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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 26, 2010

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to

Commission File No. 0-14225





EXAR CORPORATION

(Exact Name of Registrant as specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 94-1741481                             
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification Number)

48720 Kato Road, Fremont, CA
94538

(Address of principal executive offices, Zip Code)

(510) 668-7000

(Registrants telephone number, including area code)





Indicate by
check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes   ̈    No   ̈

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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

The number of shares outstanding of the Registrants Common Stock was 44,280,365 as of October 29, 2010, net of 19,924,369
treasury shares.









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##### Table of Contents



EXAR CORPORATION AND SUBSIDIARIES

INDEX TO

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 2010



|         |  |                                                                                       |  |      |    | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                       |  | Page |   
|         |  | PART I  FINANCIAL INFORMATION                                                        |  |      |    | 
|         |  |                                                                                      
|Item 1.  |  | Financial Statements (Unaudited)                                                      |  |      | 3  | 
|         |  |                                                                                      
|         |  | Condensed Consolidated Balance Sheets                                                 |  |      | 3  | 
|         |  |                                                                                      
|         |  | Condensed Consolidated Statements of Operations                                       |  |      | 4  | 
|         |  |                                                                                      
|         |  | Condensed Consolidated Statements of Cash Flows                                       |  |      | 5  | 
|         |  |                                                                                      
|         |  | Notes to Condensed Consolidated Financial Statements                                  |  |      | 6  | 
|         |  |                                                                                      
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |      | 26 | 
|         |  |                                                                                      
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |      | 36 | 
|         |  |                                                                                      
|Item 4.  |  | Controls and Procedures                                                               |  |      | 36 | 
|         |  |                                                                                      
|         |  | PART II  OTHER INFORMATION                                                           |  |      |    | 
|         |  |                                                                                      
|Item 1.  |  | Legal Proceedings                                                                     |  |      | 37 | 
|         |  |                                                                                      
|Item 1A. |  | Risk Factors                                                                          |  |      | 37 | 
|         |  |                                                                                      
|Item 6.  |  | Exhibits                                                                              |  |      | 52 | 
|         |  |                                                                                      
|         |  | Signatures                                                                            |  |      | 53 | 
|         |  |                                                                                      
|         |  | Index to Exhibits                                                                     |  |      | 54 | 



2



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PART I  FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)



|                                                                                                                                                                   |  |               |          |   |           |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | --------- | - | -------- | -
|                                                                                                                                                                   |  | September 26, |          |   | March 28, |  
|                                                                                                                                                                   |  | 2010          |          |   | 2010      |  
|ASSETS                                                                                                                                                             |  |               |          |   |           |   |          |  
|Current assets:                                                                                                                                                    |  |               |          |   |           |   |          |  
|Cash and cash equivalents                                                                                                                                          |  | $             | 14,086   |   |           | $ | 25,486   |  
|Short-term marketable securities                                                                                                                                   |  |               | 194,162  |   |           |   | 186,598  |  
|Accounts receivable (net of allowances of $793 and $831)                                                                                                           |  |               | 13,857   |   |           |   | 13,461   |  
|Accounts receivable, related party (net of allowances of $342 and $605)                                                                                            |  |               | 3,963    |   |           |   | 4,323    |  
|Inventories                                                                                                                                                        |  |               | 22,601   |   |           |   | 15,000   |  
|Other current assets                                                                                                                                               |  |               | 3,177    |   |           |   | 5,106    |  
|                                                                                                                                                                   |  |               |          |   |           |   |          |  
|Total current assets                                                                                                                                               |  |               | 251,846  |   |           |   | 249,974  |  
|                                                                                                                                                                   |  |              
|Property, plant and equipment, net                                                                                                                                 |  |               | 41,721   |   |           |   | 42,941   |  
|Goodwill                                                                                                                                                           |  |               | 3,184    |   |           |   | 3,085    |  
|Intangible assets, net                                                                                                                                             |  |               | 26,009   |   |           |   | 31,957   |  
|Other non-current assets                                                                                                                                           |  |               | 5,048    |   |           |   | 5,357    |  
|                                                                                                                                                                   |  |               |          |   |           |   |          |  
|Total assets                                                                                                                                                       |  | $             | 327,808  |   |           | $ | 333,314  |  
|                                                                                                                                                                   |  |               |          |   |           |   |          |  
|                                                                                                                                                                   |  |              
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                               |  |               |          |   |           |   |          |  
|Current liabilities:                                                                                                                                               |  |               |          |   |           |   |          |  
|Accounts payable                                                                                                                                                   |  | $             | 11,845   |   |           | $ | 9,828    |  
|Accrued compensation and related benefits                                                                                                                          |  |               | 7,161    |   |           |   | 6,619    |  
|Deferred income and allowances on sales to distributors                                                                                                            |  |               | 5,712    |   |           |   | 4,227    |  
|Deferred income and allowances on sales to distributors, related party                                                                                             |  |               | 11,018   |   |           |   | 10,650   |  
|Short-term lease financing obligations                                                                                                                             |  |               | 3,764    |   |           |   | 3,540    |  
|Other accrued expenses                                                                                                                                             |  |               | 4,935    |   |           |   | 7,058    |  
|                                                                                                                                                                   |  |               |          |   |           |   |          |  
|Total current liabilities                                                                                                                                          |  |               | 44,435   |   |           |   | 41,922   |  
|                                                                                                                                                                   |  |              
|Long-term lease financing obligations                                                                                                                              |  |               | 12,888   |   |           |   | 13,454   |  
|Other non-current obligations                                                                                                                                      |  |               | 3,838    |   |           |   | 3,806    |  
|                                                                                                                                                                   |  |               |          |   |           |   |          |  
|Total liabilities                                                                                                                                                  |  | $             | 61,161   |   |           | $ | 59,182   |  
|                                                                                                                                                                   |  |               |          |   |           |   |          |  
|Commitments and contingencies (Notes 15 and 16)                                                                                                                    |  |               |          |   |           |   |          |  
|                                                                                                                                                                   |  |              
|Stockholders equity:                                                                                                                                              |  |               |          |   |           |   |          |  
|Preferred stock, $.0001 par value; 2,250,000 shares authorized; no shares outstanding                                                                              |  | $             |         |   |           | $ |         |  
|Common stock, $.0001 par value; 100,000,000 shares authorized; 44,251,257 and 43,839,514 shares outstanding at September 26,
2010 and March 28, 2010, respectively |  |               | 4        |   |           |   | 4        |  
|Additional paid-in capital                                                                                                                                         |  |               | 724,899  |   |           |   | 720,455  |  
|Accumulated other comprehensive income                                                                                                                             |  |               | 1,226    |   |           |   | 1,282    |  
|Treasury stock at cost, 19,924,369 shares at September 26, 2010 and March 28, 2010                                                                                 |  |               | (248,983 | ) |           |   | (248,983 | )
|Accumulated deficit                                                                                                                                                |  |               | (210,499 | ) |           |   | (198,626 | )
|                                                                                                                                                                   |  |               |          |   |           |   |          |  
|Total stockholders equity                                                                                                                                         |  |               | 266,647  |   |           |   | 274,132  |  
|                                                                                                                                                                   |  |               |          |   |           |   |          |  
|Total liabilities and stockholders equity                                                                                                                         |  | $             | 327,808  |   |           | $ | 333,314  |  
|                                                                                                                                                                   |  |               |          |   |           |   |          |  

See accompanying Notes to Condensed Consolidated Financial Statements.



3



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EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                  |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                                  |  | Three Months Ended |        |   | Six Months Ended |  
|                                                  |  | September 26,      |        |   | September 27,    |   |        | September 26, |  |   | September 27, |  
|                                                  |  | 2010               |        |   | 2009             |   |        | 2010          |  |   | 2009          |  
|Sales:                                            |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Net sales                                         |  | $                  | 25,885 |   |                  | $ | 23,118 |               |  | $ | 54,250        |   |  | $ | 46,228  |  
|Net sales, related party                          |  |                    | 11,348 |   |                  |   | 8,470  |               |  |   | 22,619        |   |  |   | 16,222  |  
|                                                  |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Total net sales                                   |  |                    | 37,233 |   |                  |   | 31,588 |               |  |   | 76,869        |   |  |   | 62,450  |  
|                                                  |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Cost of sales:                                    |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Cost of sales                                     |  |                    | 13,205 |   |                  |   | 11,843 |               |  |   | 27,284        |   |  |   | 24,732  |  
|Cost of sales, related party                      |  |                    | 5,222  |   |                  |   | 4,088  |               |  |   | 10,410        |   |  |   | 7,876   |  
|Amortization of purchased intangible assets       |  |                    | 1,515  |   |                  |   | 1,567  |               |  |   | 3,068         |   |  |   | 2,907   |  
|                                                  |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Total cost of sales                               |  |                    | 19,942 |   |                  |   | 17,498 |               |  |   | 40,762        |   |  |   | 35,515  |  
|                                                  |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Gross profit                                      |  |                    | 17,291 |   |                  |   | 14,090 |               |  |   | 36,107        |   |  |   | 26,935  |  
|                                                  |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Operating expenses:                               |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Research and development                          |  |                    | 11,840 |   |                  |   | 12,288 |               |  |   | 26,283        |   |  |   | 24,582  |  
|Selling, general and administrative               |  |                    | 11,083 |   |                  |   | 11,375 |               |  |   | 24,040        |   |  |   | 26,487  |  
|                                                  |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Total operating expenses                          |  |                    | 22,923 |   |                  |   | 23,663 |               |  |   | 50,323        |   |  |   | 51,069  |  
|                                                  |  |                    |        |  
|Loss from operations                              |  |                    | (5,632 | ) |                  |   | (9,573 | )             |  |   | (14,216       | ) |  |   | (24,134 | )
|                                                  |  |                    |        |  
|Other income and expense, net:                    |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Interest income and other, net                    |  |                    | 1,578  |   |                  |   | 1,700  |               |  |   | 3,191         |   |  |   | 3,454   |  
|Interest expense                                  |  |                    | (316   | ) |                  |   | (326   | )             |  |   | (634          | ) |  |   | (650    | )
|Impairment charges on investments                 |  |                    | (62    | ) |                  |   | (245   | )             |  |   | (62           | ) |  |   | (317    | )
|                                                  |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Total other income and expense, net               |  |                    | 1,200  |   |                  |   | 1,129  |               |  |   | 2,495         |   |  |   | 2,487   |  
|                                                  |  |                    |        |  
|Loss before income taxes                          |  |                    | (4,432 | ) |                  |   | (8,444 | )             |  |   | (11,721       | ) |  |   | (21,647 | )
|Provision for (benefit from) income taxes         |  |                    | 27     |   |                  |   | (281   | )             |  |   | 152           |   |  |   | (609    | )
|                                                  |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Net loss                                          |  | $                  | (4,459 | ) |                  | $ | (8,163 | )             |  | $ | (11,873       | ) |  | $ | (21,038 | )
|                                                  |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Loss per share:                                   |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Basic and diluted loss per share                  |  | $                  | (0.10  | ) |                  | $ | (0.19  | )             |  | $ | (0.27         | ) |  | $ | (0.48   | )
|                                                  |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Shares used in the computation of loss per share: |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Basic and diluted                                 |  |                    | 44,173 |   |                  |   | 43,550 |               |  |   | 44,035        |   |  |   | 43,432  |  
|                                                  |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  

See accompanying Notes to Condensed Consolidated Financial Statements.



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EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                   |  |                  |         |   |               |   |          |  
|---------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------- | - | -------- | -
|                                                                                   |  | Six Months Ended |        
|                                                                                   |  | September 26,    |         |   | September 27, |  
|                                                                                   |  | 2010             |         |   | 2009          |  
|Cash flows from operating activities:                                              |  |                  |         |   |               |   |          |  
|Net loss                                                                           |  | $                | (11,873 | ) |               | $ | (21,038  | )
|Reconciliation of net loss to net cash provided by (used in) operating activities: |  |                  |         |   |               |   |          |  
|Depreciation and amortization                                                      |  |                  | 10,690  |   |               |   | 10,935   |  
|Deferred income taxes                                                              |  |                  |        |   |               |   | (203     | )
|Stock-based compensation expense                                                   |  |                  | 4,836   |   |               |   | 2,975    |  
|Provision for sales returns and allowances                                         |  |                  | 6,957   |   |               |   | 4,735    |  
|Other than temporary loss on investments                                           |  |                  | 62      |   |               |   | 317      |  
|Changes in operating assets and liabilities, net of effects of acquisitions:       |  |                  |         |   |               |   |          |  
|Accounts receivable and accounts receivable, related party                         |  |                  | (6,993  | ) |               |   | (8,726   | )
|Inventories                                                                        |  |                  | (7,601  | ) |               |   | 7,623    |  
|Other current assets                                                               |  |                  | 544     |   |               |   | 1,325    |  
|Accounts payable                                                                   |  |                  | 2,017   |   |               |   | 2,403    |  
|Accrued compensation and related benefits                                          |  |                  | (282    | ) |               |   | (647     | )
|Deferred income and allowance on sales to distributors and related parties         |  |                  | 1,853   |   |               |   | 191      |  
|Other accrued expenses                                                             |  |                  | (176    | ) |               |   | (2,195   | )
|                                                                                   |  |                  |         |   |               |   |          |  
|Net cash provided by (used in) operating activities                                |  |                  | 34      |   |               |   | (2,305   | )
|                                                                                   |  |                  |         |   |               |   |          |  
|Cash flows from investing activities:                                              |  |                  |         |   |               |   |          |  
|Purchases of property, plant and equipment and intellectual property, net          |  |                  | (2,645  | ) |               |   | (3,313   | )
|Purchases of short-term marketable securities                                      |  |                  | (82,269 | ) |               |   | (118,691 | )
|Proceeds from maturities of short-term marketable securities                       |  |                  | 39,676  |   |               |   | 75,875   |  
|Proceeds from sales of short-term marketable securities                            |  |                  | 35,187  |   |               |   | 35,853   |  
|Other investment activities                                                        |  |                  | (263    | ) |               |   | (25      | )
|Acquisition of Galazar, net of cash acquired                                       |  |                  |        |   |               |   | (3,495   | )
|Acquisition of Hifn, net of cash acquired                                          |  |                  |        |   |               |   | (40,349  | )
|                                                                                   |  |                  |         |   |               |   |          |  
|Net cash used in investing activities                                              |  |                  | (10,314 | ) |               |   | (54,145  | )
|                                                                                   |  |                  |         |   |               |   |          |  
|Cash flows from financing activities:                                              |  |                  |         |   |               |   |          |  
|Proceeds from issuance of common stock                                             |  |                  | 431     |   |               |   | 274      |  
|Repayment of lease financing obligations                                           |  |                  | (1,551  | ) |               |   | (792     | )
|                                                                                   |  |                  |         |   |               |   |          |  
|Net cash used in financing activities                                              |  |                  | (1,120  | ) |               |   | (518     | )
|                                                                                   |  |                  |         |   |               |   |          |  
|Net decrease in cash and cash equivalents                                          |  |                  | (11,400 | ) |               |   | (56,968  | )
|Cash and cash equivalents at the beginning of period                               |  |                  | 25,486  |   |               |   | 89,002   |  
|                                                                                   |  |                  |         |   |               |   |          |  
|Cash and cash equivalents at the end of period                                     |  | $                | 14,086  |   |               | $ | 32,034   |  
|                                                                                   |  |                  |         |   |               |   |          |  
|Supplemental disclosure of non-cash investing and financial activities:            |  |                  |         |   |               |   |          |  
|Property, plant and equipment acquired under capital lease                         |  | $                | 1,208   |   |               | $ | 710      |  
|Issuance of common stock in connection with Hifn acquisition                       |  |                  |        |   |               |   | 2,705    |  

See accompanying Notes
to Condensed Consolidated Financial Statements.



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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Description of BusinessExar Corporation was incorporated in California in 1971 and reincorporated in Delaware in 1991.
Exar Corporation and its subsidiaries (Exar or we) is a fabless semiconductor company that designs, sub-contracts manufacturing and sells highly differentiated silicon, software and subsystem solutions for industrial,
telecom, networking and storage applications.

Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current years presentation. Such reclassification had no effect on previously reported results of operations or stockholders equity.

Our fiscal years consist of 52 or 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. The additional week in a
53-week year is added to the fourth fiscal quarter, making such quarter consist of 14 weeks. Fiscal year 2011 and fiscal year 2010 are comprised of a 52-week period. The second quarters of fiscal 2011 and fiscal 2010 each included 91 days from
June 28, 2010 to September 26, 2010 and from June 29, 2009 to September 27, 2009, respectively. The first six months of fiscal 2011 and fiscal 2010 each included 182 days from March 29, 2010 to September 26, 2010 and
from March 30, 2009 to September 27, 2009, respectively.

Basis of Presentation and Use of Management
EstimatesThe accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Financial Statements and notes thereto included
in our Annual Report on Form 10-K for the fiscal year ended March 28, 2010 as filed with the SEC. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal
recurring adjustments, that we believe are necessary for a fair statement of Exars financial position as of September 26, 2010 and our results of operations for the three and six months ended September 26, 2010 and September 27,
2009, respectively. These condensed consolidated financial statements are not necessarily indicative of the results to be expected for the entire year.

The financial statements include managements estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts
of sales and expenses during the reporting periods. Actual results could differ from those estimates, and material effects on operating results and financial position may result.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial
Accounting Standards Boards (FASBs) Emerging Issues Task Force issued new authoritative guidance addressing certain measurements and disclosures about purchases, sales, issuances, and settlements in Level 3 fair value
measurements. We are currently evaluating the impact of implementing the disclosures about purchases, sales, issuances, and settlements in Level 3 fair value measurements on our financial position and result of operations, which are effective for
fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We currently do not have any purchases, sales, issuances, or settlements in Level 3 fair value measurements.

NOTE 3. BUSINESS COMBINATIONS

We periodically evaluate potential strategic acquisitions to build upon our existing library of intellectual property, human capital and engineering talent, in order to expand our capabilities in the
areas in which we operate or to acquire complementary businesses.

We account for each business combination by applying the
acquisition method, which requires (i) identifying the acquiree; (ii) determining the acquisition date; (iii) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest of Exar
in the acquiree at their acquisition date fair value; and (iv) recognizing and measuring goodwill or a gain from a bargain purchase.

Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value on the acquisition date if fair value can be determined during the measurement
period. If fair value cannot be determined, we typically account for the acquired contingencies using existing guidance for a reasonable estimate.

To establish fair value, we measure the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants. The measurement assumes the
highest and best use of the asset by the market participants that would maximize the value of the asset or the group of assets within which the asset would be used at the measurement date, even if the intended use of the asset is different.



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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Goodwill is
measured and recorded as the amount by which the consideration transferred, generally at the acquisition date fair value, exceeds the acquisition date fair value of identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest of Exar in the acquiree. To the contrary, if the acquisition date fair value of identifiable assets acquired, the liabilities assumed, and any noncontrolling interest of Exar in the acquiree exceeds the consideration transferred, it is
considered a bargain purchase and we would recognize the resulting gain in earnings on the acquisition date.

In-process
research and development (IPR&D) assets are considered an indefinite-lived intangible asset and are not subject to amortization. IPR&D assets must be tested for impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the IPR&D asset with its carrying amount. If the carrying amount of the IPR&D asset exceeds its fair value, an
impairment loss must be recognized in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of the IPR&D assets will be its new accounting basis. Subsequent reversal of a previously recognized
impairment loss is prohibited. The initial determination and subsequent evaluation for impairment of the IPR&D asset requires management to make significant judgments and estimates. Once the IPR&D projects have been completed, the useful
life of the IPR&D asset is determined and amortized accordingly. If the IPR&D asset is abandoned, the remaining carrying value is written off.

Acquisition-related costs, including finders fees, advisory, legal, accounting, valuation and other professional or consulting fees are accounted for as expenses in the periods in which the costs
are incurred and the services are received, with the exception that the costs to issue debt or equity securities are recognized in accordance with other applicable generally accepted accounting principles (GAAP).

Acquisition of Neterion

On March 16, 2010, we completed the acquisition of Neterion, Inc. (Neterion), a supplier of 10 Gigabit Ethernet controller silicon and card solutions optimized for virtualized data
centers located in Sunnyvale, California. Neterions results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning March 17, 2010.

Consideration

We paid approximately $2.3 million in cash for Neterion, representing the fair value of total consideration transferred.

Acquisition-Related Costs

Acquisition-related costs, or deal costs,
relating to Neterion which are included in the Selling, general and administrative line item on the condensed consolidated statement of operations for the six months ended September 26, 2010, were immaterial. No acquisition-related
costs relating to Neterion were incurred during the three months ended September 26, 2010.

Restructuring Costs

For disclosure regarding restructuring costs, see Note 8. Restructuring contained herein.

Purchase Price Allocation

The allocation of the purchase price to Neterions tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition. We
will recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that
date. The measurement period shall not exceed one year from the acquisition date. Further, any associated restructuring activities will be expensed in future periods. We have up to twelve months from the closing date of the acquisition to adjust
pre-acquisition contingencies, if any. There were no severance costs relating to Neterion incurred during the three and six months ended September 26, 2010.

The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill. The $464,000 in goodwill resulted primarily from our
expected synergies from the integration of Neterions technology into our product offerings. Goodwill is not deductible for tax purposes.



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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





The fair value
allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed in the Neterion acquisition was as follows (in thousands):



|                                              |  |                    |        |  
|--------------------------------------------- |  | ------------------ | ------ | -
|                                              |  | As ofMarch 16,2010 |       
|Identifiable tangible assets                  |  |                    |        |  
|Cash and cash equivalents                     |  | $                  | 747    |  
|Accounts receivable                           |  |                    | 313    |  
|Inventories                                   |  |                    | 617    |  
|Other current assets                          |  |                    | 311    |  
|Other assets                                  |  |                    | 651    |  
|Accounts payable and accruals                 |  |                    | (592   | )
|Other liabilities                             |  |                    | (2,920 | )
|Debt                                          |  |                    | (6,963 | )
|                                              |  |                    |        |  
|Total identifiable tangible assets, net       |  |                    | (7,836 | )
|Identifiable intangible assets                |  |                    | 9,700  |  
|                                              |  |                    |        |  
|Total identifiable assets, net                |  |                    | 1,864  |  
|Goodwill                                      |  |                    | 464    |  
|                                              |  |                    |        |  
|Fair value of total consideration transferred |  | $                  | 2,328  |  
|                                              |  |                    |        |  

Subsequent to the acquisition, there were no adjustments to the fair value allocated to each of the major
classes of tangible and identifiable intangible assets acquired and liabilities assumed on March 16, 2010 in the Neterion acquisition.

Identifiable Intangible Assets

The following table sets forth the
components of the identifiable intangible assets acquired in the Neterion acquisition, which are being amortized over their estimated useful lives, with a maximum amortization period of six years, on a straight-line basis with no residual value:



|                                              |  |                |       |  |             |  |     | 
|--------------------------------------------- |  | -------------- | ----- |  | ----------- |  | --- | 
|                                              |  | Fair Value     |       |  | Useful Life | 
|                                              |  | (in thousands) |       |  | (in years)  | 
|Existing technology                           |  | $              | 5,600 |  |             |  | 4.0 | 
|Patents/Core technology                       |  |                | 900   |  |             |  | 6.0 | 
|In-process research and development           |  |                | 800   |  |             |  |    | 
|Customer relationships                        |  |                | 2,100 |  |             |  | 6.0 | 
|Tradenames/Trademarks                         |  |                | 100   |  |             |  | 2.0 | 
|Non-Compete Agreements                        |  |                | 100   |  |             |  | 1.3 | 
|Order backlog                                 |  |                | 100   |  |             |  | 0.2 | 
|                                              |  |                |       |  |             |  |     | 
|Total acquired identifiable intangible assets |  | $              | 9,700 |  |             |  |     | 
|                                              |  |                |       |  |             |  |     | 

We allocated the purchase price using the established valuation techniques described below.

Inventories The value allocated to inventories reflects the estimated fair value of the acquired inventory
based on the expected sales price of the inventory, less reasonable selling margin. The estimated fair value of raw materials is generally equal to their book value, due to the fact that raw materials have not been used to develop any finished goods
or work-in-progress and therefore, there is no value added to the raw materials.

Intangible assets The fair
values of existing technology, patents/core technology, in-process research and development, customer relationships, tradenames/trademarks, non-compete agreements and order backlog were determined using the income approach, which discounted expected
future cash flows to present value, taking into account multiple factors including, but not limited to, the stage of completion, estimated costs to complete, utilization of patents/core technology, the risks related to successful completion, and the
markets served. The cash flows were discounted at rates ranging from 4% to 33%. The discount rate used to value the existing intangible assets was 20%.

Acquired In-Process Research and Development The IPR&D project underway at Neterion at the acquisition date relates to the X3500 product series and as of such acquisition date had
incurred approximately $2.9 million in expense. The total research and development expense expected to be incurred to complete the project is estimated at $17.5 million, based on the project development timeline and resource requirements, and is
expected to be completed by December 2011. The percentage of completion for the project was estimated at 25% at the acquisition date.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Acquisition
of Galazar

On June 17, 2009, we completed the acquisition of Galazar Networks, Inc. (Galazar), a
fabless semiconductor company focused on carrier grade transport over telecom networks based in Ottawa, Ontario, Canada. Galazars product portfolio addressed transport of a wide range of datacom and telecom services including Ethernet, SAN,
TDM and video over SONET/SDH, PDH and OTN networks. Galazars results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning June 18, 2009.

