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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 28, 2008

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 No.)

48720 Kato Road, Fremont, CA 94538

(Address of principal executive offices)

(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 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   ̈                      |  | Smaller reporting company   ̈
|                           |  |                      |  | (Do not check if a 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

As of October 24, 2008, 42,900,842,shares of the Registrants Common Stock, par value $0.0001, were issued and outstanding, net of 19,835,425 treasury shares.









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EXAR CORPORATION AND SUBSIDIARIES

INDEX TO

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2008



|         |  |                                                                                       |  |     
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                       |  | 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 |  | 24  
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 33  
|Item 4.  |  | Controls and Procedures                                                               |  | 33  
|         |  |                                                                                      
|         |  | PART II  OTHER INFORMATION                                                           |  |     
|         |  |                                                                                      
|Item 1.  |  | Legal Proceedings                                                                     |  | 34  
|Item 1A. |  | Risk Factors                                                                          |  | 34  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 49  
|Item 6.  |  | Exhibits                                                                              |  | 49  
|         |  | Signatures                                                                            |  | 50  



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 28,2008 |          |   | March 30,2008 |  
|ASSETS                                                                                                                                                                                                 |  |                   |          |   |               |   |          |  
|Current assets:                                                                                                                                                                                        |  |                   |          |   |               |   |          |  
|Cash and cash equivalents                                                                                                                                                                              |  | $                 | 58,377   |   |               | $ | 122,016  |  
|Short-term marketable securities                                                                                                                                                                       |  |                   | 202,375  |   |               |   | 146,844  |  
|Accounts receivable (net of allowances of $777 and $714)                                                                                                                                               |  |                   | 10,375   |   |               |   | 9,943    |  
|Accounts receivable, related party (net of allowances of $882 and $1,421)                                                                                                                              |  |                   | 2,371    |   |               |   | 3,712    |  
|Inventories                                                                                                                                                                                            |  |                   | 15,426   |   |               |   | 14,201   |  
|Interest receivable and prepaid expenses                                                                                                                                                               |  |                   | 3,222    |   |               |   | 3,889    |  
|Deferred income taxes                                                                                                                                                                                  |  |                   | 466      |   |               |   | 507      |  
|                                                                                                                                                                                                       |  |                   |          |   |               |   |          |  
|Total current assets                                                                                                                                                                                   |  |                   | 292,612  |   |               |   | 301,112  |  
|Property, plant and equipment, net                                                                                                                                                                     |  |                   | 43,826   |   |               |   | 46,130   |  
|Goodwill                                                                                                                                                                                               |  |                   | 47,208   |   |               |   | 47,626   |  
|Intangible assets, net                                                                                                                                                                                 |  |                   | 22,887   |   |               |   | 26,019   |  
|Other non-current assets                                                                                                                                                                               |  |                   | 2,581    |   |               |   | 3,333    |  
|                                                                                                                                                                                                       |  |                   |          |   |               |   |          |  
|Total assets                                                                                                                                                                                           |  | $                 | 409,114  |   |               | $ | 424,220  |  
|                                                                                                                                                                                                       |  |                   |          |   |               |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                   |  |                   |          |   |               |   |          |  
|Current liabilities:                                                                                                                                                                                   |  |                   |          |   |               |   |          |  
|Accounts payable                                                                                                                                                                                       |  | $                 | 8,379    |   |               | $ | 8,801    |  
|Accrued compensation and related benefits                                                                                                                                                              |  |                   | 6,000    |   |               |   | 5,744    |  
|Deferred income and allowance on sales to distributors                                                                                                                                                 |  |                   | 3,583    |   |               |   | 3,253    |  
|Deferred income and allowance on sales to distributors, related party                                                                                                                                  |  |                   | 8,817    |   |               |   | 9,118    |  
|Other accrued expenses                                                                                                                                                                                 |  |                   | 8,577    |   |               |   | 8,136    |  
|                                                                                                                                                                                                       |  |                   |          |   |               |   |          |  
|Total current liabilities                                                                                                                                                                              |  |                   | 35,356   |   |               |   | 35,052   |  
|Long-term lease financing obligations                                                                                                                                                                  |  |                   | 15,581   |   |               |   | 16,379   |  
|Other non-current obligations                                                                                                                                                                          |  |                   | 1,648    |   |               |   | 1,712    |  
|                                                                                                                                                                                                       |  |                   |          |   |               |   |          |  
|Total liabilities                                                                                                                                                                                      |  |                   | 52,585   |   |               |   | 53,143   |  
|                                                                                                                                                                                                       |  |                   |          |   |               |   |          |  
|Commitments and contingencies (Notes 15, 16 and 17)                                                                                                                                                    |  |                   |          |   |               |   |          |  
|Total 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; 42,847,218 and 43,928,762 shares issued and outstanding at September 28,
2008 and March 30, 2008, respectively (net of treasury shares) |  |                   | 4        |   |               |   | 4        |  
|Additional paid-in capital                                                                                                                                                                             |  |                   | 707,237  |   |               |   | 702,218  |  
|Accumulated other comprehensive income (loss)                                                                                                                                                          |  |                   | (134     | ) |               |   | 1,873    |  
|Treasury stock at cost, 19,835,425 and 18,288,021 shares at September 28, 2008 and March 30, 2008, respectively                                                                                        |  |                   | (248,450 | ) |               |   | (235,538 | )
|Accumulated deficit                                                                                                                                                                                    |  |                   | (102,128 | ) |               |   | (97,480  | )
|                                                                                                                                                                                                       |  |                   |          |   |               |   |          |  
|Total stockholders equity                                                                                                                                                                             |  |                   | 356,529  |   |               |   | 371,077  |  
|                                                                                                                                                                                                       |  |                   |          |   |               |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                             |  | $                 | 409,114  |   |               | $ | 424,220  |  
|                                                                                                                                                                                                       |  |                   |          |   |               |   |          |  

