dated  June 27, 2006, between International Rectifier Southeast Asia Pte. Ltd.,  and Bank of America, N.A. as Administrative Agent and sole initial Lender |   | Form 8-K dated July 3,  2006, filed with Securities Exchange Commission. (Exhibit 10.1)                                         |
| 10(dd)  |   | Guaranty, dated June 27,  2006, executed by International Rectifier Corporation in favor of Bank of  America, N.A.                                                                |   | Form 8-K dated July 3,  2006, filed with Securities Exchange Commission. (Exhibit 10.2)                                         |
| 14      |   | Code of Ethics                                                                                                                                                                    |   | Form 8-K, filed with the Securities and  Exchange Commission on November 18, 2005. (Exhibit 99.1)                     |

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*                    Denotesmanagement contract or compensatory plan or arrangement.

**Submitted Herewith:**

See page 59for an index of Financial Statements and Financial Statement Schedule beingfiled as part of this report.
| 10.1 |   | The First Amendment to the Amended and Restated Rights  Agreement dated August 11, 2006.                                                                       |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 |   | May 8, 2006 Confirmation between BNP Paribas  Paris and International Rectifier Corp., dated as of July 1, 1999 as  amended.                              |
| 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 accounting officer)* |

 

Date: September 15, 2006

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 15, 2006 |
| Eric  Lidow           |           |                                     |       |                    |
| /s/ ALEXANDER  LIDOW  |           | Director, Chief  Executive Officer       |       | September 15, 2006 |
| Alexander  Lidow      |           | (Principal Executive  Officer)           |       |                    |
| /s/ JACK O.  VANCE    |           | Director                                 |       | September 15, 2006 |
| Jack  O. Vance        |           |                                     |       |                    |
| /s/ ROCHUS E.  VOGT   |           | Director                                 |       | September 15, 2006 |
| Rochus  E. Vogt       |           |                                     |       |                    |
| /s/ JAMES D.  PLUMMER |           | Director                                 |       | September 15, 2006 |
| James  D. Plummer     |           |                                     |       |                    |
| /s/ MINORU  MATSUDA   |           | Director                                 |       | September 15, 2006 |
| Minoru  Matsuda       |           |                                     |       |                    |
| /s/ ROBERT  ATTIYEH   |           | Director                                 |       | September 15, 2006 |
| Robert  Attiyeh       |           |                                     |       |                    |
| /s/ MICHAEL P.  MCGEE |           | Chief Financial  Officer                 |       | September 15, 2006 |
| 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, 2006, 2005 and 2004(In thousands)**

| ** **                               | ** ** | ** **                                     | ** ** | **Additions**                                | ** ** | ** **                 | ** ** | ** **              | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged to  Cost and  Expenses** | ** ** | **Charged to  Other** | ** ** | **Deductions (1)** | ** ** | **Balance at  End of  Period** | ** ** |
| **2006**                                 |       |                                           |       |                                         |       |                       |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred income  tax valuation allowance |       |                                           | $          | 48,150                                       |       |                       |       | $                       | 5,927      |   |   |   | $ | — |   |   |   | $ | (3,189 | ) |   |   | $ | 50,888 |   |   |
| Inventory  valuation reserve             |       |                                           | 6,648      |                                         |       |                       | 9,073      |                    |       |   | — |   |   |   | (7,335 | ) |   |   | 8,386 |   |   |
| **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 |   |   |
|                                          |            |                                                |            |                                              |            |                            |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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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”.

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