Consideration

We paid approximately $5.0 million in cash for Galazar, representing the fair value of total consideration transferred. This amount included approximately $1.0 million contingent consideration that, for
the purposes of valuation, was assigned a 95% probability or a fair value of $0.95 million. This payment was contingent on Galazar achieving a project milestone within a twelve-month period following the close of the transaction. This milestone was
met during the three months ended December 27, 2009 and $1.0 million was paid in cash. The additional $50,000 was expensed and included in the Research and development line item on the consolidated statement of operations for the
fiscal year ended March 28, 2010.

Acquisition-Related Costs

Acquisition-related costs, or deal costs, relating to Galazar are included in the Selling, general and administrative line
item on the consolidated statement of operations. No acquisition-related costs relating to Galazar were incurred during the three and six months ended September 26, 2010.

Purchase Price Allocation

The allocation of the purchase price to
Galazars tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition. We will recognize additional assets or liabilities if new information is obtained about
facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period shall not exceed one year from the acquisition date and no
additional assets or liabilities were recognized during this period. Further, any associated restructuring activities will be expensed in future periods. No severance costs relating to Galazar were incurred during the three and six months ended
September 26, 2010.

The excess of the purchase price over the tangible and identifiable intangible assets acquired and
liabilities assumed has been allocated to goodwill. The $372,000 in goodwill resulted primarily from our expected synergies from the integration of Galazars technology into our product offerings. Goodwill is not deductible for tax purposes.

The fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities
assumed in the Galazar acquisition was as follows (in thousands):



|                                              |  |                   |       |  
|--------------------------------------------- |  | ----------------- | ----- | -
|                                              |  | As ofJune 17,2009 |      
|Identifiable tangible assets                  |  |                   |       |  
|Cash and cash equivalents                     |  | $                 | 506   |  
|Other current assets                          |  |                   | 909   |  
|Other assets                                  |  |                   | 250   |  
|Accounts payable and accruals                 |  |                   | (93   | )
|Accrued compensation and related benefits     |  |                   | (230  | )
|Other obligations                             |  |                   | (224  | )
|                                              |  |                   |       |  
|Total identifiable tangible assets, net       |  |                   | 1,118 |  
|Identifiable intangible assets                |  |                   | 3,460 |  
|                                              |  |                   |       |  
|Total identifiable assets, net                |  |                   | 4,578 |  
|Goodwill                                      |  |                   | 372   |  
|                                              |  |                   |       |  
|Fair value of total consideration transferred |  | $                 | 4,950 |  
|                                              |  |                   |       |  

Subsequent to the acquisition, there were no adjustments to the fair value allocated to each of the major
classes of tangible and identifiable intangible assets acquired and liabilities assumed on June 17, 2009 in the Galazar acquisition.



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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Identifiable
Intangible Assets

The following table sets forth the components of the identifiable intangible assets acquired in the
Galazar acquisition, which are being amortized over their estimated useful lives, with a maximum amortization period of six years, on a straight-line basis with no residual value:



|                                              |  |                |       |  |             |  |     | 
|--------------------------------------------- |  | -------------- | ----- |  | ----------- |  | --- | 
|                                              |  | Fair Value     |       |  | Useful Life | 
|                                              |  | (in thousands) |       |  | (in years)  | 
|Existing technology                           |  | $              | 2,100 |  |             |  | 6.0 | 
|Patents/Core technology                       |  |                | 400   |  |             |  | 6.0 | 
|In-process research and development           |  |                | 300   |  |             |  |    | 
|Customer relationships                        |  |                | 500   |  |             |  | 6.0 | 
|Tradenames/Trademarks                         |  |                | 100   |  |             |  | 3.0 | 
|Order backlog                                 |  |                | 60    |  |             |  | 0.3 | 
|                                              |  |                |       |  |             |  |     | 
|Total acquired identifiable intangible assets |  | $              | 3,460 |  |             |  |     | 
|                                              |  |                |       |  |             |  |     | 

We allocated the purchase price using the established valuation techniques described below.

Intangible assets The fair value of existing technology, patents/core technology, in-process research and
development, customer relationships, order backlog and tradenames/trademarks were determined using the income approach, which discounted expected future cash flows to present value, taking into account multiple factors including, but not limited to,
the stage of completion, estimated costs to complete, utilization of patents and core technology, the risks related to successful completion, and the markets served. The cash flows were discounted at rates ranging from 5% to 35%. The discount rate
used to value the existing intangible assets was 28%.

Acquired In-Process Research and Development The
IPR&D project underway at Galazar at the acquisition date relates to the MXP2 product and as of such acquisition date had incurred approximately $2.3 million in expense. The total research and development expense expected to be incurred to
complete the project is estimated at $7.6 million, based on the project development timeline and resource requirements, and is expected to be completed by October 2011. The percentage of completion for the project was estimated at 51% at the
acquisition date.

Acquisition of Hifn

On April 3, 2009, we completed the acquisition of hi/fn, inc. (Hifn), a provider of network-and storage-security and data reduction products that simplify the way major network and
storage OEMs, as well as small and medium enterprises, efficiently and securely share, retain, access and protect critical data. Hifns results of operations and estimated fair value of assets acquired and liabilities assumed were included in
our consolidated financial statements beginning April 4, 2009.

Consideration

The following table summarizes the consideration paid for Hifn, representing the fair value of total consideration transferred (in
thousands):



|                         |  |         |        | 
|------------------------ |  | ------- | ------ | 
|                         |  | Amounts |       
|Cash                     |  | $       | 56,825 | 
|Equity instruments       |  |         | 2,784  | 
|                         |  |         |        | 
|Total consideration paid |  | $       | 59,609 | 
|                         |  |         |        | 

The $2.8 million estimated fair value for equity instruments represented approximately 429,600 shares of
Exars common stock, valued at $6.48 per share, the closing price reported on The NASDAQ Global Market on April 3, 2009 (the acquisition date).

Acquisition-Related Costs

Acquisition-related costs, or deal costs,
relating to Hifn are included in the Selling, general and administrative line item on the consolidated statement of operations. No acquisition-related costs relating to Hifn were incurred during the three and six months ended
September 26, 2010.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Purchase Price
Allocation

The allocation of the purchase price to Hifns tangible and identifiable intangible assets acquired and
liabilities assumed was based on their estimated fair values at the date of acquisition. We will recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if
known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period shall not exceed one year from the acquisition date and no additional assets or liabilities were recognized during this period.
Further, any associated restructuring activities will be expensed in future periods. Subsequent to the acquisition, we recorded $1.0 million in restructuring expenses relating to Hifn for the fiscal year ended March 28, 2010, relating to
severance and a building lease obligation in Los Gatos, California. Severance costs relating to Hifn incurred during the six months ended September 26, 2010, were immaterial. No severance costs relating to Hifn were incurred during the three
months ended September 26, 2010.

The excess of the purchase price over the tangible and identifiable intangible assets
acquired and liabilities assumed has been allocated to goodwill. The $2.2 million in goodwill resulted primarily from our expected future product sales synergies from combining Hifns products with our product offerings. Goodwill is not
deductible for tax purposes.

The fair value allocated to each of the major classes of tangible and identifiable intangible
assets acquired and liabilities assumed on April 3, 2009 in the Hifn acquisition was as follows (in thousands):



|                                              |  |                   |        |  
|--------------------------------------------- |  | ----------------- | ------ | -
|                                              |  | As ofApril 3,2009 |       
|Identifiable tangible assets                  |  |                   |        |  
|Cash and cash equivalents                     |  | $                 | 16,468 |  
|Short-term marketable securities              |  |                   | 14,133 |  
|Accounts receivable                           |  |                   | 2,982  |  
|Inventories                                   |  |                   | 4,269  |  
|Other current assets                          |  |                   | 1,683  |  
|Property, plant and equipment                 |  |                   | 2,013  |  
|Other assets                                  |  |                   | 1,721  |  
|Accounts payable and accruals                 |  |                   | (586   | )
|Accrued compensation and related benefits     |  |                   | (1,860 | )
|Other current liabilities                     |  |                   | (2,963 | )
|                                              |  |                   |        |  
|Total identifiable tangible assets, net       |  |                   | 37,860 |  
|Identifiable intangible assets                |  |                   | 19,500 |  
|                                              |  |                   |        |  
|Total identifiable assets, net                |  |                   | 57,360 |  
|Goodwill                                      |  |                   | 2,249  |  
|                                              |  |                   |        |  
|Fair value of total consideration transferred |  | $                 | 59,609 |  
|                                              |  |                   |        |  

Subsequent to the acquisition, there were no adjustments to the fair value allocated to each of the major
classes of tangible and identifiable intangible assets acquired and liabilities assumed on April 3, 2009 in the Hifn acquisition.



Identifiable Intangible Assets

The following table sets forth the components of the identifiable intangible assets acquired in the Hifn acquisition, which are being amortized over their estimated useful lives, with a maximum
amortization period of seven years, on a straight-line basis with no residual value:



|                                                |  |                |        |  |             |  |     | 
|----------------------------------------------- |  | -------------- | ------ |  | ----------- |  | --- | 
|                                                |  | Fair Value     |        |  | Useful Life | 
|                                                |  | (in thousands) |        |  | (in years)  | 
|Existing technology                             |  | $              | 9,000  |  |             |  | 5.0 | 
|Patents/Core technology                         |  |                | 1,500  |  |             |  | 5.0 | 
|In-process research and development             |  |                | 1,600  |  |             |  |    | 
|Customer relationships                          |  |                | 1,300  |  |             |  | 7.0 | 
|Tradenames/Trademarks                           |  |                | 700    |  |             |  | 3.0 | 
|Order backlog                                   |  |                | 900    |  |             |  | 0.5 | 
|Research and development reimbursement contract |  |                | 4,500  |  |             |  | 1.5 | 
|                                                |  |                |        |  |             |  |     | 
|Total acquired identifiable intangible assets   |  | $              | 19,500 |  |             |  |     | 
|                                                |  |                |        |  |             |  |     | 



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





We allocated the
purchase price using the established valuation techniques as described below.

Inventories Inventories acquired
in connection with the Hifn acquisition were finished goods. The value allocated to inventories reflects the estimated fair value of the acquired inventory based on the expected sales price of the inventory, less reasonable selling margin.

Property, plant and equipment  The basis used for our analysis is the fair value in continued use, which is
expressed in terms of the price a willing and informed buyer would pay contemplating continued use as part of the assets in place for the purpose for which they were designed, engineered, installed, fabricated and erected.

Intangible assets The fair value of existing technology, patents/core technology, in-process research and development,
research and development reimbursement contract, customer relationships, order backlog and tradenames/trademarks were determined using the income approach, which discounted expected future cash flows to present value, taking into account multiple
factors including, but not limited to, the stage of completion, estimated costs to complete, utilization of patents and core technology, the risks related to successful completion, and the markets served. The cash flows were discounted at rates
ranging from 5% to 30%. The discount rate used to value the existing intangible assets was 14%.

Acquired In-Process
Research and Development The IPR&D projects underway at Hifn at the acquisition date were in the security processors and flow through product families, each consisting of one project, and as of such acquisition date Hifn had incurred
approximately $2.6 million and $1.1 million in costs related to those projects, respectively. The percentage of completion for these projects, at the date of acquisition, was 90% and 30%, respectively. The total research and development expenditures
expected to be incurred to complete the security processors and flow through projects were approximately $2.1 million and $0.7 million, respectively, based on project development timelines and resource requirements. The IPR&D projects for flow
through and security processors were completed in January 2010 and July 2010, respectively, and are in production. The fair value, at date of acquisition, for both IPR&D projects, will be amortized over an estimated useful life of five years.

NOTE 4. CASH, CASH EQUIVALENTS AND SHORT-TERM MARKETABLE SECURITIES

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP describes a fair value hierarchy based on
three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:



|        |  |   |  |                                                                                                                                                                                                                                                                                                                                        
|------- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  |  |  | Quoted prices in active markets for identical assets or liabilities.                                                                                                                                                                                                                                                                   
|        |  |  
|Level 2 |  |  |  | Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|        |  |  
|Level 3 |  |  |  | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.                                                                                                                                                                                        

Our investment assets, measured at fair value on a recurring basis, as of September 26, 2010 are as follows (in thousands):



|                                       |  |         |        |  |         |   |         |       |  |   |         | 
|-------------------------------------- |  | ------- | ------ |  | ------- | - | ------- | ----- |  | - | ------- | 
|                                       |  | Level 1 |        |  | Level 2 |   |         | Total | 
|Assets:                                |  |         |        |  |         |   |         |       |  |   |         | 
|Money market funds                     |  | $       | 8,552  |  |         | $ |        |       |  | $ | 8,552   | 
|U.S. Treasury securities               |  |         | 19,323 |  |         |   |        |       |  |   | 19,323  | 
|Asset-backed securities                |  |         |       |  |         |   | 19,624  |       |  |   | 19,624  | 
|Agency mortgage-backed securities      |  |         |       |  |         |   | 41,901  |       |  |   | 41,901  | 
|Agency pool mortgage-backed securities |  |         |       |  |         |   | 3,383   |       |  |   | 3,383   | 
|Corporate bonds and notes              |  |         |       |  |         |   | 80,819  |       |  |   | 80,819  | 
|Government and agency bonds            |  |         |       |  |         |   | 29,112  |       |  |   | 29,112  | 
|                                       |  |         |        |  |         |   |         |       |  |   |         | 
|Total investment assets                |  | $       | 27,875 |  |         | $ | 174,839 |       |  | $ | 202,714 | 
|                                       |  |         |        |  |         |   |         |       |  |   |         | 



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Our investment
assets, measured at fair value on a recurring basis, as of March 28, 2010 were as follows (in thousands):



|                                       |  |         |        |  |         |   |         |       |  |   |         | 
|-------------------------------------- |  | ------- | ------ |  | ------- | - | ------- | ----- |  | - | ------- | 
|                                       |  | Level 1 |        |  | Level 2 |   |         | Total | 
|Assets:                                |  |         |        |  |         |   |         |       |  |   |         | 
|Money market funds                     |  | $       | 19,616 |  |         | $ |        |       |  | $ | 19,616  | 
|U.S. Treasury securities               |  |         | 15,839 |  |         |   |        |       |  |   | 15,839  | 
|Asset-backed securities                |  |         |       |  |         |   | 17,801  |       |  |   | 17,801  | 
|Agency mortgage-backed securities      |  |         |       |  |         |   | 42,514  |       |  |   | 42,514  | 
|Agency pool mortgage-backed securities |  |         |       |  |         |   | 4,413   |       |  |   | 4,413   | 
|Corporate bonds and notes              |  |         |       |  |         |   | 62,122  |       |  |   | 62,122  | 
|Government and agency bonds            |  |         |       |  |         |   | 43,909  |       |  |   | 43,909  | 
|                                       |  |         |        |  |         |   |         |       |  |   |         | 
|Total investment assets                |  | $       | 35,455 |  |         | $ | 170,759 |       |  | $ | 206,214 | 
|                                       |  |         |        |  |         |   |         |       |  |   |         | 

Our cash, cash equivalents and short-term marketable securities as of September 26, 2010 and
March 28, 2010 are as follows (in thousands):



|                                       |  |                   |         |  |               |   |         | 
|-------------------------------------- |  | ----------------- | ------- |  | ------------- | - | ------- | 
|                                       |  | September 26,2010 |         |  | March 28,2010 |  
|Cash and cash equivalents              |  |                   |         |  |               |   |         | 
|Cash at financial institutions         |  | $                 | 5,534   |  |               | $ | 5,870   | 
|                                       |  |                  
|Cash equivalents                       |  |                   |         |  |               |   |         | 
|Money market funds                     |  |                   | 8,552   |  |               |   | 19,616  | 
|                                       |  |                   |         |  |               |   |         | 
|Total cash and cash equivalents        |  | $                 | 14,086  |  |               | $ | 25,486  | 
|                                       |  |                   |         |  |               |   |         | 
|Available-for-sale securities          |  |                   |         |  |               |   |         | 
|U.S. government and agency securities  |  | $                 | 48,435  |  |               | $ | 59,747  | 
|Corporate bonds and commercial paper   |  |                   | 80,819  |  |               |   | 62,122  | 
|Asset-backed securities                |  |                   | 19,624  |  |               |   | 17,801  | 
|Mortgage-backed securities             |  |                   | 45,284  |  |               |   | 46,928  | 
|                                       |  |                   |         |  |               |   |         | 
|Total short-term marketable securities |  | $                 | 194,162 |  |               | $ | 186,598 | 
|                                       |  |                   |         |  |               |   |         | 

Our marketable securities include municipal securities, commercial paper, asset-backed and mortgage-backed
securities, corporate bonds and U.S. government securities. We classify investments as available-for-sale at the time of purchase and re-evaluate such designation as of each balance sheet date. We amortize premiums and accrete discounts to interest
income over the life of the investment. Our available-for-sale securities, which we intend to sell as necessary to meet our liquidity requirements, are classified as cash equivalents if the maturity date is 90 days or less from the date of purchase
and as short-term marketable securities if the maturity date is greater than 90 days from the date of purchase.

All
marketable securities are reported at fair value based on the estimated or quoted market prices as of each balance sheet date, with unrealized gains or losses, net of tax effect, recorded in accumulated other comprehensive income within
stockholders equity except those unrealized losses that are deemed to be other than temporary which are reflected in the Impairment charges on investments line item on the condensed consolidated statements of operation.

Realized gains or losses on the sale of marketable securities are determined by the specific identification method and are reflected in
the Interest income and other, net line item on the condensed consolidated statements of operation.

Net realized
gains on marketable securities for the three months ended September 26, 2010 were $70,000. Net realized losses on marketable securities for the three months ended September 27, 2009 were $101,000, which included $48,000 in realized losses
associated with marketable securities marked-up to fair value upon the acquisition of Hifn. Net realized gains on marketable securities for the six months ended September 26, 2010 and September 27, 2009 were $48,000 and $43,000,
respectively.



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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





The following
table summarizes our investments in marketable securities as of September 26, 2010 and March 28, 2010 (in thousands):



|                                      |  |                    |             |  |            |              |       |            |  |   |      |   |  |   |         | 
|------------------------------------- |  | ------------------ | ----------- |  | ---------- | ------------ | ----- | ---------- |  | - | ---- | - |  | - | ------- | 
|                                      |  | September 26, 2010 |            
|                                      |  | AmortizedCost      |             |  | Unrealized |              |       | Fair Value | 
|                                      |  |                    | Gross Gains |  |            | Gross Losses |       |           
|Money market funds                    |  | $                  | 8,552       |  |            | $            |      |            |  | $ |     |   |  | $ | 8,552   | 
|U.S. government and agency securities |  |                    | 47,785      |  |            |              | 650   |            |  |   |     |   |  |   | 48,435  | 
|Corporate bonds and commercial paper  |  |                    | 79,495      |  |            |              | 1,329 |            |  |   | (5   | ) |  |   | 80,819  | 
|Asset and mortgage-backed securities  |  |                    | 64,852      |  |            |              | 293   |            |  |   | (237 | ) |  |   | 64,908  | 
|                                      |  |                    |             |  |            |              |       |            |  |   |      |   |  |   |         | 
|Total investments                     |  | $                  | 200,684     |  |            | $            | 2,272 |            |  | $ | (242 | ) |  | $ | 202,714 | 
|                                      |  |                    |             |  |            |              |       |            |  |   |      |   |  |   |         | 



|                                      |  |                |             |  |            |              |       |            |  |   |      |   |  |   |         | 
|------------------------------------- |  | -------------- | ----------- |  | ---------- | ------------ | ----- | ---------- |  | - | ---- | - |  | - | ------- | 
|                                      |  | March 28, 2010 |            
|                                      |  | AmortizedCost  |             |  | Unrealized |              |       | Fair Value | 
|                                      |  |                | Gross Gains |  |            | Gross Losses |       |           
|Money market funds                    |  | $              | 19,616      |  |            | $            |      |            |  | $ |     |   |  | $ | 19,616  | 
|U.S. government and agency securities |  |                | 58,943      |  |            |              | 835   |            |  |   | (31  | ) |  |   | 59,747  | 
|Corporate bonds and commercial paper  |  |                | 61,240      |  |            |              | 900   |            |  |   | (18  | ) |  |   | 62,122  | 
|Asset and mortgage-backed securities  |  |                | 64,329      |  |            |              | 496   |            |  |   | (96  | ) |  |   | 64,729  | 
|                                      |  |                |             |  |            |              |       |            |  |   |      |   |  |   |         | 
|Total investments                     |  | $              | 204,128     |  |            | $            | 2,231 |            |  | $ | (145 | ) |  | $ | 206,214 | 
|                                      |  |                |             |  |            |              |       |            |  |   |      |   |  |   |         | 

As of September 26, 2010, asset-backed and mortgage-backed securities, accounted for 10% and 22%,
respectively, of our total investments in marketable securities of $202.7 million. The asset-backed securities are comprised primarily of premium tranches of auto loans and credit card receivables, while our mortgage-backed securities are primarily
from Federal agencies. We do not own auction rate securities nor do we own securities that are classified as subprime. As of the date of this Form 10-Q, we have sufficient liquidity and do not intend to sell these securities to fund normal
operations nor realize any significant losses in the short term. As of September 26, 2010, the net unrealized gain of our asset-backed and mortgage-backed securities totaled $56,000.

As of September 26, 2010, for all of our marketable securities, including asset-backed and mortgage-back securities, there were
approximately $1.3 million of net unrealized gains net of tax expense from our Level 1 and Level 2 investments.

We
periodically review our investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings,
collateralized support, the length of time and significance of a securitys loss position, our intent to not sell the security, and whether it is more likely than not that we will not have to sell the security before recovery of its cost basis.
Other-than-temporary declines in value of our investments are reported in the Impairment charges on investments line item in the condensed consolidated statements of operations. In the three months ended September 27, 2009, an
investment in GSAA Home Equity with a cost of $425,000 was downgraded from an AAA rating to a CCC rating. As a result of the reduction in the rating, quantitative analysis showing an increase in the default rate and decrease in prepayment rate of
the investment, we recorded an other-than-temporary impairment charge of $91,000 during the second quarter of fiscal 2010. In the three months ended September 26, 2010, due to further decline in the investment, we recorded an additional
other-than-temporary impairment charge of $62,000.

The amortized cost and estimated fair value of cash equivalents and
marketable securities classified as available-for-sale at September 26, 2010 and March 28, 2010 by expected maturity were as follows (in thousands):



|                    |  |                    |         |  |                |   |         |               |  |   |            |  |  |   |         | 
|------------------- |  | ------------------ | ------- |  | -------------- | - | ------- | ------------- |  | - | ---------- |  |  | - | ------- | 
|                    |  | September 26, 2010 |         |  | March 28, 2010 |  
|                    |  | AmortizedCost      |         |  | Fair Value     |   |         | AmortizedCost |  |   | Fair Value | 
|Less than 1 year    |  | $                  | 92,784  |  |                | $ | 93,379  |               |  | $ | 108,813    |  |  | $ | 109,562 | 
|Due in 1 to 5 years |  |                    | 107,900 |  |                |   | 109,335 |               |  |   | 95,316     |  |  |   | 96,652  | 
|                    |  |                    |         |  |                |   |         |               |  |   |            |  |  |   |         | 
|Total               |  | $                  | 200,684 |  |                | $ | 202,714 |               |  | $ | 204,129    |  |  | $ | 206,214 | 
|                    |  |                    |         |  |                |   |         |               |  |   |            |  |  |   |         | 



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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





The following
table summarizes the gross unrealized losses and fair values of our investments in an unrealized loss position as of September 26, 2010 and March 28, 2010, aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position (in thousands):



|                                      |  |                     |        |  |                       |   |      |            |  |   |                       |  |  |            |     |   |                       |   |        |  |  |   |      |  
|------------------------------------- |  | ------------------- | ------ |  | --------------------- | - | ---- | ---------- |  | - | --------------------- |  |  | ---------- | --- | - | --------------------- | - | ------ |  |  | - | ---- | -
|                                      |  | September 26, 2010  |       
|                                      |  | Less than 12 months |        |  | 12 months or greater  |   |      | Total      | 
|                                      |  | FairValue           |        |  | GrossUnrealizedLosses |   |      | Fair Value |  |   | GrossUnrealizedLosses |  |  | Fair Value |     |   | GrossUnrealizedLosses |  
|U.S. government and agency securities |  | $                   | 501    |  |                       | $ | (1   | )          |  | $ |                      |  |  | $          |    |   |                       | $ | 501    |  |  | $ | (1   | )
|Corporate bonds and commercial paper  |  | $                   | 1,861  |  |                       | $ | (5   | )          |  | $ |                      |  |  | $          |    |   |                       | $ | 1,861  |  |  | $ | (5   | )
|Asset and mortgage-backed securities  |  |                     | 38,842 |  |                       |   | (220 | )          |  |   | 533                   |  |  |            | (16 | ) |                       |   | 39,375 |  |  |   | (236 | )
|                                      |  |                     |        |  |                       |   |      |            |  |   |                       |  |  |            |     |   |                       |   |        |  |  |   |      |  
|Total                                 |  | $                   | 41,204 |  |                       | $ | (226 | )          |  | $ | 533                   |  |  | $          | (16 | ) |                       | $ | 41,737 |  |  | $ | (242 | )
|                                      |  |                     |        |  |                       |   |      |            |  |   |                       |  |  |            |     |   |                       |   |        |  |  |   |      |  
|                                      | 
|                                      |  | March 28, 2010      |       
|                                      |  | Less than 12 months |        |  | 12 months or greater  |   |      | Total      | 
|                                      |  | FairValue           |        |  | GrossUnrealizedLosses |   |      | Fair Value |  |   | GrossUnrealizedLosses |  |  | Fair Value |     |   | GrossUnrealizedLosses |  
|U.S. government and agency securities |  | $                   | 5,399  |  |                       | $ | (27  | )          |  | $ |                      |  |  | $          |    |   |                       | $ | 5,399  |  |  | $ | (27  | )
|Corporate bonds and commercial paper  |  |                     | 12,981 |  |                       |   | (27  | )          |  |   | 353                   |  |  |            | (31 | ) |                       |   | 13,334 |  |  |   | (58  | )
|Asset and mortgage-backed securities  |  |                     | 19,672 |  |                       |   | (60  | )          |  |   |                      |  |  |            |    |   |                       |   | 19,672 |  |  |   | (60  | )
|                                      |  |                     |        |  |                       |   |      |            |  |   |                       |  |  |            |     |   |                       |   |        |  |  |   |      |  
|Total                                 |  | $                   | 38,052 |  |                       | $ | (114 | )          |  | $ | 353                   |  |  | $          | (31 | ) |                       | $ | 38,405 |  |  | $ | (145 | )
|                                      |  |                     |        |  |                       |   |      |            |  |   |                       |  |  |            |     |   |                       |   |        |  |  |   |      |  

NOTE 5. GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the purchase price over
the fair value of the net tangible and identifiable intangible assets acquired in a business combination. We evaluate goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not
be recoverable. We conduct our annual impairment analysis in the fourth quarter of each fiscal year. Impairment of goodwill is tested at the reporting unit level by comparing the reporting units carrying amount, including goodwill, to the fair
value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss. Because we have one reporting unit, we utilize
an entity-wide approach to assess goodwill for impairment.