See accompanying Notes to Condensed Consolidated Financial Statements



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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 28,2008  |        |   | September 30,2007 |   |         | September 28,2008 |  |   | September 30,2007 |  
|Net sales                                               |  | $                  | 21,581 |   |                   | $ | 15,479  |                   |  | $ | 41,752            |   |  | $ | 28,878  |  
|Net sales, related party                                |  |                    | 11,167 |   |                   |   | 3,694   |                   |  |   | 23,207            |   |  |   | 7,396   |  
|                                                        |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total net sales                                         |  |                    | 32,748 |   |                   |   | 19,173  |                   |  |   | 64,959            |   |  |   | 36,274  |  
|                                                        |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Cost of sales:                                          |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Cost of sales                                           |  |                    | 11,579 |   |                   |   | 5,748   |                   |  |   | 22,518            |   |  |   | 10,211  |  
|Cost of sales, related party                            |  |                    | 5,208  |   |                   |   | 1,442   |                   |  |   | 11,055            |   |  |   | 2,483   |  
|Amortization of purchased intangible assets             |  |                    | 956    |   |                   |   | 1,499   |                   |  |   | 1,911             |   |  |   | 1,739   |  
|                                                        |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total cost of sales                                     |  |                    | 17,743 |   |                   |   | 8,689   |                   |  |   | 35,484            |   |  |   | 14,433  |  
|                                                        |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Gross profit                                            |  |                    | 15,005 |   |                   |   | 10,484  |                   |  |   | 29,475            |   |  |   | 21,841  |  
|                                                        |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Operating expenses:                                     |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Research and development                                |  |                    | 8,133  |   |                   |   | 7,452   |                   |  |   | 16,225            |   |  |   | 13,511  |  
|Acquired in-process research and development            |  |                    |       |   |                   |   | 8,800   |                   |  |   |                  |   |  |   | 8,800   |  
|Selling, general and administrative                     |  |                    | 9,746  |   |                   |   | 8,503   |                   |  |   | 21,047            |   |  |   | 14,033  |  
|                                                        |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total operating expenses                                |  |                    | 17,879 |   |                   |   | 24,755  |                   |  |   | 37,272            |   |  |   | 36,344  |  
|Loss from operations                                    |  |                    | (2,874 | ) |                   |   | (14,271 | )                 |  |   | (7,797            | ) |  |   | (14,503 | )
|Other income and expense, net:                          |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Interest income and other, net                          |  |                    | 2,508  |   |                   |   | 4,588   |                   |  |   | 4,960             |   |  |   | 9,064   |  
|Interest expense                                        |  |                    | (330   | ) |                   |   | (152    | )                 |  |   | (661              | ) |  |   | (152    | )
|Impairment charges on investments, net of realized gain |  |                    | (1,427 | ) |                   |   | (418    | )                 |  |   | (1,209            | ) |  |   | (397    | )
|                                                        |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total other income and expense, net                     |  |                    | 751    |   |                   |   | 4,018   |                   |  |   | 3,090             |   |  |   | 8,515   |  
|Loss before income taxes                                |  |                    | (2,123 | ) |                   |   | (10,253 | )                 |  |   | (4,707            | ) |  |   | (5,988  | )
|Provision (benefit) from income taxes                   |  |                    | 64     |   |                   |   | 6,157   |                   |  |   | (59               | ) |  |   | 5,811   |  
|                                                        |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net loss                                                |  | $                  | (2,187 | ) |                   | $ | (16,410 | )                 |  | $ | (4,648            | ) |  | $ | (11,799 | )
|                                                        |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Loss per share:                                         |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Basic loss per share                                    |  | $                  | (0.05  | ) |                   | $ | (0.39   | )                 |  | $ | (0.11             | ) |  | $ | (0.30   | )
|                                                        |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Diluted loss per share                                  |  | $                  | (0.05  | ) |                   | $ | (0.39   | )                 |  | $ | (0.11             | ) |  | $ | (0.30   | )
|                                                        |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Shares used in the computation of loss per share:       |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Basic                                                   |  |                    | 42,735 |   |                   |   | 41,796  |                   |  |   | 42,854            |   |  |   | 38,843  |  
|                                                        |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Diluted                                                 |  |                    | 42,735 |   |                   |   | 41,796  |                   |  |   | 42,854            |   |  |   | 38,843  |  
|                                                        |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  