As of September 26, 2010, no events or changes in
circumstances suggest that the carrying amount for goodwill may not be recoverable and therefore we did not perform an interim goodwill impairment analysis.

The changes in the carrying amount of goodwill for the six months ended September 26, 2010 are as follows (in thousands):



|                                                |  |        |       | 
|----------------------------------------------- |  | ------ | ----- | 
|                                                |  | Amount |      
|Balance as of March 28, 2010                    |  | $      | 3,085 | 
|Goodwill additions, impairments and adjustments |  |        | 99    | 
|                                                |  |        |       | 
|Balance as of September 26, 2010                |  | $      | 3,184 | 
|                                                |  |        |       | 



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Intangible
Assets

Our purchased intangible assets at September 26, 2010 and March 28, 2010 are as follows (in
thousands):



|                                                |  |                    |        |  |                         |   |         |                    |  |   |                |  |  |                         |        |  |                    |   |         |   |  |   |        | 
|----------------------------------------------- |  | ------------------ | ------ |  | ----------------------- | - | ------- | ------------------ |  | - | -------------- |  |  | ----------------------- | ------ |  | ------------------ | - | ------- | - |  | - | ------ | 
|                                                |  | September 26, 2010 |        |  | March 28, 2010          |  
|                                                |  | CarryingAmount     |        |  | AccumulatedAmortization |   |         | Net CarryingAmount |  |   | CarryingAmount |  |  | AccumulatedAmortization |        |  | Net CarryingAmount |  
|Existing technology                             |  | $                  | 36,971 |  |                         | $ | (18,927 | )                  |  | $ | 18,044         |  |  | $                       | 35,621 |  |                    | $ | (15,734 | ) |  | $ | 19,887 | 
|Patents/Core technology                         |  |                    | 4,492  |  |                         |   | (2,020  | )                  |  |   | 2,472          |  |  |                         | 4,492  |  |                    |   | (1,688  | ) |  |   | 2,804  | 
|In-process research and development             |  |                    | 1,100  |  |                         |   |        |                    |  |   | 1,100          |  |  |                         | 2,200  |  |                    |   |        |   |  |   | 2,200  | 
|Research and development reimbursement contract |  |                    | 4,500  |  |                         |   | (4,500  | )                  |  |   |               |  |  |                         | 4,500  |  |                    |   | (2,496  | ) |  |   | 2,004  | 
|Customer backlog                                |  |                    | 1,400  |  |                         |   | (1,400  | )                  |  |   |               |  |  |                         | 1,400  |  |                    |   | (1,325  | ) |  |   | 75     | 
|Distributor relationships                       |  |                    | 1,264  |  |                         |   | (969    | )                  |  |   | 295            |  |  |                         | 1,264  |  |                    |   | (919    | ) |  |   | 345    | 
|Customer relationships                          |  |                    | 4,670  |  |                         |   | (1,115  | )                  |  |   | 3,555          |  |  |                         | 4,670  |  |                    |   | (777    | ) |  |   | 3,893  | 
|Non-compete agreement                           |  |                    | 100    |  |                         |   | (43     | )                  |  |   | 57             |  |  |                         | 100    |  |                    |   | (3      | ) |  |   | 97     | 
|Tradenames/Trademarks                           |  |                    | 1,077  |  |                         |   | (591    | )                  |  |   | 486            |  |  |                         | 1,077  |  |                    |   | (425    | ) |  |   | 652    | 
|                                                |  |                    |        |  |                         |   |         |                    |  |   |                |  |  |                         |        |  |                    |   |         |   |  |   |        | 
|Total                                           |  | $                  | 55,574 |  |                         | $ | (29,565 | )                  |  | $ | 26,009         |  |  | $                       | 55,324 |  |                    | $ | (23,367 | ) |  | $ | 31,957 | 
|                                                |  |                    |        |  |                         |   |         |                    |  |   |                |  |  |                         |        |  |                    |   |         |   |  |   |        | 

Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. We compare the carrying value of long-lived assets to our projection of future undiscounted cash flows attributable to such assets and, in the event that the carrying value exceeds the future
undiscounted cash flows, we record an impairment charge equal to the excess of the carrying value over the assets fair value.

As of September 26, 2010, there were no indicators that required us to perform an intangible assets impairment review, therefore, we did not record an impairment charge during the six months ended
September 26, 2010.

The aggregate amortization expenses for our purchased intangible assets for periods presented below
are as follows:



|                                                 |  |                        |    |  |                    |   |       |                   |  |   |                   |  |  |                   |       |  |  |   |       | 
|------------------------------------------------ |  | ---------------------- | -- |  | ------------------ | - | ----- | ----------------- |  | - | ----------------- |  |  | ----------------- | ----- |  |  | - | ----- | 
|                                                 |  |                        |    |  | Three Months Ended |   |       | Six Months Ended  | 
|                                                 |  | WeightedAverage 
Lives |    |  | September 26,2010  |   |       | September 27,2009 |  |   | September 26,2010 |  |  | September 27,2009 |      
|                                                 |  | (in months)            |    |  | (in thousands)     |  
|Existing technology                              |  |                        | 65 |  |                    | $ | 1,615 |                   |  | $ | 1,002             |  |  | $                 | 3,193 |  |  | $ | 2,074 | 
|Patents/Core technology                          |  |                        | 61 |  |                    |   | 166   |                   |  |   | 129               |  |  |                   | 332   |  |  |   | 235   | 
|Research and development reimbursement contracts |  |                        | 24 |  |                    |   | 1,002 |                   |  |   | 562               |  |  |                   | 2,004 |  |  |   | 1,078 | 
|Customer backlog                                 |  |                        | 6  |  |                    |   |      |                   |  |   | 502               |  |  |                   | 75    |  |  |   | 918   | 
|Distributor relationships                        |  |                        | 72 |  |                    |   | 25    |                   |  |   | 25                |  |  |                   | 50    |  |  |   | 50    | 
|Customer relationships                           |  |                        | 80 |  |                    |   | 169   |                   |  |   | 82                |  |  |                   | 338   |  |  |   | 140   | 
|Non-compete agreements                           |  |                        | 15 |  |                    |   | 20    |                   |  |   |                  |  |  |                   | 40    |  |  |   |      | 
|Tradenames/Trademarks                            |  |                        | 35 |  |                    |   | 82    |                   |  |   | 71                |  |  |                   | 166   |  |  |   | 130   | 
|                                                 |  |                        |    |  |                    |   |       |                   |  |   |                   |  |  |                   |       |  |  |   |       | 
|Total                                            |  |                        |    |  |                    | $ | 3,079 |                   |  | $ | 2,373             |  |  | $                 | 6,198 |  |  | $ | 4,625 | 
|                                                 |  |                        |    |  |                    |   |       |                   |  |   |                   |  |  |                   |       |  |  |   |       | 

The estimated future amortization expenses for our purchased intangible assets are summarized below (in
thousands):



|                                      |  |   |        | 
|------------------------------------- |  | - | ------ | 
|Amortization Expense (by fiscal year) | 
|2011 (6 months remaining)             |  | $ | 4,047  | 
|2012                                  |  |   | 6,919  | 
|2013                                  |  |   | 6,313  | 
|2014                                  |  |   | 5,667  | 
|2015                                  |  |   | 1,875  | 
|2016 and thereafter                   |  |   | 1,188  | 
|                                      |  |   |        | 
|Total estimated amortization          |  | $ | 26,009 | 
|                                      |  |   |        | 



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





NOTE 6. LONG-TERM INVESTMENT

Our long-term investment consists of our investment in Skypoint Telecom Fund II (US), L.P. (Skypoint Fund).
Skypoint Fund is a venture capital fund that invests primarily in private companies in the telecommunications and/or networking industries. We account for this non-marketable equity investment under the cost method. We have periodically reviewed and
determined whether the investment is other-than-temporarily impaired, in which case the investment is written down to its impaired value.

As of September 26, 2010 and March 28, 2010, our long-term investment balance, which is included in the Other non-current assets line item on the condensed consolidated balance
sheet, was as follows (in thousands):



|                     |  |                   |       |  |               |   |       | 
|-------------------- |  | ----------------- | ----- |  | ------------- | - | ----- | 
|Long-term investment |  | September 26,2010 |       |  | March 28,2010 |  
|Skypoint Fund        |  | $                 | 1,541 |  |               | $ | 1,440 | 
|                     |  |                   |       |  |               |   |       | 

We have made approximately $4.7 million in capital contributions to Skypoint Fund since we became a limited
partner in July 2001. Our total capital commitment is $5.0 million. We contributed $165,000 to the fund during the six months ended September 26, 2010. As of September 26, 2010, we have a remaining obligation of approximately $0.3 million
should the general partner decide to request it on or before July 27, 2011.

The carrying amount of $1.5 million reflects
the net of capital contributions, cumulative impairment charges and capital distributions. We received capital distributions of $63,000 and $36,000 during the six months ended September 26, 2010 and fiscal year 2010, respectively.

Impairment

In the three and six months ended September 26, 2010, we analyzed the fair value of the underlying investments of Skypoint Fund and concluded that there was no other-than-temporary impairment and
therefore we did not record an impairment charge for Skypoint Fund in either period. In the three months ended September 27, 2009, we analyzed the fair value of the underlying investments of Skypoint Fund and concluded a portion of the carrying
value was other-than-temporarily impaired and recorded an impairment charge of $154,000 in addition to the $72,000 recorded in the first quarter of fiscal 2010.

NOTE 7. RELATED PARTY TRANSACTION

Affiliates of Future Electronics Inc.
(Future), Alonim Investments Inc. and two of its affiliates (collectively Alonim), own approximately 7.6 million shares, or approximately 17%, of our outstanding common stock as of September 26, 2010. As such,
Alonim is our largest stockholder.

Our sales to Future are made under an agreement that provides protection against price
reduction for its inventory of our products and other sales allowances. We recognize revenue on sales to Future under a distribution agreement when Future sells the products to its end customers. Future has historically accounted for a significant
portion of our net sales. Future is our largest distributor worldwide and accounted for 30% and 27% of our total net sales for the second quarters of fiscal 2011 and fiscal 2010, respectively. Future accounted for 29% and 26% of our total net sales
for the six months ended September 26, 2010 and September 27, 2009, respectively.

We reimbursed Future $10,000 and
$8,000 of expenses for marketing promotional materials for the second quarters of fiscal 2011 and fiscal 2010, respectively. We reimbursed Future $16,000 and $20,000 of expenses for marketing promotional materials for each of the six months ended
September 26, 2010 and September 27, 2009, respectively.

NOTE 8. RESTRUCTURING

In connection with the Neterion acquisition in March 2010, we assumed a lease obligation for a facility in Sunnyvale, California.
Subsequent to the acquisition, we vacated the facility in May 2010 and recorded a restructuring reserve of approximately $234,000, during the three months ended June 27, 2010, to reflect the remaining payments owed under this lease. The
majority of this balance is expected to be paid by August 2011, when the lease expires.

In connection with the acquisition of
Sipex Corporation (Sipex) in August 2007, our management approved and initiated plans to restructure the operations of the combined company to eliminate certain duplicative activities, reduce costs and better align product and
operating expenses with then-current economic conditions. The Sipex restructuring costs were accounted for as liabilities assumed as part of the business combination and are expected to be paid over the remaining term of the Sipex lease, which is
for office space in Belgium and expires in March 2012.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Our restructuring
liabilities were included in the Other accrued expenses line item in our condensed consolidated balance sheets, and the activities affecting the liabilities for the three and six months ended September 26, 2010 are summarized as
follows (in thousands):



|                              |  |               |     |  
|----------------------------- |  | ------------- | --- | -
|                              |  | FacilityCosts |    
|Balance at March 28, 2010     |  | $             | 239 |  
|Payments                      |  |               | (96 | )
|Additional accruals           |  |               | 234 |  
|                              |  |               |     |  
|Balance at September 26, 2010 |  | $             | 377 |  
|                              |  |               |     |  

NOTE 9. BALANCE SHEET DETAIL

Our property, plant and equipment consisted of the following as of the dates indicated (in thousands):



|                                          |  |                   |         |   |               |   |         |  
|----------------------------------------- |  | ----------------- | ------- | - | ------------- | - | ------- | -
|                                          |  | September 26,2010 |         |   | March 28,2010 |  
|Land                                      |  | $                 | 11,960  |   |               | $ | 11,960  |  
|Building and leasehold improvements       |  |                   | 24,398  |   |               |   | 24,022  |  
|Machinery and equipment                   |  |                   | 46,232  |   |               |   | 45,932  |  
|Software and licenses                     |  |                   | 37,708  |   |               |   | 35,651  |  
|                                          |  |                   |         |   |               |   |         |  
|Property, plant and equipment, total      |  |                   | 120,298 |   |               |   | 117,565 |  
|Accumulated depreciation and amortization |  |                   | (78,577 | ) |               |   | (74,624 | )
|                                          |  |                   |         |   |               |   |         |  
|Property, plant and equipment, net        |  | $                 | 41,721  |   |               | $ | 42,941  |  
|                                          |  |                   |         |   |               |   |         |  

Our inventories consisted of the following as of the dates indicated (in thousands):



|                  |  |                   |        |  |               |   |        | 
|----------------- |  | ----------------- | ------ |  | ------------- | - | ------ | 
|                  |  | September 26,2010 |        |  | March 28,2010 |  
|Work-in-process   |  | $                 | 13,670 |  |               | $ | 9,318  | 
|Finished goods    |  |                   | 8,931  |  |               |   | 5,682  | 
|                  |  |                   |        |  |               |   |        | 
|Total Inventories |  | $                 | 22,601 |  |               | $ | 15,000 | 
|                  |  |                   |        |  |               |   |        | 

Our other accrued expenses consisted of the following as of the dates indicated (in thousands):



|                                                       |  |                   |       |  |               |   |       | 
|------------------------------------------------------ |  | ----------------- | ----- |  | ------------- | - | ----- | 
|                                                       |  | September 26,2010 |       |  | March 28,2010 |  
|Accrued legal and professional services                |  | $                 | 2,318 |  |               | $ | 4,053 | 
|Accrued sales and marketing expenses                   |  |                   | 764   |  |               |   | 676   | 
|Accrued manufacturing expenses, royalties and licenses |  |                   | 691   |  |               |   | 1,308 | 
|Accrued restructuring expenses                         |  |                   | 377   |  |               |   | 239   | 
|Other                                                  |  |                   | 785   |  |               |   | 782   | 
|                                                       |  |                   |       |  |               |   |       | 
|Total other accrued expenses                           |  | $                 | 4,935 |  |               | $ | 7,058 | 
|                                                       |  |                   |       |  |               |   |       | 

NOTE 10. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the periods. Diluted earnings per share
(EPS) reflects the potential dilution that would occur if outstanding stock options or warrants to issue common stock were exercised for common stock, using the treasury stock method, and the common stock underlying restricted stock
units (RSUs) were issued.



18



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##### Table of Contents

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





A summary of our
loss per share for the periods presented is as follows (in thousands, except per share amounts):



|                                                                                                |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|----------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                                                                |  | Three Months Ended |        |   | Six Months Ended  |  
|                                                                                                |  | September 26,2010  |        |   | September 27,2009 |   |        | September 26,2010 |  |   | September 27,2009 |  
|Net loss                                                                                        |  | $                  | (4,459 | ) |                   | $ | (8,163 | )                 |  | $ | (11,873           | ) |  | $ | (21,038 | )
|                                                                                                |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Shares used in computation:                                                                     |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Weighted average shares of common stock outstanding used in computation of basic loss per share |  |                    | 44,173 |   |                   |   | 43,550 |                   |  |   | 44,035            |   |  |   | 43,432  |  
|Dilutive effect of stock options and restricted stock units                                     |  |                    |       |   |                   |   |       |                   |  |   |                  |   |  |   |        |  
|                                                                                                |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Shares used in computation of diluted loss per share                                            |  | $                  | 44,173 |   |                   | $ | 43,550 |                   |  | $ | 44,035            |   |  | $ | 43,432  |  
|                                                                                                |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Loss per share - basic and diluted                                                              |  | $                  | (0.10  | ) |                   | $ | (0.19  | )                 |  | $ | (0.27             | ) |  | $ | (0.48   | )
|                                                                                                |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  

For the three and six months ended September 26, 2010, as we incurred a net loss, the weighted average
number of shares of common stock outstanding equaled the weighted average number of shares of common stock and common stock equivalents assuming dilution. Options to purchase shares of common stock and unvested restricted stock units
(RSUs) for shares of common stock in the aggregate amount of approximately 261,000 and 330,000 shares of common stock for the three and six months ended September 26, 2010, respectively, were excluded from our loss per share
calculation under the treasury stock method. Had we had income for these periods, our diluted shares would have increased by the aforementioned amount.

For the three and six months ended September 26, 2010, options to purchase approximately 6.0 million shares of common stock, at exercise prices ranging from approximately $5.84 to $23.99 and
$5.84 to $86.10, respectively, were outstanding but were not included in the computation of diluted loss per share because they were anti-dilutive under the treasury stock method. Warrants to purchase approximately 280,000 shares of common stock
with an exercise price of $9.63 were also excluded from the computation of diluted loss per share because they were anti-dilutive under the treasury stock method. There were no unvested RSUs at September 26, 2010 that were considered
anti-dilutive under the treasury method.

For the three and six months ended September 27, 2009, as we incurred a net
loss, the weighted average number of shares of common stock outstanding equaled the weighted average number of shares of common stock and common stock equivalent assuming dilution. Options to purchase shares of common stock and unvested restricted
stock units (RSUs) for shares of common stock in the aggregate amount of approximately 335,000 and 301,000 shares of common stock for the three and six months ended September 27, 2009, respectively, were excluded from our loss per
share calculation under the treasury stock method. Had we had income for these periods, our diluted shares would have increased by the aforementioned amount.

For the three and six months ended September 27, 2009, options to purchase approximately 5.3 million and 4.6 million shares of common stock, respectively, at exercise prices ranging from
$6.16 to $86.10 and $6.22 to $86.10, respectively, were outstanding but were not included in the computation of diluted loss per share because they were anti-dilutive under the treasury stock method. Warrants to purchase approximately 280,000 shares
of common stock with an exercise price of $9.63 were also excluded from the computation of diluted loss per share because they were anti-dilutive under the treasury stock method. There were no unvested RSUs at September 27, 2009 that were
considered anti-dilutive under the treasury method.

Our application of the treasury stock method in determining the dilutive
effect of stock options and RSUs includes assumed cash proceeds from option exercises, the average unamortized stock-based compensation expense for the period, and the estimated deferred tax benefit or detriment associated with stock-based
compensation expense.

NOTE 11. COMMON STOCK REPURCHASES

From time to time, we acquire outstanding common stock in the open market to partially offset dilution from our equity award programs, to increase our return on our invested capital and to bring our cash
to a more appropriate level for our company.

On August 28, 2007, we announced the approval of a share repurchase plan
(2007 SRP) and authorized the repurchase of up to $100 million of our common stock.

During the three and six
months ended September 26, 2010 and the three and six months ended September 27, 2009, we did not repurchase any shares under the 2007 SRP. As of September 26, 2010, the remaining authorized amount for the stock repurchase under the
2007 SRP was $11.8 million. The 2007 SRP does not have a termination date. We may continue to utilize our share repurchase plan, which would reduce our cash, cash equivalents and/or short-term marketable securities available to fund future
operations and to meet other liquidity requirements.



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##### Table of Contents

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





NOTE 12. STOCK-BASED
COMPENSATION

Employee Stock Participation Plan (ESPP)

Our ESPP permits employees to purchase common stock through payroll deductions at a purchase price that is equal to 95% of our common
stock price on the last trading day of each three-calendar-month offering period. Our ESPP is non-compensatory.

We are
authorized to issue 4.5 million shares of common stock under our ESPP. There were 1,515,858 shares of common stock reserved for future issuance under our ESPP at September 26, 2010.

In the six months ended September 26, 2010, we issued 33,304 shares of our common stock at a weighted average price of $6.71 to the
participating employees under our ESPP.

Equity Incentive Plans

We currently have four equity incentive plans including the Exar Corporation 2006 Equity Incentive Plan (the 2006 Plan) and
three other equity plans assumed upon our August 2007 acquisition of Sipex: the Sipex Corporation 2000 Non-Qualified Stock Option Plan, the Sipex Corporation Amended and Restated 2002 Non-Statutory Stock Option Plan and the Sipex Corporation 2006
Equity Incentive Plan (collectively, the Sipex Plans).

The 2006 Plan authorizes the issuance of stock options,
stock appreciation rights, restricted stock, stock bonuses and other forms of awards granted or denominated in common stock or units of common stock, as well as cash bonus awards. RSUs granted under the 2006 Plan are counted against authorized
shares available for future issuance on a basis of two shares for every RSU issued. The 2006 Plan allows for performance-based vesting and partial vesting based upon level of performance. Grants under the Sipex Plans are only available to former
Sipex employees or employees of Exar hired after the Sipex acquisition. At our annual meeting, on September 15, 2010, our stockholders approved the proposed amendment to increase the aggregate share limit for the 2006 Plan by an additional
5,500,000 shares to 8,300,000 shares. At September 26, 2010, there were approximately 5.9 million shares available for future grant under all our equity incentive plans.

Stock Option Activities

Our stock option transactions during the six months ended September 26, 2010 are summarized as follows:



|                                                |  |             |           |   |                                       |   |       |                                         |  |  |                               |  |  |   |           | 
|----------------------------------------------- |  | ----------- | --------- | - | ------------------------------------- | - | ----- | --------------------------------------- |  |  | ----------------------------- |  |  | - | --------- | 
|                                                |  | Outstanding |           |   | WeightedAverageExercisePrice perShare |   |       | WeightedAverageRemainingContractualTerm |  |  | AggregateIntrinsic Value 
(1) | 
|                                                |  |             |           |   |                                       |   |       | (in years)                              |  |  |                               | 
|Balance at March 28, 2010                       |  |             | 5,345,504 |   |                                       | $ | 8.01  |                                         |  |  | 5.38                          |  |  | $ | 1,882,286 | 
|Options granted                                 |  |             | 1,150,800 |   |                                       |   | 7.09  |                                         |  |  |                               |  |  |   |           | 
|Options exercised                               |  |             | (34,436   | ) |                                       |   | 6.04  |                                         |  |  |                               |  |  |   |           | 
|Options expired                                 |  |             | (123,271  | ) |                                       |   | 12.69 |                                         |  |  |                               |  |  |   |           | 
|Options forfeited                               |  |             | (263,768  | ) |                                       |   | 8.94  |                                         |  |  |                               |  |  |   |           | 
|                                                |  |             |           |   |                                       |   |       |                                         |  |  |                               |  |  |   |           | 
|Balance at September 26, 2010                   |  |             | 6,074,829 |   |                                       | $ | 7.79  |                                         |  |  | 5.15                          |  |  | $ | 39,829    | 
|                                                |  |             |           |   |                                       |   |       |                                         |  |  |                               |  |  |   |           | 
|Vested and expected to vest, September 26, 2010 |  |             | 5,762,027 |   |                                       | $ | 7.82  |                                         |  |  | 5.11                          |  |  | $ | 39,517    | 
|                                                |  |             |           |   |                                       |   |       |                                         |  |  |                               |  |  |   |           | 
|Vested and exercisable, September 26, 2010      |  |             | 2,144,901 |   |                                       | $ | 8.85  |                                         |  |  | 4.20                          |  |  | $ | 33,773    | 
|                                                |  |             |           |   |                                       |   |       |                                         |  |  |                               |  |  |   |           | 



|(1) | The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value, which is based on the closing price of our common stock of $5.76 and
$7.32 as of September 26, 2010 and March 28, 2010, respectively. These are the values which would have been received by option holders if all option holders exercised their options on that date.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The total number of in-the-money options vested and exercisable was 0.1 million and 0.2 million as of September 26, 2010
and March 28, 2010, respectively.



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##### Table of Contents

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Total unrecognized
stock-based compensation cost was $8.8 million at September 26, 2010, which is expected to be recognized over a weighted average period of 2.65 years.