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 28,2008 |          |   | September 30,2007 |  
|Cash flows from operating activities:                                                  |  |                   |          |   |                   |   |          |  
|Net loss                                                                               |  | $                 | (4,648   | ) |                   | $ | (11,799  | )
|Reconciliation of net loss to net cash provided by operating activities:               |  |                   |          |   |                   |   |          |  
|Acquired in-process research and development                                           |  |                   |         |   |                   |   | 8,800    |  
|Depreciation and amortization                                                          |  |                   | 7,145    |   |                   |   | 4,421    |  
|Deferred income taxes                                                                  |  |                   |         |   |                   |   | 11,410   |  
|Stock-based compensation expense                                                       |  |                   | 2,449    |   |                   |   | 2,129    |  
|Provision (reversal of) for sales returns and allowances                               |  |                   | (284     | ) |                   |   | 1,914    |  
|Impairment on investments                                                              |  |                   | 1,454    |   |                   |   | 449      |  
|Tax benefits from stock plans                                                          |  |                   |         |   |                   |   | 174      |  
|Changes in operating assets and liabilities, net of effect of the Sipex merger:        |  |                   |          |   |                   |   |          |  
|Accounts receivable                                                                    |  |                   | 1,193    |   |                   |   | (5,003   | )
|Inventories                                                                            |  |                   | (1,258   | ) |                   |   | 984      |  
|Prepaid expenses and other assets                                                      |  |                   | 821      |   |                   |   | (3,498   | )
|Accounts payable                                                                       |  |                   | (421     | ) |                   |   | (1,145   | )
|Other accrued expenses                                                                 |  |                   | 221      |   |                   |   | (3,694   | )
|Income taxes payable                                                                   |  |                   | 27       |   |                   |   | (4,486   | )
|Deferred income and allowance on sales to distributors                                 |  |                   | 447      |   |                   |   | 2,781    |  
|Accrued compensation and related benefits                                              |  |                   | 256      |   |                   |   | 3,506    |  
|                                                                                       |  |                   |          |   |                   |   |          |  
|Net cash provided by operating activities                                              |  |                   | 7,402    |   |                   |   | 6,943    |  
|                                                                                       |  |                   |          |   |                   |   |          |  
|Cash flows from investing activities:                                                  |  |                   |          |   |                   |   |          |  
|Purchases of property, plant and equipment and intellectual property                   |  |                   | (1,289   | ) |                   |   | (511     | )
|Purchases of short-term marketable securities                                          |  |                   | (124,465 | ) |                   |   | (273,248 | )
|Proceeds from sales and maturities of short-term marketable securities                 |  |                   | 65,955   |   |                   |   | 285,449  |  
|Contributions to long-term investments                                                 |  |                   | (157     | ) |                   |   | (284     | )
|Acquisition of Sipex, net of cash acquired and transaction costs                       |  |                   |         |   |                   |   | (2,916   | )
|                                                                                       |  |                   |          |   |                   |   |          |  
|Net cash provided by (used in) investing activities                                    |  |                   | (59,956  | ) |                   |   | 8,490    |  
|                                                                                       |  |                   |          |   |                   |   |          |  
|Cash flows from financing activities:                                                  |  |                   |          |   |                   |   |          |  
|Repurchase of common stock                                                             |  |                   | (12,913  | ) |                   |   | (32,361  | )
|Proceeds from issuance of common stock                                                 |  |                   | 2,368    |   |                   |   | 2,158    |  
|Repayment of bank borrowings                                                           |  |                   |         |   |                   |   | (5,291   | )
|Repayment of lease financing obligations                                               |  |                   | (540     | ) |                   |   | (19      | )
|                                                                                       |  |                   |          |   |                   |   |          |  
|Net cash used in financing activities                                                  |  |                   | (11,085  | ) |                   |   | (35,513  | )
|Effect of exchange rate changes on cash                                                |  |                   |         |   |                   |   | (92      | )
|                                                                                       |  |                   |          |   |                   |   |          |  
|Net decrease in cash and cash equivalents                                              |  |                   | (63,639  | ) |                   |   | (20,172  | )
|Cash and cash equivalents at the beginning of period                                   |  |                   | 122,016  |   |                   |   | 119,809  |  
|                                                                                       |  |                   |          |   |                   |   |          |  
|Cash and cash equivalents at the end of period                                         |  | $                 | 58,377   |   |                   | $ | 99,637   |  
|                                                                                       |  |                   |          |   |                   |   |          |  
|Supplemental disclosure of non-cash investing and financing activities:                |  |                   |          |   |                   |   |          |  
|Issuance of common stock in consideration for acquired assets and liabilities of Sipex |  | $                 |         |   |                   | $ | 229,999  |  
|Assumption of vested options and warrants                                              |  | $                 |         |   |                   | $ | 11,890   |  

See accompanying Notes to Condensed Consolidated Financial Statements



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. ORGANIZATION AND BASIS OF
PRESENTATION

Description of Business

Exar
Corporation (together with its subsidiaries, Exar or we) was incorporated in California in 1971 and reincorporated in Delaware in 1991. We are a fabless semiconductor company that designs, develops, markets and sells power
management and connectivity silicon solutions. 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 and industrial automation equipment.