RSU Activities

Our RSU transactions during the six months ended
September 26, 2010 are summarized as follows:



|                                                  |  |        |          |   |                                     |   |      |                                                  |  |  |                                          |  |  |                                                          |     |  |  |   |     | 
|------------------------------------------------- |  | ------ | -------- | - | ----------------------------------- | - | ---- | ------------------------------------------------ |  |  | ---------------------------------------- |  |  | -------------------------------------------------------- | --- |  |  | - | --- | 
|                                                  |  | Shares |          |   | WeightedAverageGrant-DateFair Value |   |      | WeightedAverageRemainingContractualTerm in Years |  |  | AggregateIntrinsicValue
(1)(in millions) |  |  | UnrecognizedStock-basedCompensationCost (2)(in millions) |    
|Unvested at March 28, 2010                        |  |        | 834,204  |   |                                     | $ | 8.20 |                                                  |  |  | 1.04                                     |  |  | $                                                        | 6.1 |  |  | $ | 4.2 | 
|Granted                                           |  |        | 275,108  |   |                                     |   | 7.10 |                                                  |  |  |                                          |  |  |                                                          |     |  |  |   |     | 
|Issued and released                               |  |        | (459,147 | ) |                                     |   | 7.00 |                                                  |  |  |                                          |  |  |                                                          |     |  |  |   |     | 
|Forfeited                                         |  |        | (18,490  | ) |                                     |   | 7.66 |                                                  |  |  |                                          |  |  |                                                          |     |  |  |   |     | 
|                                                  |  |        |          |   |                                     |   |      |                                                  |  |  |                                          |  |  |                                                          |     |  |  |   |     | 
|Unvested at September 26, 2010                    |  |        | 631,675  |   |                                     | $ | 7.34 |                                                  |  |  | 1.03                                     |  |  | $                                                        | 3.7 |  |  | $ | 3.8 | 
|                                                  |  |        |          |   |                                     |   |      |                                                  |  |  |                                          |  |  |                                                          |     |  |  |   |     | 
|Vested and expected to vest at September 26, 2010 |  |        | 599,752  |   |                                     | $ | 7.34 |                                                  |  |  | 0.99                                     |  |  | $                                                        | 3.5 |  |  |   |     | 
|                                                  |  |        |          |   |                                     |   |      |                                                  |  |  |                                          |  |  |                                                          |     |  |  |   |     | 



|(1) | The aggregate intrinsic value of RSUs represents the closing price per share of our stock at the end of the periods presented, multiplied by the number of unvested RSUs
or the number of vested and expected to vest RSUs, as applicable, at the end of each period.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | For RSUs, stock-based compensation expense was calculated based on our stock price on the date of grant, multiplied by the number of RSUs granted. The grant date fair
value of RSUs, less estimated forfeitures, is recognized on a straight-line basis over the vesting period.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
July 2009, we granted performance-based RSUs covering 99,000 shares to certain executives, issuable upon meeting certain performance targets in our fiscal year 2010 and vesting annually over a three year period beginning July 1, 2010. The
annual vesting requires continued service through each annual vesting date. In the three and six months ended September 26, 2010, we recognized approximately $61,000 and $108,000, respectively, of compensation expense related to these awards.

In April 2010, we granted performance-based RSUs covering 56,000 shares to our CEO, issuable upon meeting certain performance
targets in our fiscal year 2011 and vesting annually over a three year period beginning May 3, 2010. The annual vesting requires continued service through each annual vesting date. In the three and six months ended September 26, 2010, we
recognized approximately $60,000 and $120,000, respectively, of compensation expense related to these awards.

In the three
months ended June 27, 2010, we granted approximately 210,000 shares as stock based awards to certain employees that resulted in $1.5 million in stock-based compensation expense. These grants were discretionary in nature and fully vested
upon issuance. There were no awards of this nature granted in the three months ended September 26, 2010.

Stock-Based
Compensation Expense

The following table summarizes stock-based compensation expense related to stock options and RSUs
during the fiscal periods presented (in thousands):



|                                       |  |                    |       |  |                   |   |       |                   |  |   |                   |  |  |   |       | 
|-------------------------------------- |  | ------------------ | ----- |  | ----------------- | - | ----- | ----------------- |  | - | ----------------- |  |  | - | ----- | 
|                                       |  | Three Months Ended |       |  | Six Months Ended  |  
|                                       |  | September 26,2010  |       |  | September 27,2009 |   |       | September 26,2010 |  |   | September 27,2009 | 
|Cost of sales                          |  | $                  | 98    |  |                   | $ | 151   |                   |  | $ | 318               |  |  | $ | 267   | 
|Research and development               |  |                    | 665   |  |                   |   | 748   |                   |  |   | 2,221             |  |  |   | 1,234 | 
|Selling, general and administrative    |  |                    | 751   |  |                   |   | 767   |                   |  |   | 2,297             |  |  |   | 1,474 | 
|                                       |  |                    |       |  |                   |   |       |                   |  |   |                   |  |  |   |       | 
|Total Stock-based compensation expense |  | $                  | 1,514 |  |                   | $ | 1,666 |                   |  | $ | 4,836             |  |  | $ | 2,975 | 
|                                       |  |                    |       |  |                   |   |       |                   |  |   |                   |  |  |   |       | 

Stock-based compensation expense for the three and six months ended September 26, 2010 includes
approximately $119,000 and $252,000, respectively, of incremental stock-based compensation expense associated with RSU awards covering an aggregate of 344,020 shares of our common stock issued in exchange for the options surrendered pursuant to the
October 23, 2008 option exchange program. Stock-based compensation expense for the three and six months ended September 27, 2009, includes $140,000 and $288,000, respectively, of incremental stock-based compensation expense, associated
with the same RSU awards.



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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Valuation
Assumptions

We estimate the fair value of stock options on the date of grant using the Black-Scholes option-pricing model.
The assumptions used in calculating the fair value of stock-based compensation represent our estimates, but these estimates involve inherent uncertainties and the application of management judgments which include the expected term of the share-based
awards, stock price volatility and forfeiture rates. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

We used the following weighted average assumptions to calculate the fair values of options granted during the fiscal periods presented:



|                                      |  |                    |      |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|------------------------------------- |  | ------------------ | ---- | - | ----------------- | - | --------- | ----------------- |  | - | ----------------- | - |  | - | --------- | -
|                                      |  | Three Months Ended |      |   | Six Months Ended  |  
|                                      |  | September 26,2010  |      |   | September 27,2009 |   |           | September 26,2010 |  |   | September 27,2009 |  
|Expected term of options (years)      |  |                    | 4.4  |   |                   |   | 4.7  4.9 |                   |  |   | 4.4               |   |  |   | 4.7  4.9 |  
|Risk-free interest rate               |  |                    | 1.3  | % |                   |   | 2.4  2.5 | %                 |  |   | 1.3  2.1         | % |  |   | 2.1  2.5 | %
|Expected volatility                   |  |                    | 39   | % |                   |   | 38        | %                 |  |   | 39                | % |  |   | 38        | %
|Expected dividend yield               |  |                    |     |   |                   |   |          |                   |  |   |                  |   |  |   |          |  
|Weighted average estimated fair value |  | $                  | 2.31 |   |                   | $ | 2.64      |                   |  | $ | 2.46              |   |  | $ | 2.40      |  

NOTE 13. COMPREHENSIVE INCOME
(LOSS)

Our comprehensive loss for the periods indicated below was as follows (in thousands):



|                                                                         |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------------------ | ------ | - | ----------------- | - | ------ | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                                         |  | Three Months Ended |        |   | Six Months Ended  |  
|                                                                         |  | September 26,2010  |        |   | September 27,2009 |   |        | September 26,2010 |  |   | September 27,2009 |  
|Net loss                                                                 |  | $                  | (4,459 | ) |                   | $ | (8,163 | )                 |  | $ | (11,873           | ) |  | $ | (21,038 | )
|Other comprehensive loss:                                                |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Change in unrealized income (loss), on marketable securities, net of tax |  |                    | 442    |   |                   |   | 500    |                   |  |   | (56               | ) |  |   | 912     |  
|                                                                         |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Total other comprehensive income (loss)                                  |  |                    | 442    |   |                   |   | 500    |                   |  |   | (56               | ) |  |   | 912     |  
|                                                                         |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Comprehensive loss                                                       |  |                    | (4,017 | ) |                   |   | (7,663 | )                 |  |   | (11,929           | ) |  |   | (20,126 | )
|                                                                         |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |         |  

NOTE 14. LEASE FINANCING OBLIGATION

In connection with the Sipex acquisition, we assumed a lease financing obligation related to a facility located in Milpitas, California (the Hillview Facility). The lease term expires in
March, 2011 with average lease payments of approximately $1.4 million per year.

The fair value of the Hillview Facility was
estimated at $13.4 million at the time of the acquisition and was included in the Property, plant and equipment, net line item on the condensed consolidated balance sheet. In connection with purchase accounting, we have accounted for
this sale and leaseback transaction as a financing transaction which was included in the Long-term lease financing obligations line item on our condensed consolidated balance sheet. The effective interest rate is 8.2%. Depreciation for
the Hillview Facility was recorded over the straight-line method for the remaining useful life and was $88,000 and $176,000, respectively, for the three and six months ended on September 26, 2010.

In April 2008 we entered into a sublease agreement for the Hillview Facility. The sublease expires in March, 2011 and we expect annual
sublease income of approximately $1.5 million for the duration of the sublease term. The sublease income for the three and six months ended September 26, 2010 was $393,000 and $786,000, respectively, and was recorded in the Other income
and expense, net line item in our condensed consolidated statements of operations. The sublease income for the three and six months ended September 27, 2009 was $353,000 and $706,000, respectively.

We have also acquired engineering design tools (design tools) under capital leases. We acquired $5.2 million of design tools
in December 2007 under a four-year license, $3.7 million of design tools in November 2008 under a three-year license, and $1.3 million of design tools in February and June 2010 under a two-year and a three-year license, respectively, which were
accounted for as capital leases and recorded in the Property, plant and equipment, net line item on the condensed consolidated balance sheets. The related design tool obligations were included in the lease financing obligation in our
condensed consolidated balance sheets. Amortization of the design tools is recorded using the straight-line method over the remaining useful life and was $894,000 and $1,737,000 in the three and six months ended September 26, 2010,
respectively.



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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Future minimum
lease and sublease income payments for the lease financing obligations as of September 26, 2010 are as follows (in thousands):



|                                                    |  |                      |        |   |             |   |        |       |  |   |                        |   |  |   |     | 
|--------------------------------------------------- |  | -------------------- | ------ | - | ----------- | - | ------ | ----- |  | - | ---------------------- | - |  | - | --- | 
|Fiscal Years                                        |  | HillviewFacility (1) |        |   | DesignTools |   |        | Total |  |   | ExpectedSubleaseIncome |  
|2011 (6 months remaining)                           |  | $                    | 12,896 |   |             | $ | 2,658  |       |  | $ | 15,554                 |   |  | $ | 786 | 
|2012                                                |  |                      |       |   |             |   | 1,838  |       |  |   | 1,838                  |   |  |   |    | 
|2013                                                |  |                      |       |   |             |   | 390    |       |  |   | 390                    |   |  |   |    | 
|                                                    |  |                      |        |   |             |   |        |       |  |   |                        |   |  |   |     | 
|Total minimum lease payments                        |  |                      | 12,896 |   |             |   | 4,886  |       |  |   | 17,782                 |   |  |   | 786 | 
|Less: amount representing interest                  |  |                      | (506   | ) |             |   | (315   | )     |  |   | (821                   | ) |  |   |     | 
|Less: amount representing maintenance               |  |                      |       |   |             |   | (309   | )     |  |   | (309                   | ) |  |   |     | 
|                                                    |  |                      |        |   |             |   |        |       |  |   |                        |   |  |   |     | 
|Present value of minimum lease payments             |  |                      | 12,390 |   |             |   | 4,262  |       |  |   | 16,652                 |   |  |   | 786 | 
|Less: current portion of lease financing obligation |  |                      | (222   | ) |             |   | (3,542 | )     |  |   | (3,764                 | ) |  |   |    | 
|                                                    |  |                      |        |   |             |   |        |       |  |   |                        |   |  |   |     | 
|Long-term lease financing obligation                |  | $                    | 12,168 |   |             | $ | 720    |       |  | $ | 12,888                 |   |  | $ | 786 | 
|                                                    |  |                      |        |   |             |   |        |       |  |   |                        |   |  |   |     | 



|(1) | At the end of the lease term, the estimated final lease obligation is approximately $12.2 million, which we will settle in a noncash transaction by returning the
Hillview Facility to the lessor.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the three and six months ended September 26, 2010, interest expense
totaled $321,000 and $639,000, respectively, for the Hillview Facility lease financing obligation and design tools. For the three and six months ended September 27, 2009, interest expense totaled $322,000 and $646,000 for the Hillview Facility
lease financing obligation and design tools, respectively.

NOTE 15. COMMITMENTS AND CONTINGENCIES

In 1986, Micro Power Systems Inc. (MPSI), a subsidiary that we acquired in June 1994, identified low-level groundwater
contamination at its principal manufacturing site. The area and extent of the contamination appear to have been defined. MPSI previously reached an agreement with a prior tenant to share in the cost of ongoing site investigations and the operation
of remedial systems to remove subsurface chemicals. The frequency and number of wells monitored at the site was reduced with prior regulatory approval for a plume stability analysis as an initial step towards site closure. No significant rebound
concentrations have been observed. The groundwater treatment system remains shut down. In July 2008, we evaluated the effectiveness of the plume stability and decided to initiate an alternative treatment program to pursue a no further action order
for the site. The program was approved by the state and implementation started in October 2009. As such, we accrued an additional $58,000, increasing our liability to $250,000. This accrual included approximately $200,000 for various remediation
options under consideration and $50,000 for future annual monitoring. As of September 26, 2010 the remaining liability was $128,000, net of payments of $9,000 and $113,000, during the six months ended September 26, 2010 and the fiscal year
2010, respectively.

Sipex, which we acquired in August 2007, entered into a definitive Master Agreement with Hangzhou Silan
Microelectronics Co. Ltd. and Hangzhou Silan Integrated Circuit Co. Ltd. (collectively Silan) in China. Silan is a China-based semiconductor foundry. This transaction was related to the closing of Sipex wafer fabrication operations
located in Milpitas, California. Under this agreement, Sipex and Silan would work together to enable Silan to manufacture semiconductor wafers using Sipex process technology. The Master Agreement includes a Process Technology Transfer and License
Agreement which contemplates the transfer of eight of our processes and related product manufacturing to Silan. Subject to our option to suspend in whole or in part, there is a purchase commitment under the Wafer Supply Agreement obligating us to
purchase from Silan an average of at least one thousand equivalent wafers per week, calculated on a quarterly basis, for five years beginning February 2006. There were open purchase orders for approximately $3.1 million outstanding as of
September 26, 2010.

Generally, we warrant all custom products and application specific products, including cards and
boards, against defects in materials and workmanship for a period of 12 months and occasionally we may provide an extended warranty of up to three years from the delivery date. We warrant all of our standard products against defects in materials and
workmanship for a period of 90 days from the date of delivery. Reserve requirements are recorded in the period of sale and are based on an assessment of the products sold with warranty and historical warranty costs incurred. Our liability is
generally limited to replacing, repairing or issuing credit, at our option, for the product if it has been paid for. The warranty does not cover damage which results from accident, misuse, abuse, improper line voltage, fire, flood, lightning or
other damage resulting from modifications, repairs or alterations performed other than by us, or resulting from failure to comply with our written operating and maintenance instructions. Warranty expense has historically been immaterial for our
products. The warranty liabilities related to our products as of September 26, 2010 was immaterial.



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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





In the ordinary
course of business, we may provide indemnification of varying scope and terms to customers, vendors, lessors and business partners, purchasers of assets or subsidiaries, and other parties with respect to certain matters, including, but not limited
to, losses arising out of our breach of agreements or representations and warranties made by us, services to be provided by us, intellectual property infringement claims made by third parties or, with respect to the sale of assets or a subsidiary,
matters related to our conduct of the business and tax matters prior to the sale. In addition, we have entered into indemnification agreements with our directors and certain of our executive officers that will require us, among other things, to
indemnify them against certain liabilities that may arise by reason of their status or service as directors or executive officers. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to
indemnify our directors and officers, and former directors and officers of acquired companies, in certain circumstances. It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited
history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements might not be subject to maximum loss clauses. Historically, we have not incurred material costs as
a result of obligations under these agreements and we have not accrued any liabilities related to such indemnification obligations in our condensed consolidated financial statements.

NOTE 16. LEGAL PROCEEDINGS

From time to time, we are involved in various
claims, legal actions and complaints arising in the normal course of business. We are not a named party to any lawsuit or formal proceeding that, in the opinion of our management, is likely to have a material adverse effect on our financial
position, results of operations or cash flows.

NOTE 17. INCOME TAXES

During the three and six months ended September 26, 2010, we recorded income tax expense of approximately $27,000 and $152,000,
respectively. During the second quarter and first six months of fiscal 2010, we recorded income tax benefit of $281,000 and $609,000, respectively. The income tax expense was primarily due to expenses recorded during the second quarter of fiscal
2011 for foreign taxable income.

During the second quarter and first six months of fiscal 2011 the unrecognized tax benefits
increased by $119,000 and $238,000, respectively, to $16.1 million as of September 26, 2010. The increase was primarily related to our research tax credits. If recognized, $13.6 million of these unrecognized tax benefits (net of federal
benefit) would be recorded as a reduction of future income tax provision before consideration of changes in valuation allowance.

Estimated interest and penalties related to the income taxes are classified as a component of the provision for income taxes in the condensed consolidated statement of operations. Accrued interest and
penalties were $379,000 and $356,000 as of September 26, 2010 and September 27, 2009, respectively.

Our only major
tax jurisdictions are the United States federal and various U.S. states. The fiscal years 2002 through 2010 remain open and subject to examinations by the appropriate governmental agencies in the United States and in certain of our U.S. state
jurisdictions.

NOTE 18. SEGMENT AND GEOGRAPHIC INFORMATION

We operate in one reportable segment. We design, develop and market high-performance, analog and mixed-signal silicon solutions and software and subsystem solutions for a variety of markets including
communications, datacom and storage, interface and power management. The nature of our products and production processes and the type of customers and distribution methods are consistent among all of our products.



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##### Table of Contents

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Our net sales by
product line are summarized as follows (in thousands):



|                    |  |                    |        |  |                   |   |        |                   |  |   |                   |  |  |   |        | 
|------------------- |  | ------------------ | ------ |  | ----------------- | - | ------ | ----------------- |  | - | ----------------- |  |  | - | ------ | 
|                    |  | Three Months Ended |        |  | Six Months Ended  |  
|                    |  | September 26,2010  |        |  | September 27,2009 |   |        | September 26,2010 |  |   | September 27,2009 | 
|Communications      |  | $                  | 4,966  |  |                   | $ | 4,463  |                   |  | $ | 11,815            |  |  | $ | 12,108 | 
|Datacom and storage |  |                    | 4,438  |  |                   |   | 6,718  |                   |  |   | 9,398             |  |  |   | 12,056 | 
|Interface           |  |                    | 20,208 |  |                   |   | 14,852 |                   |  |   | 39,884            |  |  |   | 27,874 | 
|Power Management    |  |                    | 7,621  |  |                   |   | 5,555  |                   |  |   | 15,772            |  |  |   | 10,412 | 
|                    |  |                    |        |  |                   |   |        |                   |  |   |                   |  |  |   |        | 
|Total net sales     |  | $                  | 37,233 |  |                   | $ | 31,588 |                   |  | $ | 76,869            |  |  | $ | 62,450 | 
|                    |  |                    |        |  |                   |   |        |                   |  |   |                   |  |  |   |        | 



|* | Incremental revenues from Hifn, Galazar and Neterion have been included in our condensed consolidated financial statements since April 4, 2009, June 18,
2009 and March 17, 2010, respectively.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our foreign operations are conducted primarily through our
wholly-owned subsidiaries in Canada, China, France, Germany, Italy, Japan, Malaysia, Singapore, South Korea, Taiwan and the United Kingdom. Our principal markets include North America, Europe and the Asia Pacific region. Net sales by geographic
areas represent sales to unaffiliated customers.

Our net sales by geographic area are summarized as follows (in thousands):



|                           |  |                    |        |  |                   |   |        |                   |  |   |                   |  |  |   |        | 
|-------------------------- |  | ------------------ | ------ |  | ----------------- | - | ------ | ----------------- |  | - | ----------------- |  |  | - | ------ | 
|                           |  | Three Months Ended |        |  | Six Months Ended  |  
|                           |  | September 26,2010  |        |  | September 27,2009 |   |        | September 26,2010 |  |   | September 27,2009 | 
|United States              |  | $                  | 7,317  |  |                   | $ | 8,494  |                   |  | $ | 15,655            |  |  | $ | 15,678 | 
|China                      |  |                    | 13,424 |  |                   |   | 11,632 |                   |  |   | 27,248            |  |  |   | 22,896 | 
|Singapore                  |  |                    | 3,650  |  |                   |   | 3,593  |                   |  |   | 7,432             |  |  |   | 6,623  | 
|Japan                      |  |                    | 1,884  |  |                   |   | 1,397  |                   |  |   | 5,162             |  |  |   | 3,366  | 
|Germany                    |  |                    | 4,328  |  |                   |   | 420    |                   |  |   | 5,207             |  |  |   | 837    | 
|Europe (excluding Germany) |  |                    | 1,618  |  |                   |   | 3,462  |                   |  |   | 6,474             |  |  |   | 7,929  | 
|Rest of world              |  |                    | 5,012  |  |                   |   | 2,590  |                   |  |   | 9,691             |  |  |   | 5,121  | 
|                           |  |                    |        |  |                   |   |        |                   |  |   |                   |  |  |   |        | 
|Total net sales            |  | $                  | 37,233 |  |                   | $ | 31,588 |                   |  | $ | 76,869            |  |  | $ | 62,450 | 
|                           |  |                    |        |  |                   |   |        |                   |  |   |                   |  |  |   |        | 



|* | Incremental revenues from Hifn, Galazar and Neterion have been included in our consolidated financial statements since April 4, 2009, June 18, 2009 and
March 17, 2010, respectively.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Substantially all of our long-lived assets at each of September 26,
2010 and March 28, 2010 were located in the United States.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following Managements Discussion and Analysis of Financial Condition and Results of Operations, as well as information
contained in Part II, Item 1A. Risk Factors below and elsewhere in this Quarterly Report on Form 10-Q, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are generally written in the future tense and/or may generally be identified by words such as will, may, should,
could, expect, suggest, believe, anticipate, intend, plan, or other similar words. Forward-looking statements contained in this Quarterly Report include, among
others, statements regarding (1) our revenue growth, (2) our future gross profits and margins, (3) our future research and development efforts and related expenses, (4) our future selling, general and administrative expenses,
(5) our cash and cash equivalents, short-term marketable securities and cash flows from operations being sufficient to satisfy working capital requirements and capital equipment needs for at least the next 12 months, (6) our ability to
continue to finance operations with cash flows from operations, existing cash and investment balances, and some combination of long-term debt and/or lease financing and sales of equity securities, (7) the possibility of future acquisitions and
investments, (8) our ability to accurately estimate our assumptions used in valuing stock-based compensation, (9) our ability to estimate and reconcile distributors reported inventories to their activities, (10) our ability to
estimate future cash flows associated with long-lived assets, (11) the volatile global economic and financial market conditions, and (12) anticipated results in connection with the acquisitions of hi/fn, inc. (Hifn), Galazar
Networks, Inc. (Galazar) and Neterion, Inc. (Neterion). These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could
cause our business, operating results and financial condition to differ materially and adversely from what is projected or implied by any forward looking statement included in this Form 10-Q. Factors that could cause actual results to differ
materially from those stated herein include, but are not limited to: the information contained under the captions Part I, Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations and
Part II, Item 1A. Risk Factors, as well as those risks discussed in our Annual Report on Form 10-K for the fiscal year ended March 28, 2010. We disclaim any obligation to update information in any forward-looking statement.

The following Managements Discussion and Analysis of Financial Condition and Results of Operations should be
read in conjunction with the condensed consolidated financial statements and notes thereto, included in this Quarterly Report on Form 10-Q, and our audited consolidated financial statements for the fiscal year ended March 28, 2010 included in
our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC). Our results of operations for the three and six months ended September 26, 2010 are not necessarily indicative of results to be expected for
any future period.

BUSINESS OVERVIEW

Exar Corporation and its subsidiaries (Exar or we) is a fabless semiconductor company that designs, sub-contracts manufacturing and sells highly differentiated silicon, software
and subsystem solutions for industrial, telecom, networking and storage applications. Our core expertise in silicon integration, system architecture and software has enabled the development of innovative solutions designed to meet the needs of the
evolving connected world. Our product portfolio includes power management and interface components, datacom products, storage optimization solutions, network security and applied service processors. Applying both analog and digital technologies, our
products are deployed in a wide array of applications such as portable electronic devices, set top boxes, digital video recorders, telecommunication systems, servers, enterprise storage systems and industrial automation equipment. We provide
customers with a breadth of component products and subsystem solutions based on advanced silicon integration.

We market our
products worldwide with sales offices and personnel located throughout the Americas, Europe, and Asia. Our products are sold in the United States through a number of manufacturers representatives and distributors. Internationally, our products
are sold through various regional and country specific distributors with locations around the globe. In addition to our sales offices, we also employ a worldwide team of field application engineers to work directly with our customers.

Our international sales consist of sales that are denominated in U.S. dollars. Our international related operations expenses expose us to
fluctuations in currency exchange rates because our foreign operating expenses are denominated in foreign currency while our sales are denominated in U.S. dollars. Although foreign sales within certain countries or foreign sales comprised of certain
products may subject us to tariffs, our gross profit margin on international sales, adjusted for differences in product mix, is not significantly different from that realized on our sales to domestic customers. Our operating results are subject to
quarterly and annual fluctuations as a result of several factors that could materially and adversely affect our future profitability as described in Part II, Item 1A. Risk FactorsOur Financial Results May Fluctuate Significantly
Because Of A Number Of Factors, Many Of Which Are Beyond Our Control.