In December 2007, we changed our fiscal year end from a fiscal year ending as of the last day of March to a
52-53 week fiscal year ending on the Sunday closest to March 31. As part of this change, each fiscal quarter also ends on the Sunday closest to the end of the corresponding calendar quarter. The second fiscal quarters of 2009 and 2008 included
91 and 92 days from June 30, 2008 to September 28, 2008 and July 1, 2007 to September 30, 2007, respectively.

On August 25, 2007,
we acquired Sipex Corporation (Sipex) through the merger of Sipex and a subsidiary of Exar. Accordingly, the results of operations of Sipex and the estimated fair value of assets acquired and liabilities assumed were included in our
consolidated financial statements beginning August 26, 2007.

Basis of Presentation and Use of Management Estimates

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States
(GAAP) and include Exar and its wholly-owned subsidiaries. This financial information reflects all adjustments, which are, in our opinion, of a normal and recurring nature and necessary to state fairly the statements of financial
position, results of operations and cash flows for the dates and periods presented. The March 30, 2008 condensed consolidated balance sheet was derived from the audited financial statements at that date, but does not include all disclosures
required by GAAP. All significant inter-company transactions and balances have been eliminated.

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. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the fiscal year ended
March 30, 2008 included in our Annual Report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A and our Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 2008, as amended by Amendment No. 1 on Form
10-Q/A, as filed with the Securities and Exchange Commission (SEC). The results of operations for the three and six months ended September 28, 2008 are not necessarily indicative of the results to be expected for any future period.

To conform with current period presentation, we have reclassified net realized gain on investments from Interest income and other, net to
Impairment charges on investments, net of realized gain line time on the condensed consolidated statements of operations.

NOTE 2.
ACCOUNTING POLICIES

Recent Accounting Pronouncements

In April 2008, the Financial Accounting Standards Board (FASB) issued Staff Position No. FAS 142-3,Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets (FAS
142). FSP 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under Statement of Financial
Accounting Standards No. 141 (revised 2007),Business Combinations (FAS 141R), and other guidance under GAAP. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the
impact, if any, of the adoption of FSP 142-3 on our financial position, results of operations and liquidity.



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In December 2007, the FASB issued FAS 141R, which replaces FAS 141. The statement retains the purchase method of
accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized under purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. FAS 141R is effective for financial statements issued for fiscal years beginning
after December 15, 2008 and will apply prospectively to business combinations completed on or after that date. We will adopt FAS 141R in fiscal year 2010 and its effects on future periods will depend on the nature and significance of any
acquisitions subject to this Statement.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of
Generally Accepted Accounting Principles (FAS 162). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with GAAP for nongovernmental entities. FAS 162 is effective 60 days following SEC approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We have evaluated the new statement and have determined that it will not have a significant impact on the determination or reporting of our financial results.

NOTE 3. FAIR VALUE MEASURMENT

Effective
March 31, 2008, the first date of our 2009 fiscal year, we adopted the Statement of Financial Accounting Standards No. 157,Fair Value Measurements (FAS 157), which defines fair value, establishes a framework and
provides guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. The adoption of FAS 157 for financial assets and financial liabilities had no material impact on our financial position,
results of operations and liquidity. We are currently assessing the impact of FAS 157 for nonfinancial assets and nonfinancial liabilities on our financial position, results of operations and liquidity.

Relative to FAS 157, the FASB issued Staff Position No. FAS 157-1 and FAS 157-2 in February 2008 and FAS 157-3 in October 2008. FAS 157-1, Application of FASB
Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions, did not impact us as it amends FAS 157 to exclude Statement of Financial Accounting Standards
No. 13, Accounting for Leases and its related interpretative accounting pronouncements that address leasing transaction. FAS 157-2, Effective Date of FASB Statement No. 157,delays the effective date of FAS 157 for all
non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008. FAS
157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, clarifies the application of FAS 157 as it relates to the valuation of financial assets in a market that is not active and is effective
immediately. As of September 28, 2008, we did not have any financial assets that were valued using inactive markets, and as such, we were not impacted by FAS 157-3.

Valuation Hierarchy and Techniques

FAS 157 defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS 157 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial assets and financial liabilities recorded at fair value have been categorized based upon
the following three levels of inputs in accordance with FAS 157:

Level 1  Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted assets or liabilities. Our investments in marketable securities and money market funds that are traded in active exchange markets, as well as our investments in U.S. Treasury securities
that are highly liquid and are actively traded in over-the-counter markets are classified under level 1.

Level 2  Observable inputs
other than level 1 prices 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. Our investments in U.S. government and agency securities, commercial paper, corporate and municipal debt securities and asset-



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backed and collateralized-backed securities are traded less frequently than exchange traded securities and are valued using inputs that include quoted prices
for similar assets in active markets, and inputs other than quoted prices that are observable for the asset, such as interest rates and yield curves that are observable at commonly quoted intervals. These instruments are classified within level 2.

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. We hold no financial assets or liabilities that are classified within level 3.

Our assets, measured at fair value on a recurring
basis, at the end of the second quarter of fiscal 2009 were summarized as follows (in thousands):



|                                           |  |       |         |         |   |         |  |   |        
|------------------------------------------ |  | ----- | ------- | ------- | - | ------- |  | - | -------
|                                           |  | Total |         | Level 1 |   | Level 2
|Assets                                     |  |       |         |         |   |         |  |   |        
|Money market funds                         |  | $     | 21,547  |         | $ | 21,547  |  | $ |       
|Fixed income available-for-sale securities |  |       | 238,071 |         |   | 7,570   |  |   | 230,501
|                                           |  |       |         |         |   |         |  |   |        
|Total financial instruments owned          |  | $     | 259,618 |         | $ | 29,117  |  | $ | 230,501
|                                           |  |       |         |         |   |         |  |   |        

We account for our investments in debt and equity instruments under the Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (FAS 115). Management determines the appropriate classification of cash equivalent or short-term marketable securities at the time of
purchase and reevaluates such classification as of each balance sheet date. The investments are adjusted for amortization of premiums and discounts to maturity and such amortization is included in interest income. Cash equivalents and short-term
marketable securities are reported at fair value with the related unrealized gains and losses included in the Accumulated other comprehensive income (loss) line item in the condensed consolidated balance sheets. At September 28,
2008, there was approximately $0.1 million of net unrealized losses from our level 1 and level 2 investments.

We follow the guidance provided by FASB
Staff Position No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,(FSP 115-1), to assess whether our investments with unrealized loss positions are other-than-temporarily
impaired. Realized gains and losses and declines in value judged to be other-than-temporary are determined based on the specific identification method and are reported in Other income and expense, net line item in the condensed
consolidated statements of operations. We recorded an other-than-temporary impairment charge of a debt security in the amount of $0.6 million in the second quarter of fiscal 2009. Our unrealized loss, reported in the Accumulated other
comprehensive income (loss) line item in the condensed consolidated balance sheets, was therefore reduced by this amount.

In February 2007, the FASB
issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159). FAS 159 permits companies to choose to measure certain financial instruments and
certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. FAS 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, although earlier adoption was permitted. On March 31, 2008, the first day of our fiscal year 2009, we adopted FAS 159 and have elected not to measure any additional financial instruments and other items
at fair value. As such, the adoption had no material impact on our financial position, results of operations and liquidity.

NOTE 4. BUSINESS
COMBINATION

On August 25, 2007, we completed our merger with Sipex, a company that designed, manufactured and marketed high performance analog ICs
used by OEMs in the computing, consumer electronics, communications and networking infrastructure markets. As a result of the merger, we have combined product offerings, increased technical expertise, distribution channels, customer base and
geographic reach, and reduced expenses due to significant cost synergies.

The merger was accounted for as a purchase in accordance with FAS 141.
Accordingly, the results of operations of Sipex and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning August 26, 2007.



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The total estimated purchase price of the merger was as follows (in thousands):



|                                           |  |         |        
|------------------------------------------ |  | ------- | -------
|                                           |  | Amounts
|Fair value of Exar common stock issued     |  | $       | 229,999
|Fair value of options and warrants assumed |  |         | 16,701 
|Direct transaction costs                   |  |         | 4,038  
|                                           |  |         |        
|Total estimated purchase price             |  | $       | 250,738
|                                           |  |         |        

Purchase Price Allocation

The allocation of the purchase price to Sipexs tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values. The excess of the purchase price over the
tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill. Goodwill resulted primarily from our expectations of synergies from integration of Sipexs product offerings with our product
offerings. Goodwill is not deductible for tax purposes. We had up to twelve months from the closing date of the merger to adjust pre-acquisition contingencies, if any.

The purchase price was adjusted during the first six months of fiscal 2009 as follows (in thousands):



|                                           |  |                    |         |   |             |      |   |                        |   |         |  
|------------------------------------------ |  | ------------------ | ------- | - | ----------- | ---- | - | ---------------------- | - | ------- | -
|                                           |  | As ofMarch 30,2008 |         |   | Adjustments |      |   | As ofSeptember 28,2008 |  
|Cash                                       |  | $                  | 1,122   |   |             |      |   |                        | $ | 1,122   |  
|Accounts receivable                        |  |                    | 5,720   |   |             |      |   |                        |   | 5,720   |  
|Inventory                                  |  |                    | 12,245  |   |             |      |   |                        |   | 12,245  |  
|Other assets                               |  |                    | 2,056   |   |             |      |   |                        |   | 2,056   |  
|Property, plant and equipment              |  |                    | 19,883  |   |             |      |   |                        |   | 19,883  |  
|Accounts payable                           |  |                    | (6,439  | ) |             |      |   |                        |   | (6,439  | )
|Other liabilities                          |  |                    | (10,530 | ) |             | 418  |   |                        |   | (10,112 | )
|Long-term financing obligations and others |  |                    | (18,470 | ) |             |      |   |                        |   | (18,470 | )
|                                           |  |                    |         |   |             |      |   |                        |   |         |  
|Net tangible assets acquired               |  |                    | 5,587   |   |             |      |   |                        |   | 6,005   |  
|Identifiable intangible assets             |  |                    | 60,600  |   |             |      |   |                        |   | 60,600  |  
|In-process research and development        |  |                    | 8,800   |   |             |      |   |                        |   | 8,800   |  
|Fair value of unvested options assumed     |  |                    | 4,811   |   |             |      |   |                        |   | 4,811   |  
|Goodwill                                   |  |                    | 170,940 |   |             | (418 | ) |                        |   | 170,522 |  
|                                           |  |                    |         |   |             |      |   |                        |   |         |  
|Total estimated purchase price             |  | $                  | 250,738 |   |             |      |   |                        | $ | 250,738 |  
|                                           |  |                    |         |   |             |      |   |                        |   |         |  