Our fiscal years consist of 52 or
53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. The additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal year 2011 and fiscal year 2010 are comprised of a
52-week period. The second quarter of fiscal 2011 and fiscal 2010 included 91 days from June 28, 2010 to September 26, 2010 and from June 29, 2009 to September 27, 2009, respectively. The first six months of fiscal 2011 and
fiscal 2010 each included 182 days from March 29, 2010 to September 26, 2010 and from March 30, 2009 to September 27, 2009, respectively.

Business Outlook

We experienced a sequential quarterly decrease in
our net sales in the second quarter of fiscal 2011 as compared to the first quarter of fiscal 2011. The major factors affecting our decrease in net sales were inventory corrections at our end customers as their inventory was built in excess of their
end demand and a slower than expected increase in sales of our new products. We expect our net sales for our third quarter of fiscal 2011 to be slightly down to marginally up when compared to the current quarter as we believe our end customer
inventory correction will continue through our third fiscal quarter. As we exit fiscal year 2011, we believe, with our limited visibility, that sales of our new products will increase and net sales of certain of our other products will rebound. We
continue to manage our operating expenses but will experience some upward fluctuation in the near term as we invest in some intellectual property and mask tooling costs for our key, next generation products.



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CRITICAL ACCOUNTING POLICIES AND
ESTIMATES

The preparation of our financial statements and accompanying disclosures in conformity with GAAP requires
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the condensed consolidated financial statements and the accompanying notes. The
SEC has defined a companys critical accounting policies as policies that are most important to the portrayal of a companys financial condition and results of operations, and which require a company to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified our most critical accounting policies and estimates to be as follows: (1) revenue
recognition; (2) valuation of inventories; (3) income taxes; (4) stock-based compensation; (5) goodwill; (6) long-lived assets; and (7) valuation of business combinations. Although we believe that our estimates,
assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates if the assumptions, judgments and conditions upon which they are based turn out to be
inaccurate. A further discussion of our critical accounting policies can be found in Part II, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form
10-K for the fiscal year ended March 28, 2010.

RESULTS OF OPERATIONS

Net Sales by Product Line

Our net sales by product line in dollars and as a percentage of net sales were as follows for the periods presented (in thousands, except percentages):



|                    |  |                    |        |  |                   |  |     |                  |                   |   |        |                   |  |  |     |   |  |  |     |    |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |   |  |  |     |   
|------------------- |  | ------------------ | ------ |  | ----------------- |  | --- | ---------------- | ----------------- | - | ------ | ----------------- |  |  | --- | - |  |  | --- | -- |  | - | ------ |  |  |  | --- | - |  | - | ------ |  |  |  | --- | - |  |  | --- | --
|                    |  | Three Months Ended |        |  | Change            |  |     | Six Months Ended |                   |   | Change |                  
|                    |  | September 26,2010  |        |  | September 27,2009 |  |     |                  | September 26,2010 |   |        | September 27,2009 |  | 
|Net Sales:          |  |                    |        |  |                   |  |     |                  |                   |   |        |                   |  |  |     |   |  |  |     |    |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |   |  |  |     |   
|Communication       |  | $                  | 4,966  |  |                   |  | 13  | %                |                   | $ | 4,463  |                   |  |  | 14  | % |  |  | 11  | %  |  | $ | 11,815 |  |  |  | 15  | % |  | $ | 12,108 |  |  |  | 19  | % |  |  | (2  | %)
|Datacom and storage |  |                    | 4,438  |  |                   |  | 12  | %                |                   |   | 6,718  |                   |  |  | 21  | % |  |  | (34 | %) |  |   | 9,398  |  |  |  | 12  | % |  |   | 12,056 |  |  |  | 19  | % |  |  | (22 | %)
|Interface           |  |                    | 20,208 |  |                   |  | 54  | %                |                   |   | 14,852 |                   |  |  | 47  | % |  |  | 36  | %  |  |   | 39,884 |  |  |  | 52  | % |  |   | 27,874 |  |  |  | 45  | % |  |  | 43  | % 
|Power Management    |  |                    | 7,621  |  |                   |  | 21  | %                |                   |   | 5,555  |                   |  |  | 18  | % |  |  | 37  | %  |  |   | 15,772 |  |  |  | 21  | % |  |   | 10,412 |  |  |  | 17  | % |  |  | 51  | % 
|                    |  |                    |        |  |                   |  |     |                  |                   |   |        |                   |  |  |     |   |  |  |     |    |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |   |  |  |     |   
|Total               |  | $                  | 37,233 |  |                   |  | 100 | %                |                   | $ | 31,588 |                   |  |  | 100 | % |  |  |     |    |  | $ | 76,869 |  |  |  | 100 | % |  | $ | 62,450 |  |  |  | 100 | % |  |  |     |   
|                    |  |                    |        |  |                   |  |     |                  |                   |   |        |                   |  |  |     |   |  |  |     |    |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |   |  |  |     |   



|* | Net sales from Hifn, Galazar and Neterion have been included in our consolidated financial statements since April 4, 2009, June 18, 2009 and
March 17, 2010, respectively. Software net sales have not been a significant part of our total net sales.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Communication

Net sales of communication products include network access, transport and transmission products as well as optical products. Net sales of communications products for the three months ended
September 26, 2010 increased $0.5 million as compared to the same period a year ago. The increase is primarily due to higher shipments of our SDH/SONET Framer products partially offset by price erosion on certain framer products and a decrease
in our Ethernet over SONET/SDH products.

Net sales of communications products for the six months ended September 26,
2010 decreased $0.3 million as compared to the same period a year ago. The decrease is primarily due to lower shipments of our Ethernet over SDH/SONET products.

Datacom and Storage

Net sales of datacom and storage products include
network access, transmission and storage products, as well as encryption, data reduction and packet processing products and 10 Gigabit Ethernet controller silicon and card solutions. Net sales of datacom and storage products for the three months
ended September 26, 2010 decreased $2.3 million as compared to the same period a year ago and included $1.2 million of additional sales of Neterion products. Excluding the additional Neterion sales, datacom and storage decreased $3.5 million
primarily due to slower demand with an inventory correction at certain OEM customers and a discontinuation of a platform at a storage OEM.

Net sales of datacom and storage products for the six months ended September 26, 2010 decreased $2.7 million as compared to the same period a year ago and included $1.8 million of additional sales of
Neterion products. Excluding the additional Neterion sales, datacom and storage decreased $4.4 million primarily due to slower demand with an inventory correction at certain OEM customers and a discontinuation of a platform at a storage OEM.



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Interface

Net sales of interface products include UARTs, video, imaging and other products as well as transceiver products. Net
sales of interface products for the three months ended September 26, 2010 increased $5.4 million as compared to the same period a year ago, primarily due to higher shipments of our serial transceiver and UART products.

Net sales of interface products for the six months ended September 26, 2010 increased $12.0 million as compared to the same period a
year ago, primarily due to higher shipments of our serial transceiver and UART products.

Power Management

Power management products include DC-DC regulators and LED drivers. Net sales of power management products for the three months ended
September 26, 2010 increased $2.1 million as compared to the same period a year ago primarily due to higher shipments of our analog power solutions.

Net sales of power management products for the six months ended September 26, 2010 increased $5.4 million as compared to the same period a year ago primarily due to higher shipments of our analog
power solutions.

Net Sales by Channel

Our net sales by channel in dollars and as a percentage of net sales were as follows for the periods presented (in thousands, except percentages):



|                          |  |                    |        |  |                   |  |     |                  |                   |   |        |                   |  |  |        |   |  |  |    |    |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |   |  |  |    |  
|------------------------- |  | ------------------ | ------ |  | ----------------- |  | --- | ---------------- | ----------------- | - | ------ | ----------------- |  |  | ------ | - |  |  | -- | -- |  | - | ------ |  |  |  | --- | - |  | - | ------ |  |  |  | --- | - |  |  | -- | -
|                          |  | Three Months Ended |        |  | Change            |  |     | Six Months Ended |                   |   |        |                  
|                          |  | September 26,2010  |        |  | September 27,2009 |  |     |                  | September 26,2010 |   |        | September 27,2009 |  |  | Change |  
|Net Sales:                |  |                    |        |  |                   |  |     |                  |                   |   |        |                   |  |  |        |   |  |  |    |    |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |   |  |  |    |  
|Sell-through distributors |  | $                  | 21,297 |  |                   |  | 57  | %                |                   | $ | 15,562 |                   |  |  | 49     | % |  |  | 37 | %  |  | $ | 43,317 |  |  |  | 56  | % |  | $ | 30,859 |  |  |  | 49  | % |  |  | 40 | %
|Direct and others         |  |                    | 15,936 |  |                   |  | 43  | %                |                   |   | 16,026 |                   |  |  | 51     | % |  |  | (1 | %) |  |   | 33,552 |  |  |  | 44  | % |  |   | 31,591 |  |  |  | 51  | % |  |  | 6  | %
|                          |  |                    |        |  |                   |  |     |                  |                   |   |        |                   |  |  |        |   |  |  |    |    |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |   |  |  |    |  
|Total                     |  | $                  | 37,233 |  |                   |  | 100 | %                |                   | $ | 31,588 |                   |  |  | 100    | % |  |  |    |    |  | $ | 76,869 |  |  |  | 100 | % |  | $ | 62,450 |  |  |  | 100 | % |  |  |    |  
|                          |  |                    |        |  |                   |  |     |                  |                   |   |        |                   |  |  |        |   |  |  |    |    |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |   |  |  |    |  



|* | Net sales from Hifn, Galazar and Neterion have been included in our consolidated financial statements since April 4, 2009, June 18, 2009 and
March 17, 2010, respectively. Software net sales have not been a significant part of our total net sales.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the three months ended September 26, 2010, net sales to our distributors for which we recognize revenue on the sell-through
method increased as a percentage of total net sales as compared to the same period a year ago primarily due to the strength in our serial and power products, which are products primarily sold through distributors.

For the three months ended September 26, 2010, net sales to our direct and other distributors included $0.3 million of sales of our
Neterion products.

For the six months ended September 26, 2010, net sales increased as a percentage of total net sales
as compared to the same period a year ago primarily due to the strength in our serial and power products, which are products primarily sold through distributors.

For the six months ended September 26, 2010, net sales to our direct and other distributors included $0.9 million of sales of our Neterion products.



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Net Sales by
Geography

Our net sales by geography in dollars and as a percentage of net sales were as follows for the periods
presented (in thousands, except percentages):



|           |  |                    |        |  |                   |  |     |                  |                   |   |        |                   |  |  |     |   |  |  |    |    |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |   |  |  |    |  
|---------- |  | ------------------ | ------ |  | ----------------- |  | --- | ---------------- | ----------------- | - | ------ | ----------------- |  |  | --- | - |  |  | -- | -- |  | - | ------ |  |  |  | --- | - |  | - | ------ |  |  |  | --- | - |  |  | -- | -
|           |  | Three Months Ended |        |  | Change            |  |     | Six Months Ended |                   |   | Change |                  
|           |  | September 26,2010  |        |  | September 27,2009 |  |     |                  | September 26,2010 |   |        | September 27,2009 |  | 
|Net Sales: |  |                    |        |  |                   |  |     |                  |                   |   |        |                   |  |  |     |   |  |  |    |    |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |   |  |  |    |  
|Americas   |  | $                  | 8,357  |  |                   |  | 22  | %                |                   | $ | 8,567  |                   |  |  | 27  | % |  |  | (2 | %) |  | $ | 17,019 |  |  |  | 22  | % |  | $ | 15,883 |  |  |  | 25  | % |  |  | 7  | %
|Asia       |  |                    | 22,930 |  |                   |  | 62  | %                |                   |   | 19,139 |                   |  |  | 61  | % |  |  | 20 | %  |  |   | 48,169 |  |  |  | 63  | % |  |   | 37,801 |  |  |  | 61  | % |  |  | 27 | %
|Europe     |  |                    | 5,946  |  |                   |  | 16  | %                |                   |   | 3,882  |                   |  |  | 12  | % |  |  | 53 | %  |  |   | 11,681 |  |  |  | 15  | % |  |   | 8,766  |  |  |  | 14  | % |  |  | 33 | %
|           |  |                    |        |  |                   |  |     |                  |                   |   |        |                   |  |  |     |   |  |  |    |    |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |   |  |  |    |  
|Total      |  | $                  | 37,233 |  |                   |  | 100 | %                |                   | $ | 31,588 |                   |  |  | 100 | % |  |  |    |    |  | $ | 76,869 |  |  |  | 100 | % |  | $ | 62,450 |  |  |  | 100 | % |  |  |    |  
|           |  |                    |        |  |                   |  |     |                  |                   |   |        |                   |  |  |     |   |  |  |    |    |  |   |        |  |  |  |     |   |  |   |        |  |  |  |     |   |  |  |    |  



|* | Net sales from Hifn, Galazar and Neterion have been included in our consolidated financial statements since April 4, 2009, June 18, 2009 and
March 17, 2010, respectively. Software net sales have not been a significant part of our total net sales.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the three and six months ended September 26, 2010, net sales in the Americas included $0.9 million and $1.2 million of Neterion
sales, respectively.

For the three and six months ended September 26, 2010, net sales in Asia included $0.2 million and
$0.5 million of Neterion sales, respectively.

Gross Profit

Our gross profit in dollars and as a percentage of net sales was as follows for the periods indicated (in thousands, except percentages):



|                                              |  |                    |        |  |                    |  |    |                  |                    |   |        |                    |  |  |    |   |  |  |      |    |  |   |        |  |  |  |    |   |  |   |        |  |  |  |    |   |  |  |     |   
|--------------------------------------------- |  | ------------------ | ------ |  | ------------------ |  | -- | ---------------- | ------------------ | - | ------ | ------------------ |  |  | -- | - |  |  | ---- | -- |  | - | ------ |  |  |  | -- | - |  | - | ------ |  |  |  | -- | - |  |  | --- | --
|                                              |  | Three Months Ended |        |  | Change             |  |    | Six Months Ended |                    |   | Change |                   
|                                              |  | September 
26,2010 |        |  | September 
27,2009 |  |    |                  | September 
26,2010 |   |        | September 
27,2009 |  | 
|Net Sales                                     |  | $                  | 37,233 |  |                    |  |    |                  |                    | $ | 31,588 |                    |  |  |    |   |  |  |      |    |  | $ | 76,869 |  |  |  |    |   |  | $ | 62,450 |  |  |  |    |   |  |  |     |   
|Cost of sales:                                |  |                    |        |  |                    |  |    |                  |                    |   |        |                    |  |  |    |   |  |  |      |    |  |   |        |  |  |  |    |   |  |   |        |  |  |  |    |   |  |  |     |   
|Cost of sales                                 |  |                    | 18,427 |  |                    |  | 50 | %                |                    |   | 15,484 |                    |  |  | 49 | % |  |  | 19   | %  |  |   | 37,652 |  |  |  | 49 | % |  |   | 30,374 |  |  |  | 49 | % |  |  | 24  | % 
|Fair value adjustment of acquired inventories |  |                    |       |  |                    |  |   | %                |                    |   | 447    |                    |  |  | 1  | % |  |  | (100 | %) |  |   | 42     |  |  |  |   | % |  |   | 2,234  |  |  |  | 3  | % |  |  | (98 | %)
|Amortization of acquired intangible assets    |  |                    | 1,515  |  |                    |  | 4  | %                |                    |   | 1,567  |                    |  |  | 5  | % |  |  | (3   | %) |  |   | 3,068  |  |  |  | 4  | % |  |   | 2,907  |  |  |  | 5  | % |  |  | 6   | % 
|                                              |  |                    |        |  |                    |  |    |                  |                    |   |        |                    |  |  |    |   |  |  |      |    |  |   |        |  |  |  |    |   |  |   |        |  |  |  |    |   |  |  |     |   
|Gross profit                                  |  | $                  | 17,291 |  |                    |  | 46 | %                |                    | $ | 14,090 |                    |  |  | 45 | % |  |  |      |    |  | $ | 36,107 |  |  |  | 47 | % |  | $ | 26,935 |  |  |  | 43 | % |  |  |     |   
|                                              |  |                    |        |  |                    |  |    |                  |                    |   |        |                    |  |  |    |   |  |  |      |    |  |   |        |  |  |  |    |   |  |   |        |  |  |  |    |   |  |  |     |   

Gross profit represents net sales less cost of sales. Cost of sales includes:



| |  |  | the cost of purchasing finished silicon wafers manufactured by independent foundries;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | the costs associated with assembly, packaging, test, quality assurance and product yields;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the cost of personnel and equipment associated with manufacturing support and engineering;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the cost of stock-based compensation associated with manufacturing engineering and support personnel;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the amortization of purchased intangible assets, acquired intellectual property and capitalized IPR&D;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | the fair value adjustment of acquired inventories;
| | - |  | --------------------------------------------------



| |  |  | the provision for excess and obsolete inventory; and
| | - |  | ----------------------------------------------------



| |  |  | the sale of previously reserved inventory.
| | - |  | ------------------------------------------



29



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The increase in gross
profit, as a percentage of net sales, for the three and six months ended September 26, 2010, as compared to the same periods a year ago, was primarily due to improved manufacturing absorption and yields and the exclusion of fair value
adjustment of acquired inventories partially offset by a change in the product mix.

We believe that gross margin will
fluctuate as a percentage of sales and in absolute dollars due to, among other factors, sales mix, including the release of our new products which are designed to have better margins, subcontract manufacturing costs, our ability to leverage fixed
operational costs across increased shipment volumes and competitive pricing pressure on our products.

Other Costs and
Expenses



|                                            |  |                    |        |  |                   |  |    |                  |                   |   |        |                   |  |  |    |   |  |  |      |    |  |   |        |  |  |  |    |   |  |   |        |  |  |  |    |   |  |  |      |   
|------------------------------------------- |  | ------------------ | ------ |  | ----------------- |  | -- | ---------------- | ----------------- | - | ------ | ----------------- |  |  | -- | - |  |  | ---- | -- |  | - | ------ |  |  |  | -- | - |  | - | ------ |  |  |  | -- | - |  |  | ---- | --
|(in thousands, except percentages)          |  | Three Months Ended |        |  | Change            |  |    | Six Months Ended |                   |   | Change |                  
|                                            |  | September 26,2010  |        |  | September 27,2009 |  |    |                  | September 26,2010 |   |        | September 27,2009 |  | 
|Net Sales                                   |  | $                  | 37,233 |  |                   |  |    |                  |                   | $ | 31,588 |                   |  |  |    |   |  |  |      |    |  | $ | 76,869 |  |  |  |    |   |  | $ | 62,450 |  |  |  |    |   |  |  |      |   
|                                            |  |                    |        |  |                   |  |    |                  |                   |  
|R&D expense:                                |  |                    |        |  |                   |  |    |                  |                   |   |        |                   |  |  |    |   |  |  |      |    |  |   |        |  |  |  |    |   |  |   |        |  |  |  |    |   |  |  |      |   
|R&D - base                                  |  | $                  | 10,101 |  |                   |  | 27 | %                |                   | $ | 10,713 |                   |  |  | 34 | % |  |  | (6   | %) |  | $ | 21,914 |  |  |  | 28 | % |  | $ | 21,376 |  |  |  | 34 | % |  |  | 3    | % 
|Stock-based compensation                    |  |                    | 665    |  |                   |  | 2  | %                |                   |   | 748    |                   |  |  | 2  | % |  |  | (11  | %) |  |   | 2,221  |  |  |  | 3  | % |  |   | 1,234  |  |  |  | 2  | % |  |  | 80   | % 
|Amortization expense  acquired intangibles |  |                    | 1,074  |  |                   |  | 3  | %                |                   |   | 635    |                   |  |  | 2  | % |  |  | 69   | %  |  |   | 2,148  |  |  |  | 3  | % |  |   | 1,223  |  |  |  | 2  | % |  |  | 76   | % 
|Accelerated depreciation and other          |  |                    |       |  |                   |  |   | %                |                   |   | 192    |                   |  |  | 1  | % |  |  | (100 | %) |  |   |       |  |  |  |   | % |  |   | 749    |  |  |  | 1  | % |  |  | (100 | %)
|                                            |  |                    |        |  |                   |  |    |                  |                   |   |        |                   |  |  |    |   |  |  |      |    |  |   |        |  |  |  |    |   |  |   |        |  |  |  |    |   |  |  |      |   
|Total R&D expense                           |  | $                  | 11,840 |  |                   |  | 32 | %                |                   | $ | 12,288 |                   |  |  | 39 | % |  |  | (4   | %) |  | $ | 26,283 |  |  |  | 34 | % |  | $ | 24,582 |  |  |  | 39 | % |  |  | 7    | % 
|                                            |  |                    |        |  |                   |  |    |                  |                   |   |        |                   |  |  |    |   |  |  |      |    |  |   |        |  |  |  |    |   |  |   |        |  |  |  |    |   |  |  |      |   
|SG&A expense:                               |  |                    |        |  |                   |  |    |                  |                   |   |        |                   |  |  |    |   |  |  |      |    |  |   |        |  |  |  |    |   |  |   |        |  |  |  |    |   |  |  |      |   
|SG&A - base                                 |  | $                  | 10,035 |  |                   |  | 27 | %                |                   | $ | 9,809  |                   |  |  | 31 | % |  |  | 2    | %  |  | $ | 20,820 |  |  |  | 27 | % |  | $ | 20,146 |  |  |  | 32 | % |  |  | 3    | % 
|Stock-based compensation                    |  |                    | 751    |  |                   |  | 2  | %                |                   |   | 767    |                   |  |  | 2  | % |  |  | (2   | %) |  |   | 2,297  |  |  |  | 3  | % |  |   | 1,474  |  |  |  | 2  | % |  |  | 56   | % 
|Amortization expense  acquired intangibles |  |                    | 297    |  |                   |  | 1  | %                |                   |   | 179    |                   |  |  | 1  | % |  |  | 66   | %  |  |   | 595    |  |  |  | 1  | % |  |   | 321    |  |  |  | 1  | % |  |  | 85   | % 
|Acquisition related costs                   |  |                    |       |  |                   |  |   | %                |                   |   | 620    |                   |  |  | 2  | % |  |  | (100 | %) |  |   | 328    |  |  |  |   | % |  |   | 4,546  |  |  |  | 7  | % |  |  | (93  | %)
|                                            |  |                    |        |  |                   |  |    |                  |                   |   |        |                   |  |  |    |   |  |  |      |    |  |   |        |  |  |  |    |   |  |   |        |  |  |  |    |   |  |  |      |   
|Total SG&A expense                          |  | $                  | 11,083 |  |                   |  | 30 | %                |                   | $ | 11,375 |                   |  |  | 36 | % |  |  | (3   | %) |  | $ | 24,040 |  |  |  | 31 | % |  | $ | 26,487 |  |  |  | 42 | % |  |  | (9   | %)
|                                            |  |                    |        |  |                   |  |    |                  |                   |   |        |                   |  |  |    |   |  |  |      |    |  |   |        |  |  |  |    |   |  |   |        |  |  |  |    |   |  |  |      |   



|* | Incremental revenues and operating expenses from Hifn, Galazar and Neterion have been included in our consolidated financial statements since April 4,
2009, June 18, 2009 and March 17, 2010, respectively.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Research and Development
(R&D)

Our R&D costs consist primarily of:



| |  |  | the salaries, stock-based compensation, and related expenses of employees engaged in product research, design and development activities;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs related to engineering design tools, mask tooling costs, software amortization, test hardware, and engineering supplies and services;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | amortization of acquired intangible assets; and
| | - |  | -----------------------------------------------



| |  |  | facilities expenses.
| | - |  | --------------------

The $0.6 million decrease in base R&D expenses for the three months ended September 26, 2010 as compared to the same period a year ago was primarily a result of decreased mask sets and outside
design offset by incremental labor-related expenses due to the acquisition of Neterion. The $0.5 million increase in base R&D expenses for the six months ended September 26, 2010 as compared to the same period a year ago was primarily a
result of incremental labor-related costs due to the Galazar and Neterion acquisitions partially offset by lower mask sets, outside services and tool maintenance costs. Included in the base R&D expenses are costs offsets as discussed below.



30



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##### Table of Contents



In connection with the
Hifn acquisition, we assumed a contractual agreement under which certain of our research and development costs are eligible for reimbursement. Amounts collected under this arrangement are offset against R&D expenses. For the second quarters of
fiscal 2011 and 2010, we offset $2.0 million and $1.7 million, respectively, of R&D expenses in connection with this agreement. For the first six months of fiscal 2011 and 2010, we offset $3.5 million and $2.4 million, respectively, of R&D
expenses in connection with the same agreement.

Stock-based compensation expense recorded in R&D expenses was $0.7
million for both of the second quarter of fiscal 2011 and 2010. The $1.0 million increase in stock-based compensation for the six months ended September 26, 2010 as compared to the same period a year ago reflects the increase in grants of
options and RSUs to employees in connection with our acquisitions and award based incentives to certain individuals.

The
growth in amortization expense  acquired intangibles relates to the shortening of the useful life of the R&D reimbursement contract associated with the Hifn acquisition that resulted in higher amortization expense.

Accelerated depreciation and other costs in the six months ended September 27, 2009 are primarily associated with the accelerated
depreciation relating to shortened remaining lives of equipment of $0.5 million acquired from Hifn and employee severance costs.

We believe that development R&D expenses will fluctuate as a percentage of sales and in absolute dollars due to, among other factors, higher mask costs in connection with advanced process geometries,
development for our 10 Gigabit Ethernet products, increased investment in software development, higher salaries due to additional employees from acquired companies, annual merit increases and fluctuations in reimbursements under the research and
development contract.