We recorded an adjustment to reduce goodwill by $0.4 million during the first six months of fiscal 2009. This
adjustment reduced the allowance for sales returns and volume price discounts for Sipexs products in the distribution channel, which was initially estimated on the Sipex merger date.

During the fourth quarter of fiscal year ended March 30, 2008, we recorded a goodwill impairment loss of approximately $128.5 million associated with the Sipex
merger.

Pro Forma Financial Information

The following
unaudited pro forma financial information was based on the respective historical financial statements of Exar and Sipex. The unaudited pro forma financial information reflected the consolidated results of operations as if the merger of Sipex
occurred at the beginning of the period and included the amortization of the resulting identifiable acquired intangible assets, effects of the estimated write-up of Sipex inventory to fair value on cost of goods sold, the exclusion of interest
expense on Sipexs senior convertible notes and stock-based compensation expenses. These unaudited pro forma financial information adjustments reflected their related tax effects. The pro forma data for the second quarter and first six months
of fiscal 2008 also included a non-recurring charge, consisting of acquired in-process research and development of $8.8 million. The unaudited pro forma financial data is provided for illustrative purposes only and is not necessarily indicative
of the consolidated results of operations for future periods or that actually would have been realized had Exar and Sipex been a consolidated business during the period presented (in thousands except per share information):



|                                               |  |                                      |         |   |                                    |   |         |  
|---------------------------------------------- |  | ------------------------------------ | ------- | - | ---------------------------------- | - | ------- | -
|                                               |  | Three Months EndedSeptember 30, 2007 |         |   | Six Months EndedSeptember 30, 2007 |  
|Pro forma net sales                            |  | $                                    | 28,836  |   |                                    | $ | 64,356  |  
|Pro forma net loss                             |  | $                                    | (33,575 | ) |                                    | $ | (40,136 | )
|Pro forma basic and diluted net loss per share |  | $                                    | (0.65   | ) |                                    | $ | (0.77   | )



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NOTE 5. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The change in the carrying amount of goodwill for the first six months of fiscal 2009 was as follows (in
thousands):



|                                 |  |        |        |  
|-------------------------------- |  | ------ | ------ | -
|                                 |  | Amount |       
|Balance as of March 30, 2008     |  | $      | 47,626 |  
|Goodwill adjustment              |  |        | (418   | )
|                                 |  |        |        |  
|Balance as of September 28, 2008 |  | $      | 47,208 |  
|                                 |  |        |        |  

We recorded an adjustment to reduce goodwill by $0.4 million during the first six months of fiscal 2009. This
adjustment reduced the allowance for sales returns and volume price discounts for Sipexs products in the distribution channel, which was initially estimated on the Sipex merger date.

During the fourth quarter of fiscal year ended March 30, 2008, we recorded a goodwill impairment charge of approximately $128.5 million associated with the Sipex
merger.

Intangible Assets

Our purchased intangible
assets at September 28, 2008 and September 30, 2007 were summarized below (in thousands):



|                          |  |                          |        |                         |   |         |                    |  |                      |        |                         |        |  |                    |   |  |       
|------------------------- |  | ------------------------ | ------ | ----------------------- | - | ------- | ------------------ |  | -------------------- | ------ | ----------------------- | ------ |  | ------------------ | - |  | ------
|                          |  | September 28, 2008       |        | September 30, 2007     
|                          |  | Gross CarryingAmount (1) |        | AccumulatedAmortization |   |         | Net CarryingAmount |  | Gross CarryingAmount |        | AccumulatedAmortization |        |  | Net CarryingAmount
|Existing technology       |  | $                        | 26,673 |                         | $ | (9,083  | )                  |  | $                    | 17,590 |                         | 48,310 |  | (3,222             | ) |  | 45,088
|Patents/Core technology   |  |                          | 3,159  |                         |   | (1,050  | )                  |  |                      | 2,109  |                         | 7,900  |  | (165               | ) |  | 7,735 
|Customer backlog          |  |                          | 340    |                         |   | (340    | )                  |  |                      |       |                         | 400    |  | (42                | ) |  | 358   
|Distributor relationships |  |                          | 2,539  |                         |   | (722    | )                  |  |                      | 1,817  |                         | 6,500  |  | (115               | ) |  | 6,385 
|Customer relationships    |  |                          | 1,647  |                         |   | (406    | )                  |  |                      | 1,241  |                         | 4,300  |  | (61                | ) |  | 4,239 
|Tradenames/Trademarks     |  |                          | 263    |                         |   | (133    | )                  |  |                      | 130    |                         | 600    |  | (20                | ) |  | 580   
|                          |  |                          |        |                         |   |         |                    |  |                      |        |                         |        |  |                    |   |  |       
|                          |  | $                        | 34,621 |                         | $ | (11,734 | )                  |  | $                    | 22,887 |                         | 68,010 |  | (3,625             | ) |  | 64,385
|                          |  |                          |        |                         |   |         |                    |  |                      |        |                         |        |  |                    |   |  |       