Selling, General and Administrative (SG&A)

SG&A expenses consist primarily of:



| |  |  | salaries, stock-based compensation and related expenses;
| | - |  | --------------------------------------------------------



| |  |  | sales commissions;
| | - |  | ------------------



| |  |  | professional and legal fees;
| | - |  | ----------------------------



| |  |  | amortization of acquired intangible assets such as distributor relationships, tradenames/trademarks and customer relationships; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | acquisition related costs.
| | - |  | --------------------------

The $0.2 million increase in base SG&A expenses for the three months ended September 26, 2010 as compared to the same period a year ago was primarily a result of incremental business taxes as
well as an accrual for a loss contingency. The $0.7 million increase in base SG&A expenses for the six months ended September 26, 2010 as compared to the same period a year ago was primarily a result of incremental labor-related costs, an
accrual for a loss contingency, incentives and trade show and advertising costs.

Stock-based compensation expense recorded in
SG&A expenses was $0.8 million for both of the second fiscal periods of 2011 and 2010. The $0.8 million increase in stock-based compensation for the six months ended September 26, 2010 as compared to the same period a year ago reflects the
increase in grants of options and RSUs to employees in connection with our acquisitions, award based incentives to certain individuals and performance based RSU grants to our executive officers.

Acquisition related costs in the six months ended September 26, 2010 primarily reflects remaining payments on a vacated Neterion
facility located in Sunnyvale, California. Acquisition related costs for the six months ended September 27, 2009 are primarily associated with $2.2 million in investment banker, printing, legal and other professional fees that are recorded as
expenses under business combinations accounting and the accelerated depreciation relating to shortened remaining lives of equipment of $0.8 million acquired from Hifn, employee severance of $0.6 million, and building exit and moving costs of $0.3
million related to the Hifn Los Gatos facility.

We believe that SG&A expenses will fluctuate as a percentage of sales and
in absolute dollars due to, among other factors, salaries of employees from acquired companies, variable commissions, legal costs and annual merit increases.



31



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##### Table of Contents



Other Income and
Expenses



|                                   |  |                    |        |   |                    |  |    |                  |                    |   |        |                    |  |  |    |    |  |  |     |    |  |   |        |   |  |  |    |    |  |   |        |   |  |  |    |    |  |  |     |   
|---------------------------------- |  | ------------------ | ------ | - | ------------------ |  | -- | ---------------- | ------------------ | - | ------ | ------------------ |  |  | -- | -- |  |  | --- | -- |  | - | ------ | - |  |  | -- | -- |  | - | ------ | - |  |  | -- | -- |  |  | --- | --
|(in thousands, except percentages) |  | Three Months Ended |        |   | Change             |  |    | Six Months Ended |                    |   | Change |                   
|                                   |  | September 
26,2010 |        |   | September 
27,2009 |  |    |                  | September 
26,2010 |   |        | September 
27,2009 |  | 
|Net Sales                          |  | $                  | 37,233 |   |                    |  |    |                  |                    | $ | 31,588 |                    |  |  |    |    |  |  |     |    |  | $ | 76,869 |   |  |  |    |    |  | $ | 62,450 |   |  |  |    |    |  |  |     |   
|                                   |  |                    |        |   |                    |  |    |                  |                    |  
|Interest income and other, net     |  |                    | 1,578  |   |                    |  | 4  | %                |                    |   | 1,700  |                    |  |  | 5  | %  |  |  | (7  | %) |  |   | 3,191  |   |  |  | 4  | %  |  |   | 3,454  |   |  |  | 6  | %  |  |  | (8  | %)
|Interest expense                   |  |                    | (316   | ) |                    |  | (1 | %)               |                    |   | (326   | )                  |  |  | (1 | %) |  |  | (3  | %) |  |   | (634   | ) |  |  | (1 | %) |  |   | (650   | ) |  |  | (1 | %) |  |  | (2  | %)
|Impairment charges on investments  |  |                    | (62    | ) |                    |  |   | %                |                    |   | (245   | )                  |  |  | (1 | %) |  |  | (75 | %) |  |   | (62    | ) |  |  |   | %  |  |   | (317   | ) |  |  | (1 | %) |  |  | (80 | %)

Interest Income and
Other, Net

Interest income and other, net primarily consists of:



| |  |  | interest income;
| | - |  | ----------------



| |  |  | sublease income;
| | - |  | ----------------



| |  |  | foreign exchange gains or losses;
| | - |  | ---------------------------------



| |  |  | realized gains or losses on marketable securities; and
| | - |  | ------------------------------------------------------



| |  |  | gains or losses on the sale or disposal of equipment.
| | - |  | -----------------------------------------------------

The decrease in interest income and other, net during the three and six months ended September 26, 2010 as compared to the same periods a year ago was primarily attributable to a decrease in interest
income as a result of lower invested interest earning balances and lower interest rates.

Our Hillview Facility, which we
originally leased from Mission West Properties, L.P., was sublet in April 2008. The sublease expires on March 31, 2011 with average annual rent of approximately $1.5 million. The sublease also requires the subtenant to pay certain operating
costs associated with subleasing the facility. The sublease income for the three and six months ended September 26, 2010 was approximately $0.4 million and $0.8 million, respectively. See Part I, Item 1, Notes to Condensed
Consolidated Financial Statements,Note 14  Lease Financing Obligation. The sublease income is derived from a tenant who is a venture backed, private company. If the subtenant were to experience financial difficulties, our sublease
would be impacted and costs to maintain and return the lease facility to the landlord could increase.

Interest Expense

In fiscal year 2008, in connection with the acquisition of Sipex, we assumed a lease financing obligation related to the
Hillview Facility. We have accounted for this sale and leaseback transaction as a financing transaction which is included in the Long-term lease financing obligation line item on the condensed consolidated balance sheet. The effective
interest rate is 8.2%.

We have also acquired engineering design tools (design tools) under capital leases. We
acquired $5.2 million of design tools in December 2007 under a four-year license, $3.7 million of design tools in November 2008 under a three-year license, and $1.3 million of design tools in February and June 2010 under two-year and three-year
licenses, which were accounted for as capital leases and recorded in the Property, plant and equipment, net line item on the condensed consolidated balance sheets. The related design tool obligations were included in the Long-term
lease financing obligations line on our condensed consolidated balance sheets. The effective interest rates for the design tools range from 4.0% to 7.25%.

Interest expense for the Hillview Facility lease financing and the design tools lease obligations was approximately $0.3 million and $0.6 million for the three and six months ended September 26,
2010, respectively.



32



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Impairment Charges
on Investments

We periodically review and determine whether our investments with unrealized loss positions are
other-than-temporarily impaired. We regularly review our investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and
estimates regarding credit ratings, collateralized support, the length of time and significance of a securitys loss position, our intent to not sell the security and whether it is more likely than not that we will not have to sell the security
before recovery of its cost basis. Realized gains and losses and declines in value of our investments, both marketable and non-marketable, judged to be other-than-temporary are reported in the Impairment charges on investments line item
in the condensed consolidated statements of operations.

Our long-term investment consists of our investment in Skypoint
Telecom Fund II (US), L.P. (Skypoint Fund). Skypoint Fund is a venture capital fund that invested primarily in private companies in the telecommunications and/or networking industries. We account for this non-marketable equity investment
under the cost method. We periodically review and determine whether the investment is other-than-temporarily impaired, in which case the investment is written down to its impaired value.

In the second quarter of fiscal 2010, we analyzed the fair value of the underlying investments of Skypoint Fund and concluded a portion
of the carrying value was other-than-temporarily impaired and recorded an impairment charge of $154,000 in addition to the $72,000 recorded in the first quarter of fiscal 2010.

In the second quarter of fiscal 2010 an investment in GSAA Home Equity with a cost of $425,000 was downgraded from an AAA rating to a CCC
rating. As a result of the reduction in the rating and quantitative analysis showing an increase in the default rate and decrease in prepayment rate of the investment, we recorded an other-than-temporary impairment charge of $91,000 during the
second quarter of fiscal 2010. In the second quarter of fiscal 2011, this investment continued to deteriorate and we recorded an additional charge of $62,000.

Provision for (Benefit from) Income Taxes

During the three and six
months ended September 26, 2010, we recorded an income tax expense of approximately $27,000 and $152,000, respectively. During the three and six months ended September 27, 2009, we recorded an income tax benefit of $281,000 and $609,000,
respectively. The increase in income tax expense was primarily due to expenses recorded during the first six months of fiscal 2011 for foreign taxable income.

LIQUIDITY AND CAPITAL RESOURCES



|                                                         |  |                        |         |   |                   |   |         |  
|-------------------------------------------------------- |  | ---------------------- | ------- | - | ----------------- | - | ------- | -
|                                                         |  | Six Months Ended       |        
|                                                         |  | September 26,2010      |         |   | September 27,2009 |  
|                                                         |  | (dollars in thousands) |        
|Cash and cash equivalents                                |  | $                      | 14,086  |   |                   | $ | 32,034  |  
|Short-term investments                                   |  |                        | 194,162 |   |                   |   | 189,411 |  
|                                                         |  |                        |         |   |                   |   |         |  
|Total cash, cash equivalents, and short-term investments |  | $                      | 208,248 |   |                   | $ | 221,445 |  
|                                                         |  |                        |         |   |                   |   |         |  
|Percentage of total assets                               |  |                        | 64      | % |                   |   | 67      | %
|                                                         |  |                       
|Net cash provided by (used in) operating activities      |  | $                      | 34      |   |                   | $ | (2,305  | )
|Net cash used in investing activities                    |  |                        | (10,314 | ) |                   |   | (54,145 | )
|Net cash used in financing activities                    |  |                        | (1,120  | ) |                   |   | (518    | )
|                                                         |  |                        |         |   |                   |   |         |  
|Net decrease in cash and cash equivalents                |  | $                      | (11,400 | ) |                   | $ | (56,968 | )
|                                                         |  |                        |         |   |                   |   |         |  

Our net loss was approximately $11.9 million for the six months ended September 26, 2010. After
adjustments for non-cash items and changes in working capital, we provided $34,000 of cash through operating activities.

Significant non-cash charges included:



| |  |  | depreciation and amortization expenses of $10.7 million;
| | - |  | --------------------------------------------------------



| |  |  | stock-based compensation expense of $4.8 million; and
| | - |  | -----------------------------------------------------



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| |  |  | provision for sales returns and allowances of $7.0 million.
| | - |  | -----------------------------------------------------------

Working capital changes included:



| |  |  | a $7.0 million increase in accounts receivable primarily due to excluding the noncash provision for sales returns and allowances line item of the
consolidated statements of cash flow;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $7.6 million increase in inventories primarily due to higher material receipts for our datacom and storage and power products in anticipation of
higher future shipments of our new products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $2.0 million increase in accounts payable primarily due to higher inventory receipts; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | a $1.9 million increase in deferred income and allowances on sales to distributors and related party as our distributors and related party have
increased their inventories.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the six months ended September 26, 2010, net cash used in investing
activities reflects net purchases of short-term marketable securities of $7.4 million and $2.6 million in purchases of property, plant and equipment and intellectual property.

From time to time, we acquire outstanding shares of our common stock in the open market to partially offset dilution from our equity awards, to increase our return on our invested capital and to bring our
cash to a more appropriate level for our company. On August 28, 2007, we established a share repurchase plan (2007 SRP) and authorized the repurchase of up to $100 million of our common stock. During the three and six months ended
September 26, 2010 and the three and six months ended September 27, 2009, we did not repurchase any shares under the 2007 SRP. As of September 26, 2010, the remaining authorized amount for the stock repurchase under the 2007 SRP was
$11.8 million. We may continue to utilize our share repurchase plan, which would reduce our cash, cash equivalents and/or short-term investments available to fund future operations and to meet other liquidity requirements.

To date, inflation has not had a significant impact on our operating results.

We anticipate that we will continue to finance our operations with cash flows from operations, existing cash and investment balances, and
some combination of long-term debt and/or lease financing and additional sales of equity securities. The combination and sources of capital will be determined by management based on our needs and prevailing market conditions.

The following table summarizes our investments in marketable securities (in thousands):



|                                      |  |                    |             |  |            |              |       |            |  |   |      |   |  |   |         | 
|------------------------------------- |  | ------------------ | ----------- |  | ---------- | ------------ | ----- | ---------- |  | - | ---- | - |  | - | ------- | 
|                                      |  | September 26, 2010 |            
|                                      |  | AmortizedCost      |             |  | Unrealized |              |       | Fair Value | 
|                                      |  |                    | Gross Gains |  |            | Gross Losses |       |           
|Money market funds                    |  | $                  | 8,552       |  |            | $            |      |            |  | $ |     |   |  | $ | 8,552   | 
|U.S. government and agency securities |  |                    | 47,785      |  |            |              | 650   |            |  |   |     |   |  |   | 48,435  | 
|Corporate bonds and commercial paper  |  |                    | 79,495      |  |            |              | 1,329 |            |  |   | (5   | ) |  |   | 80,819  | 
|Asset and mortgage-backed securities  |  |                    | 64,852      |  |            |              | 293   |            |  |   | (237 | ) |  |   | 64,908  | 
|                                      |  |                    |             |  |            |              |       |            |  |   |      |   |  |   |         | 
|Total investments                     |  | $                  | 200,684     |  |            | $            | 2,272 |            |  | $ | (242 | ) |  | $ | 202,714 | 
|                                      |  |                    |             |  |            |              |       |            |  |   |      |   |  |   |         | 
|                                      | 
|                                      |  | March 28, 2010     |            
|                                      |  | AmortizedCost      |             |  | Unrealized |              |       | Fair Value | 
|                                      |  |                    | Gross Gains |  |            | Gross Losses |       |           
|Money market funds                    |  | $                  | 19,616      |  |            | $            |      |            |  | $ |     |   |  | $ | 19,616  | 
|U.S. government and agency securities |  |                    | 58,943      |  |            |              | 835   |            |  |   | (31  | ) |  |   | 59,747  | 
|Corporate bonds and commercial paper  |  |                    | 61,240      |  |            |              | 900   |            |  |   | (18  | ) |  |   | 62,122  | 
|Asset and mortgage-backed securities  |  |                    | 64,329      |  |            |              | 496   |            |  |   | (96  | ) |  |   | 64,729  | 
|                                      |  |                    |             |  |            |              |       |            |  |   |      |   |  |   |         | 
|Total investments                     |  | $                  | 204,128     |  |            | $            | 2,231 |            |  | $ | (145 | ) |  | $ | 206,214 | 
|                                      |  |                    |             |  |            |              |       |            |  |   |      |   |  |   |         | 

As of September 26, 2010, asset-backed and mortgage-backed securities, accounted for 10% and 22%,
respectively, of our total investments in marketable securities of $202.7 million. The asset-backed securities are comprised primarily of premium tranches of auto loans and credit card receivables, while our mortgage-backed securities are primarily
from Federal agencies. We do not own auction rate securities nor do we own securities that are classified as sub-prime. As of the date of this Form 10-Q, we have sufficient liquidity and do not expect the need to sell these securities to fund normal
operations nor realize any significant losses in the short term. As of September 26, 2010, the net unrealized gain of our asset-backed and mortgage-backed securities totaled $56,000.



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We believe that our
cash and cash equivalents, short-term marketable securities and expected cash flows from operations will be sufficient to satisfy working capital requirements, capital equipment and intellectual property needs for at least the next 12 months.
However, should the demand for our products decrease in the future, the availability of cash flows from operations may be limited, thus having a material adverse effect on our financial condition or results of operations. From time to time, we
evaluate potential acquisitions, strategic arrangements and equity investments complementary to our design expertise and market strategy, which may include investments in wafer fabrication foundries. To the extent that we pursue or position
ourselves to pursue these transactions, we could consume a significant portion of our capital resources or choose to seek additional equity or debt financing. Additional financing may not be available on terms acceptable to us or at all. The sale of
additional equity or convertible debt could result in dilution to our stockholders.

RECENT ACCOUNTING PRONOUNCEMENTS

Please refer to Part I, Item 1. Financial Statements and Notes to Condensed Consolidated Financial
Statements, Note 2  Recent Accounting Pronouncements.

OFF-BALANCE SHEET ARRANGEMENTS

As of September 26, 2010, the Company has not utilized special purpose entities to facilitate off-balance sheet financing
arrangements. However, we have, in the normal course of business, entered into agreements which impose warranty obligations with respect to our products or which obligate us to provide indemnification of varying scope and terms to customers,
vendors, lessors and business partners, our directors and executive officers, purchasers of assets or subsidiaries, and other parties with respect to certain matters. These arrangements may constitute off-balance sheet transactions as
defined in Section 303(a)(4) of Regulation S-K. Please see Note 15. Commitments and Contingencies to the Condensed Consolidated Financial Statements for further discussion of our product warranty liabilities and
indemnification obligations.

As discussed in Note 15. Commitments and Contingencies, during the normal
course of business, we make certain indemnities and commitments under which we may be required to make payments in relation to certain transactions. These indemnities include non-infringement of patents and intellectual property, indemnities to our
customers in connection with the delivery, design, manufacture and sale of our products, indemnities to our directors and officers in connection with legal proceedings, indemnities to various lessors in connection with facility leases for certain
claims arising from such facility or lease, and indemnities to other parties to certain acquisition agreements. The duration of these indemnities and commitments varies, and in certain cases, is indefinite. We believe that substantially all of our
indemnities and commitments provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liability related to our indemnities and commitments because such
liabilities are contingent upon the occurrence of events which are not reasonably determinable. Management believes that any liability for these indemnities and commitments would not be material to our accompanying condensed consolidated financial
statements.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Our contractual obligations and commitments at September 26, 2010 were as follows (in thousands):



|                                                     |  |                        |        |  |                 |   |        |          |  |   |          |  |  |                  |    |  |  |   |   | 
|---------------------------------------------------- |  | ---------------------- | ------ |  | --------------- | - | ------ | -------- |  | - | -------- |  |  | ---------------- | -- |  |  | - | - | 
|                                                     |  | Payments due by period |       
|Contractual Obligations                              |  | Total                  |        |  | Less than1
year |   |        | 1-3years |  |   | 3-5years |  |  | More than5
years |   
|Purchase commitments (1)                             |  | $                      | 22,080 |  |                 | $ | 22,080 |          |  | $ |         |  |  | $                |   |  |  | $ |  | 
|Long-term lease financing obligations (2)            |  |                        | 5,613  |  |                 |   | 4,861  |          |  |   | 752      |  |  |                  |   |  |  |   |  | 
|Lease obligations (3)                                |  |                        | 1,948  |  |                 |   | 1,453  |          |  |   | 495      |  |  |                  |   |  |  |   |  | 
|Long-term investment commitments (Skypoint Fund) (4) |  |                        | 304    |  |                 |   | 304    |          |  |   |         |  |  |                  |   |  |  |   |  | 
|Remediation commitment (5)                           |  |                        | 128    |  |                 |   | 78     |          |  |   | 10       |  |  |                  | 40 |  |  |   |  | 
|                                                     |  |                        |        |  |                 |   |        |          |  |   |          |  |  |                  |    |  |  |   |   | 
|Total                                                |  | $                      | 30,073 |  |                 | $ | 28,776 |          |  | $ | 1,257    |  |  | $                | 40 |  |  | $ |  | 
|                                                     |  |                        |        |  |                 |   |        |          |  |   |          |  |  |                  |    |  |  |   |   | 



|Note: | The table above excludes the liability for unrecognized income tax benefit of approximately $3.6 million at September 26, 2010 since we cannot predict with
reasonable reliability the timing of cash settlements with the respective taxing authorities.
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(1) | We place purchase orders with wafer foundries and other vendors as part of our normal course of business. We expect to receive and pay for wafers, capital equipment and
various service contracts over the next 12 to 18 months from our existing cash balances.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes licensing agreements related to engineering design software of $4.9 million. Also includes $0.7 million related to the Hillview Facility, but excludes
approximately $12.2 million estimated final obligation settlement with the lessor by returning the Hillview Facility at the end of the lease term due on the Hillview Facility in Milpitas, California under a 5-year Standard Form Lease agreement that
we signed with Mission West Properties, L.P. on March 9, 2006, as amended on August 25, 2007. The lease term expires on March 31, 2011.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes lease payments related to worldwide offices and buildings.
|--- | -------------------------------------------------------------------

|(4) | The commitment related to the Skypoint Fund does not have a set payment schedule and thus will become payable upon the request from the Funds General Partner.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | The commitment relates to the environmental remediation activities of Micro Power Systems, Inc.
|--- | -----------------------------------------------------------------------------------------------



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Foreign Currency Fluctuations.We are exposed to foreign currency fluctuations primarily through our foreign operations. This exposure is the result of foreign operating expenses being denominated
in foreign currency. Operational currency requirements are typically forecasted for a one-month period. If there is a need to hedge this risk, we may enter into transactions to purchase currency in the open market or enter into forward currency
exchange contracts.

If our foreign operations forecasts are overstated or understated during periods of currency volatility,
we could experience unanticipated currency gains or losses. At September 26, 2010, we did not have significant foreign currency denominated net assets or net liabilities positions, and had no foreign currency contracts outstanding.

Investment Risk and Interest Rate Sensitivity. We maintain investment portfolio holdings of various issuers, types, and maturity
dates with two professional money management institutions. The market value of these investments on any given day during the investment term may vary as a result of market interest rate fluctuations. Our investment portfolio consisted of cash
equivalents, money market funds and fixed income securities of $202.7 million as of September 26, 2010 and $206.2 million as of March 28, 2010. These securities, like all fixed income instruments, are subject to interest rate risk and will
vary in value as market interest rates fluctuate. If market interest rates were to increase or decline immediately and uniformly by less than 10% from levels as of September 26, 2010, the increase or decline in the fair value of the portfolio
would not be material. At September 26, 2010, the difference between the fair market value and the underlying cost of the investments portfolio was a net unrealized gain of $2.0 million.

Our short-term investments are classified as available-for-sale securities and the cost of securities sold is based on the
specific identification method. At September 26, 2010, short-term investments consisted of asset and mortgage-backed securities, corporate bonds and government agency securities of $194.2 million.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and Procedures (Disclosure Controls)

Disclosure Controls, as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act, are controls and procedures designed to ensure that
information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods as specified in the SECs rules and forms. In
addition, Disclosure Controls are designed to ensure the accumulation and communications of information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, to our management, including the
Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), to allow timely decisions regarding required disclosure.

We evaluated the effectiveness of the design and operation of our Disclosure Controls, as defined by the rules and regulations of the SEC (the Evaluation), as of the end of the period covered
by this Quarterly Report on Form 10-Q. This Evaluation was performed under the supervision and with the participation of management, including our CEO, as principal executive officer, and CFO, as principal financial officer.

Attached as Exhibits 31.1 and 31.2 of this Quarterly Report on Form 10-Q are the certifications of the CEO and the CFO, respectively, in
compliance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Certifications). This section of the Quarterly Report on Form 10-Q provides information concerning the Evaluation referred to in the Certifications and should be
read in conjunction with the Certifications.

Based on the Evaluation, our CEO and CFO have concluded that our Disclosure
Controls are effective at the reasonable assurance level as of September 26, 2010.

Inherent Limitations on the
Effectiveness of Disclosure Controls

Our management, including the CEO and CFO, does not expect that our Disclosure
Controls will prevent all errors and all fraud. Disclosure Controls, no matter how well conceived, managed, utilized and monitored, can provide only reasonable assurance that the objectives of such controls are met. Therefore, because of the
inherent limitation of Disclosure Controls, no evaluation of such controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report
on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

The
disclosure in Notes to Condensed Consolidated Financial Statements, Note 16  Legal Proceedings contained in Part I, Item 1. Financial Statements is hereby incorporated by reference.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

We are
subject to the following risks that could materially adversely affect our business, results of operations and financial condition. The following risk factors and other information included in this Quarterly Report, in our Quarterly Report on Form
10-Q for the fiscal quarter ended June 27, 2010 and in our Annual Report on Form 10-K for our fiscal year ended March 28, 2010 should be carefully considered. The risks and uncertainties described below, in the Quarterly Report on Form
10-Q for the fiscal quarter ended June 27, 2010 and in our Annual Report on Form 10-K for our fiscal year ended March 28, 2010 are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently
deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected.

Global capital, credit market, employment, and general economic conditions, and resulting declines in consumer confidence and spending, could have
a material adverse effect on our business, operating results, and financial condition.

Periodic declines or
fluctuations in the U.S. dollar, corporate results of operations, interest rates, inflation or deflation, the global impact of sovereign debt, economic trends, actual or feared economic recessions, lower spending, the impact of conflicts
throughout the world, terrorist acts, natural disasters, volatile energy costs, the outbreak of communicable diseases and other geopolitical factors, have had, and may continue to have, a negative impact on the U.S. and global economies. Volatility
and disruption in the global capital and credit markets have led to a tightening of business credit and liquidity, a contraction of consumer credit, business failures, higher unemployment, and declines in consumer confidence and spending in the U.S.
and internationally. If global economic and financial market conditions, currently showing signs of recovery, deteriorate or remain weak for an extended period of time, many related factors could have a material adverse effect on our business,
operating results, and financial condition, including the following:



| |  |  | slower spending by consumers and market fluctuations may result in reduced demand for our products, reduced orders for our products, order
cancellations, lower revenues, increased inventories, and lower gross margins;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if we undertake restructuring activities due to economical pressure, we cannot guarantee that any of our restructuring efforts will be successful, or
that we will be able to realize the cost savings and other anticipated benefits from our previous or future restructuring plans, in addition, if we reduce our workforce, it may adversely impact our ability to respond rapidly to new growth
opportunities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | we may be unable to predict the strength or duration of market conditions or the effects of consolidation of our customers in their industries, which
may result in project delays or cancellations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be unable to find suitable investments that are safe, liquid, and provide a reasonable return resulting in lower interest income or longer
investment horizons, and disruptions to capital markets or the banking system may also impair the value of investments or bank deposits we currently consider safe or liquid;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the failure of financial institution counterparties to honor their obligations to us under credit instruments could jeopardize our ability to rely on
and benefit from those instruments, and our ability to replace those instruments on the same or similar terms may be limited under poor market conditions;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continued volatility in the markets and prices for commodities and raw materials we use in our products and in our supply chain could have a material
adverse effect on our costs, gross margins, and profitability;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if distributors of our products experience declining revenues, or experience difficulty obtaining financing in the capital and credit markets to
purchase our products, or experience severe financial difficulty, it could result in insolvency, reduced orders for our products, order cancellations, inability to timely meet payment obligations to us, extended payment terms, higher accounts
receivable, reduced cash flows, greater expenses associated with collection efforts, and increased bad debt expenses;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if contract manufacturers or foundries of our products or other participants in our supply chain experience difficulty obtaining financing in the
capital and credit markets to purchase raw materials or to finance general working capital needs, it may result in delays or non-delivery of shipments of our products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | potential shutdowns or over capacity constraints by our third-party foundry, assembly and test subcontractors could result in longer lead-times, higher
buffer inventory levels and degraded on-time delivery performance; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the current macroeconomic environment also limits our visibility into future purchases by our customers and renewals of existing agreements, which may
necessitate changes to our business model.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our financial results may fluctuate significantly because of a number of
factors, many of which are beyond our control.

Our financial results may fluctuate significantly as a result of a
number of factors, many of which are difficult or impossible to control or predict, which include:



| |  |  | the continuing effects of the recent economic downturn;
| | - |  | -------------------------------------------------------



| |  |  | the cyclical nature of the semiconductor industry;
| | - |  | --------------------------------------------------



| |  |  | difficulty in predicting revenues and ordering the correct mix of products from suppliers due to limited visibility provided by customers and channel
partners;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | fluctuations of our revenue and gross profits due to the mix of product sales as our margins vary by product;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | the impact of our revenue recognition policies on reported results; and
| | - |  | -----------------------------------------------------------------------



| |  |  | the reduction, rescheduling, cancellation or timing of orders by our customers, distributors and channel partners due to, among others, the following
factors:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | management of customer, subcontractor and/or channel inventory;
| | - |  | ---------------------------------------------------------------



| |  |  | delays in shipments from our subcontractors causing supply shortages;
| | - |  | ---------------------------------------------------------------------



| |  |  | inability of our subcontractors to provide quality products, in adequate quantities and in a timely manner;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | dependency on a single product with a single customer and/or distributor;
| | - |  | -------------------------------------------------------------------------



| |  |  | volatility of demand for equipment sold by our large customers, which in turn, introduces demand volatility for our products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



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| |  |  | disruption in customer demand as customers change or modify their complex subcontract manufacturing supply chain;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | disruption in customer demand due to technical or quality issues with our devices or components in their system;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | the inability of our customers to obtain components from their other suppliers;
| | - |  | -------------------------------------------------------------------------------



| |  |  | disruption in sales or distribution channels;
| | - |  | ---------------------------------------------



| |  |  | our ability to maintain and expand distributor relationships;
| | - |  | -------------------------------------------------------------



| |  |  | changes in sales and implementation cycles for our products;
| | - |  | ------------------------------------------------------------



| |  |  | the ability of our suppliers and customers to remain solvent, obtain financing or fund capital expenditures as a result of the recent global economic
slowdown;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | risks associated with entering new markets;
| | - |  | -------------------------------------------



| |  |  | the announcement or introduction of products by our existing competitors or new competitors;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | loss of market share by our customers;
| | - |  | --------------------------------------



| |  |  | competitive pressures on selling prices or product availability;
| | - |  | ----------------------------------------------------------------



| |  |  | pressures on selling prices overseas due to foreign currency exchange fluctuations;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | erosion of average selling prices coupled with the inability to sell newer products with higher average selling prices, resulting in lower overall
revenue and margins;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in product design releases;
| | - |  | ----------------------------------



| |  |  | market and/or customer acceptance of our products;
| | - |  | --------------------------------------------------



| |  |  | consolidation among our competitors, our customers and/or our customers customers;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | changes in our customers end user concentration or requirements;
| | - |  | -----------------------------------------------------------------



| |  |  | loss of one or more major customers;
| | - |  | ------------------------------------



| |  |  | significant changes in ordering pattern by major customers;
| | - |  | -----------------------------------------------------------



| |  |  | our or our channel partners ability to maintain and manage appropriate inventory levels;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the availability and cost of materials and services, including foundry, assembly and test capacity, needed by us from our foundries and other
manufacturing suppliers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | disruptions in our or our customers supply chain due to natural disasters, fire, outbreak of communicable diseases, labor disputes, civil unrest
or other reasons;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in successful transfer of manufacturing processes to our subcontractors;
| | - |  | -------------------------------------------------------------------------------



| |  |  | fluctuations in the manufacturing output, yields, and capacity of our suppliers;
| | - |  | --------------------------------------------------------------------------------



| |  |  | fluctuation in suppliers capacity due to reorganization, relocation or shift in business focus, financial constraints, or other reasons;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | problems, costs, or delays that we may face in shifting our products to smaller geometry process technologies and in achieving higher levels of design
and device integration;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to successfully introduce and transfer into production new products and/or integrate new technologies;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | increased manufacturing costs;
| | - |  | ------------------------------



| |  |  | higher mask tooling costs associated with advanced technologies; and
| | - |  | --------------------------------------------------------------------



| |  |  | the amount and timing of our investment in research and development;
| | - |  | --------------------------------------------------------------------



| |  |  | costs and business disruptions associated with stockholder or regulatory issues;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the timing and amount of employer payroll tax to be paid on our employees gains on stock options exercised;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | inability to generate profits to utilize net operating losses;
| | - |  | --------------------------------------------------------------



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| |  |  | increased costs and time associated with compliance with new accounting rules or new regulatory requirements;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | changes in accounting or other regulatory rules, such as the requirement to record assets and liabilities at fair value;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | write-off of some or all of our goodwill and other intangible assets;
| | - |  | ---------------------------------------------------------------------



| |  |  | fluctuations in interest rates and/or market values of our marketable securities;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | litigation costs associated with the defense of suits brought or complaints made against us; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | change in or continuation of certain tax provisions.
| | - |  | ----------------------------------------------------

Our expense levels are based, in part, on expectations of future revenues and are, to a large extent, fixed in the short-term. Our revenues are difficult to predict and at times we have failed to achieve
revenue expectations. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. If revenue levels are below expectations for any reason, our business, financial condition and results of operations
could be materially and adversely impacted.

If we fail to develop, introduce or enhance products that meet evolving market needs or
which are necessitated by technological advances, or we are unable to grow revenues, then our business, financial condition and results of operations could be materially and adversely impacted.

The markets for our products are characterized by a number of factors, some of which are listed below:



| |  |  | changing or disruptive technologies;
| | - |  | ------------------------------------



| |  |  | evolving and competing industry standards;
| | - |  | ------------------------------------------



| |  |  | changing customer requirements;
| | - |  | -------------------------------



| |  |  | increasing price pressure;
| | - |  | --------------------------



| |  |  | increasing product development costs;
| | - |  | -------------------------------------



| |  |  | long design-to-production cycles;
| | - |  | ---------------------------------



| |  |  | competitive solutions;
| | - |  | ----------------------



| |  |  | fluctuations in capital equipment spending levels and/or deployment;
| | - |  | --------------------------------------------------------------------



| |  |  | rapid adjustments in customer demand and inventory;
| | - |  | ---------------------------------------------------



| |  |  | increasing functional integration;
| | - |  | ----------------------------------



| |  |  | moderate to slow growth;
| | - |  | ------------------------



| |  |  | frequent product introductions and enhancements;
| | - |  | ------------------------------------------------



| |  |  | changing competitive landscape (consolidation, financial viability); and
| | - |  | ------------------------------------------------------------------------



| |  |  | finite market windows for product introductions.
| | - |  | ------------------------------------------------

Our growth depends in part on our successful continued development and customer acceptance of new products for our core markets. We must: (i) anticipate customer and market requirements and changes
in technology and industry standards; (ii) properly define and develop new products on a timely basis; (iii) gain access to and use technologies in a cost-effective manner; (iv) have suppliers produce quality products;
(v) continue to expand our technical and design expertise; (vi) introduce and cost-effectively manufacture new products on a timely basis; (vii) differentiate our products from our competitors offerings; and (viii) gain
customer acceptance of our products. In addition, we must continue to have our products designed into our customers future products and maintain close working relationships with key customers to define and develop new products that meet their
evolving needs. Moreover, we must respond in a rapid and cost-effective manner to shifts in market demands, the trend towards increasing functional integration and other changes. Migration from older products to newer products may result in
volatility of earnings as revenues from older products decline and revenues from newer products begin to grow.



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Products for our
customers applications are subject to continually evolving industry standards and new technologies. Our ability to compete will depend in part on our ability to identify and ensure compliance with these industry standards. The emergence of new
standards could render our products incompatible. We could be required to invest significant time, effort and expenses to develop and qualify new products to ensure compliance with industry standards.

The process of developing and supporting new products is complex, expensive and uncertain, and if we fail to accurately predict and
understand our customers changing needs and emerging technological trends, our business, financial condition and results of operations may be harmed. In addition, we may make significant investments to modify new products according to input
from our customers who may choose a competitors or an internal solution, or cancel their projects. We may not be able to identify new product opportunities successfully, develop and bring to market new products, achieve design wins, ensure
when and which design wins actually get released to production, or respond effectively to technological changes or product announcements by our competitors. In addition, we may not be successful in developing or using new technologies or may
incorrectly anticipate market demand and develop products that achieve little or no market acceptance. Our pursuit of technological advances may require substantial time and expense and may ultimately prove unsuccessful. Failure in any of these
areas may materially and adversely harm our business, financial condition and results of operations.

We have made and in the future may
make acquisitions and significant strategic equity investments, which may involve a number of risks. If we are unable to address these risks successfully, such acquisitions and investments could have a materially adverse effect on our business,
financial condition and results of operations.

We have recently undertaken a number of strategic acquisitions, have
made strategic investments in the past, and may make further strategic acquisitions and investments from time to time in the future. The risks involved with these acquisitions and investments include:



| |  |  | the possibility that we may not receive a favorable return on our investment or incur losses from our investment or the original investment may become
impaired;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | revenues or synergies could fall below projections or fail to materialize as assumed;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | failure to satisfy or set effective strategic objectives;
| | - |  | ---------------------------------------------------------



| |  |  | the opportunity cost associated with committing capital in such transactions;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the possibility of litigation arising from these transactions;
| | - |  | --------------------------------------------------------------



| |  |  | our assumption of known or unknown liabilities or other unanticipated events or circumstances; and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the diversion of managements attention from day-to-day operations of the business and the resulting potential disruptions to the ongoing
business.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

Additional risks involved with acquisitions include:



| |  |  | difficulties in integrating and managing various functional areas such as sales, engineering, marketing, and operations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in incorporating or leveraging acquired technologies and intellectual property rights in new products;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties or delays in the transfer of manufacturing flows and supply chains of products of acquired businesses;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | failure to retain and integrate key personnel;
| | - |  | ----------------------------------------------



| |  |  | failure to retain and maintain relationships with existing customers, distributors, channel partners and other parties;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | failure to manage and operate multiple geographic locations both effectively and efficiently;
| | - |  | ---------------------------------------------------------------------------------------------



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| |  |  | failure to coordinate research and development activities to enhance and develop new products and services in a timely manner that optimize the assets
and resources of the combined company;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in creating uniform standards, controls (including internal control over financial reporting), procedures, policies and information
systems;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unexpected capital equipment outlays and continuing expenses related to technical and operational integration;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in entering markets or retaining current markets in which we have limited or no direct prior experience and where competitors in such
markets may have stronger market positions;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | insufficient revenues to offset increased expenses associated with acquisitions;
| | - |  | --------------------------------------------------------------------------------



| |  |  | under-performance problems with an acquired company;
| | - |  | ----------------------------------------------------



| |  |  | issuance of common stock that would dilute our current stockholders percentage ownership;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | reduction in liquidity and interest income on lower cash balances;
| | - |  | ------------------------------------------------------------------



| |  |  | recording of goodwill and intangible assets that will be subject to periodic impairment testing and potential impairment charges against our future
earnings;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | incurring amortization expenses related to certain intangible assets; and
| | - |  | -------------------------------------------------------------------------



| |  |  | incurring large and immediate write-offs.
| | - |  | -----------------------------------------

Strategic equity investments also include risks associated with third parties managing the funds and the risk of poor strategic choices or execution of strategic and operating plans.

We may not address these risks successfully without substantial expense, delay or other operational or financial problems, or at all. Any
delays or other such operations or financial problems could materially and adversely impact our business, financial condition and results of operations.

If we are unable to convert a significant portion of our design wins into revenue, our business, financial condition and results of operations could be materially and adversely impacted.

We continue to secure design wins for new and existing products. Such design wins are necessary for revenue growth.
However, many of our design wins may never generate revenues if their end-customer projects are unsuccessful in the market place or the end-customer terminates the project, which may occur for a variety of reasons. Mergers, consolidations or cost
reduction activities among our customers may lead to termination of certain projects before the associated design win generates revenue. If design wins do generate revenue, the time lag between the design win and meaningful revenue is typically
between six months to greater than eighteen months. If we fail to convert a significant portion of our design wins into substantial revenue, our business, financial condition and results of operations could be materially and adversely impacted.
Under recent deteriorating global economic conditions, our design wins could be delayed even longer than the typical lag period and our eventual revenue could be less than anticipated from products that were introduced within the last eighteen to
thirty-six months, which would likely materially and adversely affect our business, financial condition and results of operations.

The
complexity of our products may lead to errors, defects and bugs, which could subject us to significant costs or damages and adversely affect market acceptance of our products.

Although we, our customers and our suppliers rigorously test our products, they may contain undetected errors, performance weaknesses,
defects or bugs when first introduced or as new versions are released. If any of our products contain production defects or reliability, quality or compatibility problems that are significant to our customers, our reputation may be damaged and
customers may be reluctant to continue to buy our products, which could adversely affect our ability to retain and attract new customers. In addition, these defects or bugs could interrupt or delay sales of affected products, which could materially
and adversely affect our business, financial condition and results of operations.



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If defects or bugs are
discovered after commencement of commercial production, we may be required to make significant expenditures of capital and other resources to resolve the problems. This could result in significant additional development costs and the diversion of
technical and other resources from our other development efforts. We could also incur significant costs to repair or replace defective products or may agree to be liable for certain damages incurred. These costs or damages could have a material
adverse effect on our business, financial condition and results of operations.

We derive a substantial portion of our revenues from
distributors, especially from our two primary distributors, Future Electronics Inc. (Future), a related party, and Nu Horizons Electronics Corp. (Nu Horizons). Our revenues would likely decline significantly if our primary
distributors elected not to promote or sell our products or if they elected to cancel, reduce or defer purchases of our products.

Future and Nu Horizons have historically accounted for a significant portion of our revenues, and they are our two primary distributors worldwide. We anticipate that sales of our products to these
distributors will continue to account for a significant portion of our revenues. The loss of either Future or Nu Horizons as a distributor, for any reason, or a significant reduction in orders from either of them would materially and adversely
affect our business, financial condition and results of operations.

Sales to Future and Nu Horizons are made under agreements
that provide protection against price reduction for their inventory of our products. As such, we could be exposed to significant liability if the inventory value of the products held by Future and Nu Horizons declined dramatically. Our distributor
agreements with Future and Nu Horizons do not contain minimum purchase commitments. As a result, Future and Nu Horizons could cease purchasing our products with short notice or cease distributing these products. In addition, they may defer or cancel
orders without penalty, which would likely cause our revenues to decline and materially and adversely impact our business, financial condition and results of operations.

On September 20, 2010, Arrow Electronics, Inc. announced a definitive agreement to acquire Nu Horizons in an all cash transaction for $7.00 per share. The acquisition has been approved by the
Boards of Directors of both companies and is subject to the approval of Nu Horizons' shareholders as well as customary regulatory approvals. The transaction is expected to close during the fourth quarter of 2010. It is uncertain at this point what
effect, if any, the acquisition may have on our relationship with the combined company going forward. As Nu Horizons is currently one of our two primary distributors, if the relationship were to be terminated or altered in an unfavorable fashion, it
could result in a material and adverse effect on our business, financial condition and/or results of operations.

If we are unable to
accurately forecast demand for our products, we may be unable to efficiently manage our inventory.

Due to the absence
of substantial non-cancelable backlog, we typically plan our production and inventory levels based on customer forecasts, internal evaluation of customer demand and current backlog, which can fluctuate substantially. As a consequence of inaccuracies
inherent in forecasting, inventory imbalances periodically occur that result in surplus amounts of some of our products and shortages of others. Such shortages can adversely impact customer relations and surpluses can result in larger-than-desired
inventory levels, which can materially and adversely impact our business, financial condition and results of operations. Due to the unpredictability of global economic conditions and increased difficulty in forecasting demand for our products, we
could experience an increase in inventory levels.

If our distributors or sales representatives stop selling or fail to successfully
promote our products, our business, financial condition and results of operations could be materially and adversely impacted.

We sell many of our products through sales representatives and distributors, many of which sell directly to OEMs, contract manufacturers and end customers. Our non-exclusive distributors and sales
representatives may carry our competitors products, which could adversely impact or limit sales of our products. Additionally, they could reduce or discontinue sales of our products or may not devote the resources necessary to sell our
products in the volumes and within the time frames that we expect. Our agreements with distributors contain limited provisions for return of our products, including stock rotations whereby distributors may return a percentage of their purchases from
us based upon a percentage of their most recent three or six months of shipments. In addition, in certain circumstances upon termination of the distributor relationship, distributors may return some portion of their prior purchases. The loss of
business from any of our significant distributors or the delay of significant orders from any of them, even if only temporary, could materially and adversely harm our business, financial conditions and results of operations.

Moreover, we depend on the continued viability and financial resources of these distributors and sales representatives, some of which are
small organizations with limited working capital. In turn, these distributors and sales representatives are subject to general economic and semiconductor industry conditions. We believe that our success will continue to depend on these distributors
and sales representatives. If some or all of our distributors and sales representatives experience financial difficulties, or otherwise become unable or unwilling to promote and sell our products, our business, financial condition and results of
operations could be materially and adversely impacted.



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Our distributors rely
heavily on the availability of short-term capital at reasonable rates to fund their ongoing operations. If this capital is not available, or is only available on onerous terms, certain distributors may not be able to pay for inventory received or we
may experience a reduction in orders from these distributors, which would likely cause our revenue to decline and materially and adversely impact our business, financial condition and results of operations.

We depend in part on the continued service of our key engineering and management personnel and our ability to identify, hire, incentivize and
retain qualified personnel. If we lose key employees or fail to identify, hire, incentivize and retain these individuals, our business, financial condition and results of operations could be materially and adversely impacted.

Our future success depends, in part, on the continued service of our key design engineering, technical, sales, marketing and executive
personnel and our ability to identify, hire, motivate and retain other qualified personnel.

Under certain circumstances,
including a company acquisition or business downturn, current and prospective employees may experience uncertainty about their future roles with us. Volatility or lack of positive performance in our stock price and the ability to offer equity
compensation to as many key employees or in amounts consistent with market practices, as a result of regulations regarding the expensing of equity awards, may also adversely affect our ability to retain key employees, all of whom have been granted
equity awards. In addition, competitors may recruit employees, as is common in the high tech sector. If we are unable to retain personnel that are critical to our future operations, we could face disruptions in operations, loss of existing
customers, loss of key information, expertise or know-how, and unanticipated additional recruitment and training costs.

Competition for skilled employees having specialized technical capabilities and industry-specific expertise is intense and continues to
be a considerable risk inherent in the markets in which we compete. At times, competition for such employees has been particularly notable in California and the Peoples Republic of China (PRC). Further, the PRC historically has
different managing principles from Western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems, making the successful identification and employment of qualified personnel
particularly important, and hiring and retaining a sufficient number of such qualified employees may be difficult. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting
financial data, books of account and records and instituting business practices that meet Western standards, which could materially and adversely impact our business, financial condition and results of operations.

Our employees are employed at-will, which means that they can terminate their employment at any time. Our international locations are
subject to local labor laws, which are often significantly different from U.S. labor laws and which may under certain conditions result in large separation costs upon termination. The failure to recruit and retain, as necessary, key design engineers
and technical, sales, marketing and executive personnel could materially and adversely impact our business, financial condition and results of operations.

Stock-based awards are critical to our ability to recruit, retain and motivate highly skilled talent. In making employment decisions, particularly in the semiconductor industry and the geographies where
our employees are located, a key consideration of current and potential employees is the value of the equity awards they receive in connection with their employment. If we are unable to offer employment packages with competitive equity award
component, our ability to attract highly skilled employees would be harmed. In addition, volatility in our stock price could result in a stock options exercise price exceeding the market value of our common stock or a deterioration in the
value of restricted stock units granted, thus lessening the effectiveness of stock-based awards for retaining and motivating employees. Similarly, decreases in the number of unvested in-the-money stock options held by existing employees, whether
because our stock price has declined, options have vested, or because the size of follow-on option grants has declined, may make it more difficult to retain and motivate employees. Consequently, we may not continue to successfully attract and retain
key employees, which could have an adverse effect on our business, financial condition and results of operations.

Occasionally, we
enter into agreements that expose us to potential damages that exceed the value of the agreement.

We have given
certain customers increased indemnification for product deficiencies or intellectual property infringement that is in excess of our standard limited warranty and indemnification provision and could possibly result in greater costs, in excess of the
original contract value. In an attempt to limit this liability, we have purchased an errors and omissions insurance policy to partially offset these potential additional costs; however, our insurance coverage could be insufficient in terms of amount
and/or coverage language to prevent us from suffering material losses if the indemnification amounts are large enough or if there are coverage issues.

We may be exposed to additional credit risk as a result of the addition of significant direct customers through recent acquisitions.

From time to time one of our customers has contributed more than 10% of our quarterly net sales. A number of our customers are OEMs, or
the manufacturing subcontractors of OEMs, which might result in an increase in concentrated credit risk with respect to our trade receivables and therefore, if a large customer were to be unable to pay, it could materially and adversely impact our
business, financial condition and results of operations.



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Any error in our sell-through
revenue recognition judgment or estimates could lead to inaccurate reporting of our net sales, gross profit, deferred income and allowances on sales to distributors and net income.

Sell-through revenue recognition is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion.
Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities of our products they still have in stock. We must use estimates and apply judgment to reconcile
distributors reported inventories to their activities. Any error in our judgment could lead to inaccurate reporting of our net sales, gross profit, deferred income and allowances on sales to distributors and net income.

Because a significant portion of our total assets were, and may again be with future potential acquisitions, represented by goodwill and other
intangible assets, which are subject to mandatory annual impairment evaluations, we could be required to write-off some or all of our goodwill and other intangible assets, which may materially and adversely impact our business, financial condition
and results of operations.

A significant portion of the purchase price for any business combination may be allocated
to identifiable tangible and intangible assets and assumed liabilities based on estimated fair values at the date of consummation. As required by GAAP, the excess purchase price, if any, over the fair value of these assets less liabilities typically
would be allocated to goodwill. We evaluate goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We typically conduct our annual analysis of our goodwill
in the fourth quarter of our fiscal year. In-process research and development (IPR&D) asset is considered an indefinite-lived intangible asset and is not subject to amortization until the conclusion of development. IPR&D must be
tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the IPR&D with its carrying amount. If the
carrying amount of the IPR&D exceeds its fair value, an impairment loss must be recognized in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of the IPR&D will be its new accounting basis.
If the fair value of the IPR&D exceeds the carrying amount, no adjustment is recorded. Subsequent reversal of a previously recognized impairment loss is prohibited. Once the IPR&D projects have been completed, the useful life of the
IPR&D asset is determined and amortized accordingly. Intangible assets that are subject to amortization are reviewed for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be
recoverable.

The assessment of goodwill and other intangible assets impairment is a subjective process. Estimations and
assumptions regarding future performance, results of our operations and comparability of our market capitalization and its net book value will be used. Changes in estimates and assumptions could impact fair value resulting in an impairment which
could materially and adversely impact on our business, financial condition and results of operations.

Our business may be materially
and adversely impacted if we fail to effectively utilize and incorporate acquired technology.

We have acquired and
may in the future acquire intellectual property in order to accelerate our time to market for new products. Acquisitions of intellectual property may involve risks such as successful technical integration into new products, market acceptance of new
products and achievement of planned return on investment. Successful technical integration in particular requires a variety of factors which we may not currently have, such as available technical staff with sufficient time to devote to integration,
the requisite skill sets to understand the acquired technology and the necessary support tools to effectively utilize the technology. The timely and efficient integration of acquired technology may be adversely impacted by inherent design
deficiencies or application requirements. The potential failure of or delay in product introduction utilizing acquired intellectual property could lead to an impairment of capitalized intellectual property acquisition costs.

If we are unable to compete effectively with existing or new competitors, we will experience fewer customer orders, reduced revenues, reduced gross
margins and lost market share.

We compete in markets that are intensely competitive, and which are subject to both
rapid technological change, continued price erosion and changing business terms with regard to risk allocation. Our competitors include many large domestic and foreign companies that have substantially greater financial, technical and management
resources, name recognition and leverage than we have. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to promote the sale of their products.