|(1) | During the fourth quarter of fiscal year ended March 30, 2008, we recorded an intangible asset impairment charge of approximately $36.7 million associated with Sipex intangible
assets.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The aggregate amortization expenses for our purchased intangible assets were summarized for the periods presented below
(in thousands):



|                          |  |                       |  |                    |       |                   |   |                   |  |                   |       |  |   |      
|------------------------- |  | --------------------- |  | ------------------ | ----- | ----------------- | - | ----------------- |  | ----------------- | ----- |  | - | -----
|                          |  |                       |  | Three Months Ended |       | Six Months Ended 
|                          |  | WeightedAverage Lives |  | September 28,2008  |       | September 30,2007 |   | September 28,2008 |  | September 30,2007
|                          |  | (in months)           |  | (in thousands)     |       | (in thousands)   
|Existing technology       |  | 50                    |  | $                  | 1,266 |                   | $ | 1,029             |  | $                 | 2,566 |  | $ | 1,346
|Patents/Core technology   |  | 60                    |  |                    | 135   |                   |   | 165               |  |                   | 269   |  |   | 165  
|Customer backlog          |  | 6                     |  |                    |      |                   |   | 42                |  |                   |      |  |   | 42   
|Distributor relationships |  | 72                    |  |                    | 92    |                   |   | 114               |  |                   | 185   |  |   | 114  
|Customer relationships    |  | 84                    |  |                    | 52    |                   |   | 61                |  |                   | 105   |  |   | 61   
|Tradenames/Trademarks     |  | 36                    |  |                    | 17    |                   |   | 21                |  |                   | 34    |  |   | 21   
|                          |  |                       |  |                    |       |                   |   |                   |  |                   |       |  |   |      
|Total                     |  |                       |  | $                  | 1,562 |                   | $ | 1,432             |  | $                 | 3,159 |  | $ | 1,749
|                          |  |                       |  |                    |       |                   |   |                   |  |                   |       |  |   |      

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



|                     |  |   |       
|-------------------- |  | - | ------
|Amortization Expense
|(by fiscal year)    
|                     | 
|Remainder of 2009    |  | $ | 3,125 
|2010                 |  |   | 6,249 
|2011                 |  |   | 5,482 
|2012                 |  |   | 3,483 
|2013                 |  |   | 3,129 
|2014 and thereafter  |  |   | 1,419 
|                     |  |   |       
|                     |  | $ | 22,887
|                     |  |   |       

NOTE 6. LONG-TERM INVESTMENTS

Our long-term investments, recorded in the Other non-current assets line item in the condensed consolidated balance sheets, consist of the investments in TechFarm Ventures L.P. (Q), L.P. (TechFarm
Fund) and Skypoint Telecom Fund II (US), L.P. (Skypoint Fund). Both TechFarm Fund and Skypoint Fund are venture capital funds which invest primarily in private companies in the telecommunications and/or networking industry. We
account for these non-marketable equity securities under the cost method. In accordance with the FSP 115-1, we periodically review and determine whether the investments are other-than-temporarily impaired, in which case the investments are written
down to their impaired value.

As of September 28, 2008 and March 30, 2008, our long-term investments balances were as follows (in thousands):



|                      |  |                   |       |               |   |      
|--------------------- |  | ----------------- | ----- | ------------- | - | -----
|                      |  | September 28,2008 |       | March 30,2008
|TechFarm Fund         |  | $                 |      |               | $ | 466  
|Skypoint Fund         |  |                   | 1,891 |               |   | 2,170
|                      |  |                   |       |               |   |      
|Long-term investments |  | $                 | 1,891 |               | $ | 2,636
|                      |  |                   |       |               |   |      

In the second quarter of fiscal 2009, we analyzed the fair value of the underlying investment in TechFarm Fund and
concluded that the remaining carrying value in TechFarm Fund was other-than-temporarily impaired and recorded an impairment charge of $0.5 million. As such, we reduced the carrying value of our investment in TechFarm Fund to zero as of
September 28, 2008. During the same period, we also 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
$0.4 million.



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In the second quarter of fiscal 2008, we performed a review of our investments and determined that two of the portfolio
companies in the Skypoint Fund had limited cash on hand and financing opportunities were minimal. We concluded that a portion of the carrying value had been other-than-temporarily impaired and recorded an impairment charge against our earnings of
$0.4 million. No impairment charged was recorded for TechFarm Fund in the second quarter of fiscal 2008.