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We have experienced
increased competition at the design stage, where customers evaluate alternative solutions based on a number of factors, including price, performance, product features, technologies, and availability of long-term product supply and/or roadmap
guarantee. Additionally, we experience, in some cases, severe pressure on pricing from some of our competitors or on-going cost reduction expectations from customers. Such circumstances may make some of our products unattractive due to price or
performance measures and result in losing our design opportunities or causing a decrease in our revenue and margins. Also, competition from new companies in emerging economy countries with significantly lower costs could affect our selling price and
gross margins. In addition, if competitors in Asia reduce prices on commodity products, it would adversely affect our ability to compete effectively in that region. Specifically, we have licensed rights to Hangzhou Silan Microelectronics Co. Ltd.
and Hangzhou Silan Integrated Circuit Co. Ltd. (collectively Silan) in China to market our commodity interface products that could reduce our sales in the future should they become a meaningful competitor. Loss of competitive position
could result in price reductions, fewer customer orders, reduced revenues, reduced gross margins and loss of market share, any of which would affect our operating results and financial condition. To the extent that our competitors offer distributors
or sales representatives more favorable terms, these distributors and sales representatives may decline to carry, or discontinue carrying, our products. Our business, financial condition and results of operations could be harmed by any failure to
maintain and expand our distribution network. Furthermore, many of our existing and potential customers internally develop solutions which attempt to perform all or a portion of the functions performed by our products. To remain competitive, we
continue to evaluate our manufacturing operations for opportunities for additional cost savings and technological improvements. If we or our contract partners are unable to successfully implement new process technologies and to achieve volume
production of new products at acceptable yields, our business, financial condition and results of operations may be materially and adversely affected. Our future competitive performance depends on a number of factors, including our ability to:



| |  |  | increase device performance and improve manufacturing yields;
| | - |  | -------------------------------------------------------------



| |  |  | accurately identify emerging technological trends and demand for product features and performance characteristics;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | develop and maintain competitive and reliable products;
| | - |  | -------------------------------------------------------



| |  |  | enhance our products by adding innovative features that differentiate our products from those of our competitors;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | bring products to market on a timely basis at competitive prices;
| | - |  | -----------------------------------------------------------------



| |  |  | respond effectively to new technological changes or new product announcements by others;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | adapt products and processes to technological changes;
| | - |  | ------------------------------------------------------



| |  |  | adopt or set emerging industry standards;
| | - |  | -----------------------------------------



| |  |  | meet changing customer requirements; and
| | - |  | ----------------------------------------



| |  |  | provide adequate technical service and support.
| | - |  | -----------------------------------------------

Our design, development and introduction schedules for new products or enhancements to our existing and future products may not be met. In addition, these products or enhancements may not achieve market
acceptance, or we may not be able to sell these products at prices that are favorable which could materially and adversely affect on our business, financial condition and results of operations.

Soros Fund Management LLC, as principal investment manager for Quantum Partners LP (Soros), beneficially owns approximately 14.5% of
our common stock, and affiliates of Future, Alonim Investments Inc. and two of its affiliates (collectively Alonim), beneficially own approximately 17% of our common stock. As such, Alonim and Soros are our largest stockholders. These
substantial ownership positions allow Alonim and Soros to significantly influence matters requiring shareholder approval, which may or may not be in our best interests or the interest of the other holders of common stock. In addition, Alonim is an
affiliate of Future and an executive officer of Future is on our board of directors, which could lead to actual or perceived influence from Future.

Alonim and Soros each own a significant percentage of our outstanding shares. Due to such ownership, Alonim and Soros, acting independently or jointly, may be able to exert strong influence over actions
requiring the approval of our stockholders, including the election of directors, many types of change of control transactions and amendments to our charter documents. Further, if one of these stockholders were to sell or even propose to sell a large
number of their shares, the market price of our common stock could decline significantly.

Although we have no reason to
believe it to be the case, the interests of these significant stockholders could conflict with our best interests or the interests of the other stockholders. For example, the significant ownership percentages of these two stockholders could have the
effect of delaying or preventing a change of control or otherwise discouraging a potential acquirer from obtaining control of us, regardless of whether the change of control is supported by us and the other stockholders. Conversely, by virtue of
their percentage ownership of our stock, Alonim and/or Soros could facilitate a takeover transaction that our board of directors and/or the other stockholders did not approve.



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Further, Alonim is an
affiliate of Future, our largest distributor, and Pierre Guilbault, the chief financial officer of Future, is a member of our board of directors. These relationships could also result in actual or perceived attempts to influence management and/or
our stockholders to take actions beneficial to Future which may or may not be beneficial to us or in our best interests. Future could attempt to obtain terms and conditions more favorable than those we would typically provide our distributors
because of its relationship with us. Any such actual or perceived preferential treatment could materially and adversely affect our business, financial condition and results of operations.

We depend on third-party subcontractors to manufacture our products. We utilize wafer foundries for processing our wafers and assembly and test subcontractors for manufacturing and testing our
packaged products. Any disruption in or loss of subcontractors capacity to manufacture our products subjects us to a number of risks, including the potential for an inadequate supply of products and higher materials costs. These risks may lead
to delayed product delivery or increased costs, which could materially and adversely impact our business, financial condition and results of operations.

We do not own or operate a semiconductor fabrication facility or a foundry. We utilize various foundries for different processes. Our products are based on Complementary Metal Oxide Semiconductor
(CMOS) processes, bipolar processes and bipolar-CMOS (BiCMOS) processes. Globalfoundries Singapore Pte. Ltd. (f.k.a. Chartered Semiconductor Manufacturing Ltd.) (Globalfoundries) manufactures the majority of the
CMOS wafers from which the majority of our communications and UART products are produced. Episil Technologies, Inc. (Episil), located in Taiwan, and Silan, located in China, manufacture the majority of the CMOS and bipolar wafers from
which our power and serial products are produced. High Voltage BiCMOS power products are supplied by Polar Semiconductor (MN, USA) and Jazz Semiconductor (CA, USA). All of these foundries produce semiconductors for many other companies (many of
which have greater requirements than us), and therefore, we may not have access on a timely basis to sufficient capacity or certain process technologies and we do, from time to time, experience extended lead times on some products. In addition, we
rely on our foundries continued financial health and ability to continue to invest in smaller geometry manufacturing processes and additional wafer processing capacity.

Many of our new products are designed to take advantage of smaller geometry manufacturing processes. Due to the complexity and increased cost of migrating to smaller geometries as well as process changes,
we could experience interruptions in production or significantly reduced yields causing product introduction or delivery delays. If such delays occur, our products may have delayed market acceptance or customers may select our competitors
products during the design process.

New process technologies or new products can be subject to especially wide variations in
manufacturing yields and efficiency. There can be no assurance that our foundries or the foundries of our suppliers will not experience unfavorable yield variances or other manufacturing problems that result in delayed product introduction or
delivery delays.

We do not have long-term wafer supply agreements with Globalfoundries that would guarantee wafer quantities,
prices, and delivery or lead times, but we do provide minimum purchase commitments to Silan and Episil in accordance with our supply agreements. Subject to any such minimum purchase commitments, these foundries manufacture our products on a purchase
order basis. We provide our foundries with rolling forecasts of our production requirements. However, the ability of our foundries to provide wafers is limited by the foundries available capacity. There can be no assurance that our third-party
foundries will allocate sufficient capacity to satisfy our requirements.

Furthermore, any sudden reduction or elimination of
any primary source or sources of fully processed wafers could result in a material delay in the shipment of our products. Any delays or shortages will materially and adversely impact our business, financial condition and results of operations.

In addition, we may not continue to do business with our foundries on terms as favorable as our current terms. Significant
risks associated with our reliance on third-party foundries include:



| |  |  | consolidation in the industry leading to a change in control at key wafer suppliers;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the lack of assured process technology and wafer supply;
| | - |  | --------------------------------------------------------



| |  |  | limited control over quality assurance, manufacturing yields and production costs;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | financial and operating stability of the foundries;
| | - |  | ---------------------------------------------------



| |  |  | limited control over delivery schedules;
| | - |  | ----------------------------------------



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| |  |  | limited manufacturing capacity of the foundries; and
| | - |  | ----------------------------------------------------



| |  |  | potential misappropriation of our intellectual property.
| | - |  | --------------------------------------------------------

Our reliance on our wafer foundries and assembly and test subcontractors involves the following risks:



| |  |  | a manufacturing disruption or sudden reduction or elimination of any existing source or sources of semiconductor manufacturing materials or processes,
which might include the potential closure, change of ownership, change in business conditions or relationships, change of management or consolidation by one of our foundries;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | disruption of manufacturing or assembly or test services due to relocation or limited capacity of the foundries or subcontractors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | inability to obtain or develop technologies needed to manufacture our products;
| | - |  | -------------------------------------------------------------------------------



| |  |  | extended time required to identify, qualify and transfer to alternative manufacturing sources for existing or new products or the possible inability to
obtain an adequate alternative;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure of our foundries or subcontractors to obtain raw materials and equipment;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | increasing cost of raw materials and energy resulting in higher wafer or package costs;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | long-term financial and operating stability of the foundries, or their suppliers or subcontractors and their ability to invest in new capabilities and
expand capacity to meet increasing demand, to remain solvent, or to obtain financing in tight credit markets;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continuing measures taken by our suppliers such as reductions in force, pay reductions, forced time off or shut down of production for extended periods
of time to reduce and/or control operating expenses in response to weakened and weakening customer demand;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | subcontractors inability to transition to smaller package types or new package compositions;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | a sudden, sharp increase in demand for semiconductor devices, which could strain the foundries or subcontractors manufacturing resources
and cause delays in manufacturing and shipment of our products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | manufacturing quality control or process control issues, including reduced control over manufacturing yields, production schedules and product quality;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | disruption of transportation to and from Asia where most of our foundries and subcontractors are located;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | political, civil, labor and economic instability;
| | - |  | -------------------------------------------------



| |  |  | embargoes or other regulatory limitations affecting the availability of raw materials, equipment or changes in tax laws, tariffs, services and freight
rates; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | compliance with local or international regulatory requirements.
| | - |  | ---------------------------------------------------------------

Other additional risks associated with subcontractors include:



| |  |  | subcontractors imposing higher minimum order quantities for substrates;
| | - |  | -----------------------------------------------------------------------



| |  |  | potential increase in assembly and test costs;
| | - |  | ----------------------------------------------



| |  |  | our board level product volume may not be attractive to preferred manufacturing partners, which could result in higher pricing or having to qualify an
alternative vendor;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in selecting, qualifying and integrating new subcontractors;
| | - |  | -------------------------------------------------------------------------



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| |  |  | entry into take-or-pay agreements; and
| | - |  | ----------------------------------------



| |  |  | limited warranties from our subcontractors for products assembled and tested for us.
| | - |  | ------------------------------------------------------------------------------------

Our stock price is volatile.

The market price of our common stock has fluctuated significantly to date. In the future, the market price of our common stock could be subject to significant fluctuations due to, among other reasons:



| |  |  | our anticipated or actual operating results;
| | - |  | --------------------------------------------



| |  |  | announcements or introductions of new products by us or our competitors;
| | - |  | ------------------------------------------------------------------------



| |  |  | technological innovations by us or our competitors;
| | - |  | ---------------------------------------------------



| |  |  | investors perception of the semiconductor sector;
| | - |  | --------------------------------------------------



| |  |  | loss of or changes to key executives;
| | - |  | -------------------------------------



| |  |  | product delays or setbacks by us, our customers or our competitors;
| | - |  | -------------------------------------------------------------------



| |  |  | potential supply disruptions;
| | - |  | -----------------------------



| |  |  | sales channel interruptions;
| | - |  | ----------------------------



| |  |  | concentration of sales among a small number of customers;
| | - |  | ---------------------------------------------------------



| |  |  | conditions in our customers markets and the semiconductor markets;
| | - |  | -------------------------------------------------------------------



| |  |  | the commencement and/or results of litigation;
| | - |  | ----------------------------------------------



| |  |  | changes in estimates of our performance by securities analysts;
| | - |  | ---------------------------------------------------------------



| |  |  | decreases in the value of our investments or long-lived assets, thereby requiring an asset impairment charge against earnings;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | repurchasing shares of our common stock;
| | - |  | ----------------------------------------



| |  |  | announcements of merger or acquisition transactions; and/or
| | - |  | -----------------------------------------------------------



| |  |  | general global economic and capital market conditions.
| | - |  | ------------------------------------------------------

In the past, securities and class action litigation has been brought against companies following periods of volatility in the market prices of their securities. We may be the target of one or more of
these class action suits, which could result in significant costs and divert managements attention, thereby materially and adversely impact our business, financial condition and results of operations.

In addition, at times the stock market has experienced and is currently experiencing extreme price, volume and value fluctuations that
affect the market prices of the stock of many high technology companies, including semiconductor companies, and that are unrelated or disproportionate to the operating performance of those companies. Any such fluctuations may harm the market price
of our common stock.

Our results of operations could vary as a result of the methods, estimations and judgments we use in applying our
accounting policies.

The methods, estimates and judgments we use in applying our accounting policies have a
significant impact on our results of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties, assumptions and changes in rulemaking by the regulatory bodies; and factors may arise over time
that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates and judgments could materially and adversely impact our business, financial condition and results of operations. Our revenue reporting is highly
dependent on receiving pertinent and accurate data from our distributors in a timely fashion. Distributors provide us periodic data regarding the product, price, quantity and end customer when products are resold as well as the quantities of our
products they still have in stock. We must use estimates and apply judgment to reconcile distributors reported inventories to their activities. Any error in our judgment could lead to inaccurate reporting of our revenues, deferred income and
allowances on sales to distributors and net income.



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The final determination of our
income tax liability may be materially different from our income tax provision, which could have an adverse effect on our results of operations.

Our future effective tax rates may be adversely affected by a number of factors including:



| |  |  | the jurisdictions in which profits are determined to be earned and taxed;
| | - |  | -------------------------------------------------------------------------



| |  |  | the resolution of issues arising from tax audits with various tax authorities;
| | - |  | ------------------------------------------------------------------------------



| |  |  | changes in the valuation of our deferred tax assets and liabilities;
| | - |  | --------------------------------------------------------------------



| |  |  | adjustments to estimated taxes upon finalization of various tax returns;
| | - |  | ------------------------------------------------------------------------



| |  |  | increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill
in connection with acquisitions;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in available tax credits;
| | - |  | ---------------------------------



| |  |  | changes in stock-based compensation expense;
| | - |  | --------------------------------------------



| |  |  | changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles; and/or
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.
| | - |  | -----------------------------------------------------------------------------------------------

Any significant increase in our future effective tax rates could adversely impact net income for future periods. In addition, the U.S.
Internal Revenue Service (IRS) and other tax authorities regularly examine our income tax returns. Our results of operations could be materially and adversely impacted if these assessments or any other assessments resulting from the
examination of our income tax returns by the IRS or other taxing authorities are not resolved in our favor.

We have acquired
significant Net Operating Loss (NOL) carryforwards as a result of our acquisitions. The utilization of acquired NOL carryforwards is subject to the IRSs complex limitation rules that carry significant burdens of proof. Our eventual
ability to utilize our estimated NOL carryforwards is subject to IRS scrutiny and our future results may not benefit as a result of potential unfavorable IRS rulings.

Our engagement with foreign customers could cause fluctuations in our operating results, which could materially and adversely impact our business, financial condition and results of operations.

International sales have accounted for, and will likely continue to account for a significant portion of our
revenues, which subjects us to the following risks, among others:



| |  |  | changes in regulatory requirements;
| | - |  | -----------------------------------



| |  |  | tariffs and other barriers;
| | - |  | ---------------------------



| |  |  | timing and availability of export or import licenses;
| | - |  | -----------------------------------------------------



| |  |  | disruption of services due to political, civil, labor, and economic instability;
| | - |  | --------------------------------------------------------------------------------



| |  |  | disruption of services due to natural disasters outside the United States;
| | - |  | --------------------------------------------------------------------------



| |  |  | disruptions to customer operations outside the United States due to the outbreak of communicable diseases;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | difficulties in accounts receivable collections;
| | - |  | ------------------------------------------------



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| |  |  | difficulties in staffing and managing foreign subsidiary and branch operations;
| | - |  | -------------------------------------------------------------------------------



| |  |  | difficulties in managing sales channel partners;
| | - |  | ------------------------------------------------



| |  |  | difficulties in obtaining governmental approvals for communications and other products;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | limited intellectual property protection;
| | - |  | -----------------------------------------



| |  |  | foreign currency exchange fluctuations;
| | - |  | ---------------------------------------



| |  |  | the burden of complying with foreign laws and treaties;
| | - |  | -------------------------------------------------------



| |  |  | contractual or indemnity issues that are materially different from our standard sales terms; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | potentially adverse tax consequences.
| | - |  | -------------------------------------

In addition, because sales of our products have been denominated primarily in U.S. dollars, increases in the value of the U.S. dollar as compared with local currencies could make our products more
expensive to customers in the local currency of a particular country resulting in pricing pressures on our products. Increased international activity in the future may result in foreign currency denominated sales. Furthermore, because some of our
customers purchase orders and agreements are governed by foreign laws, we may be limited in our ability, or it may be too costly for us, to enforce our rights under these agreements and to collect damages, if awarded.

Because some of our integrated circuit products have lengthy sales cycles, we may experience substantial delays between incurring expenses related
to product development and the revenue derived from these products.

A portion of our revenue is derived from selling
integrated circuits to communications equipment vendors. Due to their product development cycle, we have typically experienced at least an eighteen-month time lapse between our initial contact with a customer and realizing volume shipments. We first
work with customers to achieve a design win, which may take nine months or longer. Our customers then complete their design, test and evaluation process and begin to ramp-up production, a period which typically lasts an additional nine months. The
customers of communications equipment manufacturers may also require a period of time for testing and evaluation, which may cause further delays. As a result, a significant period of time may elapse between our research and development efforts and
our realization of revenue, if any, from volume purchasing of our communications products by our customers. Due to the length of the communications equipment vendors product development cycle, the risks of project cancellation by our
customers, price erosion or volume reduction are common aspects of such engagements.

Our backlog may not result in revenue.

Due to the possibility of customer changes in delivery schedules and quantities actually purchased, cancellation of
orders, distributor returns or price reductions, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. The still unsettled and weakened economy increases the risk of purchase order cancellations
or delays, product returns and price reductions. We may not be able to meet our expected revenue levels or results of operations if there is a reduction in our order backlog for any particular period and we are unable to replace those sales during
the same period.

Earthquakes and other natural disasters may damage our facilities or those of our suppliers and customers.

Our corporate headquarters in Fremont, California is located near major earthquake faults that have experienced
seismic activity. In addition, some of our customers and suppliers are in locations which may be subject to similar natural disasters. In the event of a major earthquake or other natural disaster near our headquarters, our operations could be
disrupted. Similarly, a major earthquake or other natural disaster affecting one or more of our major customers or suppliers could adversely impact the operations of those affected, which could disrupt the supply or sales of our products and harm
our business, financial condition and results of operations.

Fixed operating expenses and our practice of ordering materials in
anticipation of projected customer demand could make it difficult for us to respond effectively to sudden swings in demand and result in higher than expected costs and excess inventory. Such sudden swings in demand could therefore have a material
adverse impact on our business, financial condition and results of operations.

Our operating expenses are relatively
fixed in the short to medium term, and therefore, we have limited ability to reduce expenses quickly and sufficiently in response to any revenue shortfall. In addition, we typically plan our production and inventory levels based on forecasts of
customer demand, which is highly unpredictable and can fluctuate substantially. From time to time, in response to anticipated long lead times to obtain inventory and materials from our outside suppliers and foundries, we may order materials in
advance of anticipated customer demand. This advance ordering may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize. This incremental cost could have a materially adverse impact on our
business, financial condition and results of operations.



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We may be unable to protect our
intellectual property rights, which could harm our competitive position.

Our ability to compete is affected by our
ability to protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, mask work registrations, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our
intellectual property rights. Despite these efforts, we may be unable to protect our proprietary information. Such intellectual property rights may not be recognized or if recognized, may not be commercially feasible to enforce. Moreover, our
competitors may independently develop technology that is substantially similar or superior to our technology.

More
specifically, our pending patent applications or any future applications may not be approved, and any issued patents may not provide us with competitive advantages or may be challenged by third parties. If challenged, our patents may be found to be
invalid or unenforceable, and the patents of others may have an adverse effect on our ability to do business. Furthermore, others may independently develop similar products or processes, duplicate our products or processes or design around any
patents that may be issued to us.

We could be required to pay substantial damages or could be subject to various equitable remedies if
it were proven that we infringed the intellectual property rights of others.

As a general matter, the semiconductor
industry is characterized by ongoing litigation regarding patents and other intellectual property rights. If a third party were to prove that our technology infringed its intellectual property rights, we could be required to pay substantial damages
for past infringement and could be required to pay license fees or royalties on future sales of our products. If we were required to pay such license fees whenever we sold our products, such fees could exceed our revenue. In addition, if it was
proven that we willfully infringed a third partys proprietary rights, we could be held liable for three times the amount of the damages that we would otherwise have to pay. Such intellectual property litigation could also require us to:



| |  |  | stop selling, incorporating or using our products that use the infringed intellectual property;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property, which license may not be available
on commercially reasonable terms, if at all; and/or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redesign our products so as not to use the infringed intellectual property, which may not be technically or commercially feasible.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

The defense of infringement claims and lawsuits, regardless of their outcome, would likely be expensive and
could require a significant portion of managements time. In addition, rather than litigating an infringement matter, we may determine that it is in our best interests to settle the matter. Terms of a settlement may include the payment of
damages and our agreement to license technology in exchange for a license fee and ongoing royalties. These fees could be substantial. If we were required to pay damages or otherwise became subject to such equitable remedies, our business, financial
condition and results of operations would suffer. Similarly, if we were required to pay license fees to third parties based on a successful infringement claim brought against us, such fees could exceed our revenue.



|ITEM 6. | EXHIBITS
|------- | --------

(a) Exhibits
required by Item 601 of Regulation S-K

See the Exhibit Index, which follows the signature page to this Quarterly
Report on Form 10-Q.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q of Exar Corporation to be signed on its behalf by the undersigned
thereunto duly authorized.



|                 |  |  |  |                               |  |                                                                                                                                      
|---------------- |  |  |  | ----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|                 |  |  |  | EXAR CORPORATION (Registrant)
|                 |  |  | 
|November 4, 2010 |  |  |  | By                            |  | /S/    KEVIN
BAUER                                                                                                                   
|                 |  |  |  |                               |  | Kevin Bauer Vice President and Chief Financial Officer (On the Registrants
Behalf and as Principal Financial and Accounting Officer)



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INDEX TO EXHIBITS



|               |  |                                                                                                                                                   |  |                           |  |               |  |             |  |           |  |  
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------------- |  | ----------- |  | --------- |  | -
|Exhibit
Number |  | Exhibit                                                                                                                                           |  | Incorporated by Reference |  | FiledHerewith
|               |  | Form                                                                                                                                              |  | File No.                  |  | Exhibit       |  | Filing Date | 
|               |  |                                                                                                                                                   |  |                           |  |              
|3.1            |  | Restated Certificate of Incorporation of Exar Corporation                                                                                         |  | 8-K                       |  | 0-14225       |  | 3.3         |  | 9/17/2010 |  |  
|               |  |                                                                                                                                                   |  |                           |  |              
|3.2            |  | Bylaws of Exar Corporation                                                                                                                        |  | 8-K                       |  | 0-14225       |  | 3.1         |  | 9/17/2010 |  |  
|               |  |                                                                                                                                                   |  |                           |  |              
|10.1           |  | Exar Corporation 2006 Equity Incentive Plan                                                                                                       |  | 8-K                       |  | 0-14225       |  | 10.1        |  | 9/17/2010 |  |  
|               |  |                                                                                                                                                   |  |                           |  |              
|10.2           |  | Letter Agreement with Kevin Bauer                                                                                                                 |  | 8-K                       |  | 0-14225       |  | 10.2        |  | 9/17/2010 |  |  
|               |  |                                                                                                                                                   |  |                           |  |              
|10.3           |  | Exar Corporation Corporate Governance Principles                                                                                                  |  | 8-K                       |  | 0-14225       |  | 10.3        |  | 9/17/2010 |  |  
|               |  |                                                                                                                                                   |  |                           |  |              
|10.4           |  | Compensation Committee Charter                                                                                                                    |  | 8-K                       |  | 0-14225       |  | 10.4        |  | 9/17/2010 |  |  
|               |  |                                                                                                                                                   |  |                           |  |              
|10.5           |  | Audit Committee Charter                                                                                                                           |  | 8-K                       |  | 0-14225       |  | 10.5        |  | 9/17/2010 |  |  
|               |  |                                                                                                                                                   |  |                           |  |              
|10.6           |  | Corporate Governance and Nominating Committee Charter                                                                                             |  | 8-K                       |  | 0-14225       |  | 10.6        |  | 9/17/2010 |  |  
|               |  |                                                                                                                                                   |  |                           |  |              
|10.7           |  | Director Restricted Stock Unit Award Agreement                                                                                                    |  |                           |  |               |  |             |  |           |  | X
|               |  |                                                                                                                                                   |  |                           |  |              
|31.1           |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)                                                                  |  |                           |  |               |  |             |  |           |  | X
|               |  |                                                                                                                                                   |  |                           |  |              
|31.2           |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)                                                                  |  |                           |  |               |  |             |  |           |  | X
|               |  |                                                                                                                                                   |  |                           |  |              
|32.1           |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  |                           |  |               |  |             |  |           |  | X
|               |  |                                                                                                                                                   |  |                           |  |              
|32.2           |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  |                           |  |               |  |             |  |           |  | X



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