NOTE 7. RELATED PARTY TRANSACTIONS

Affiliates of Future Electronics Inc. (Future), Alonim Investments Inc. and two of its affiliates (collectively Alonim), own
approximately 7.7 million shares, or approximately 18% of our outstanding common stock as of September 28, 2008. 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 the
distribution agreement when Future sells the products to end customers. Future has historically accounted for a significant portion of our net sales. It is our largest distributor worldwide and accounted for 34% and 19% of our total net sales for
the second quarters of fiscal 2009 and fiscal 2008, respectively. It accounted for 36% and 20% of our total net sales for the first six months of fiscal 2009 and fiscal 2008, respectively.

We reimbursed Future for approximately $11,000 and $5,000 of expenses for marketing promotional materials for the second quarters of fiscal 2009 and fiscal 2008,
respectively. We reimbursed Future for approximately $20,000 and $5,000 of expenses for marketing promotional materials for the first six months of fiscal 2009 and fiscal 2008, respectively.

NOTE 8. RESTRUCTURING

In connection with the Sipex merger
in August 2007, our management approved and initiated plans to restructure the operations of the combined company to eliminate certain duplicative activities, reduce cost structure and better align product and operating expenses with existing
general economic conditions. The Sipex restructuring costs were accounted for as liabilities assumed as part of the purchase business combination in accordance with the Emerging Issues Task Force Issue No. 95-3,Recognition of Liabilities in
Connection with a Purchase Business Combination (EITF 95-3).

Our restructuring liabilities were included in the Other accrued
expenses line item on the condensed consolidated balance sheets, and the activities affecting the liabilities for the first and second quarters of fiscal 2009 were summarized as follows (in thousands):



|                              |  |                |     |   |                |   |                               |  |   |     |  
|----------------------------- |  | -------------- | --- | - | -------------- | - | ----------------------------- |  | - | --- | -
|                              |  | Facility costs |     |   | Severancecosts |   | Totalrestructuringliabilities | 
|Balance at March 30, 2008     |  | $              | 491 |   |                | $ | 200                           |  | $ | 691 |  
|Utilization                   |  |                | (36 | ) |                |   |                              |  |   | (36 | )
|                              |  |                |     |   |                |   |                               |  |   |     |  
|Balance at June 29, 2008      |  |                | 455 |   |                |   | 200                           |  |   | 655 |  
|Utilization                   |  |                | (36 | ) |                |   |                              |  |   | (36 | )
|                              |  |                |     |   |                |   |                               |  |   |     |  
|Balance at September 28, 2008 |  | $              | 419 |   |                | $ | 200                           |  | $ | 619 |  
|                              |  |                |     |   |                |   |                               |  |   |     |  

For the second quarter and first six months of fiscal 2009, we utilized approximately $36,000 and $72,000,
respectively, of our restructuring reserve primarily related to our unused space at one of our international offices. The remaining balance of approximately $419,000 was expected to be paid during the remaining term of the lease contract which
extends through 2012.

The remaining reserve of approximately $200,000 on severance costs was expected to be paid during the next six months.



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NOTE 9. INVENTORIES

Our inventories consisted of the following (in thousands):



|                |  |                    |        |                |   |       
|--------------- |  | ------------------ | ------ | -------------- | - | ------
|                |  | September 28, 2008 |        | March 30, 2008
|Work-in-process |  | $                  | 8,983  |                | $ | 8,775 
|Finished goods  |  |                    | 6,443  |                |   | 5,426 
|                |  |                    |        |                |   |       
|Inventories     |  | $                  | 15,426 |                | $ | 14,201
|                |  |                    |        |                |   |       

NOTE 10. PROPERTY, PLANT AND EQUIPMENT

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



|                                          |  |                    |         |   |                |   |         |  
|----------------------------------------- |  | ------------------ | ------- | - | -------------- | - | ------- | -
|                                          |  | September 28, 2008 |         |   | March 30, 2008 |  
|Land                                      |  | $                  | 11,960  |   |                | $ | 11,960  |  
|Buildings                                 |  |                    | 22,624  |   |                |   | 22,584  |  
|Machinery and equipment                   |  |                    | 66,323  |   |                |   | 65,215  |  
|                                          |  |                    |         |   |                |   |         |  
|Property, plant and equipment, total      |  |                    | 100,907 |   |                |   | 99,759  |  
|Accumulated depreciation and amortization |  |                    | (57,081 | ) |                |   | (53,629 | )
|                                          |  |                    |         |   |                |   |         |  
|Property, plant and equipment, net        |  | $                  | 43,826  |   |                | $ | 46,130  |  
|                                          |  |                    |         |   |                |   |         |  

NOTE 11. 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 in accordance with FASB Statement of
Financial Accounting Standards No. 128,Earnings Per Share (FAS 128). Diluted earnings per share (EPS) reflects the potential dilution that would occur if outstanding stock options or warrants to issue common
stock, unvested restricted stock units (RSU) and restricted stock awards (RSA) were exercised or converted into common stock by using the treasury stock method.

Our loss per share was summarized as follows for the periods presented (in thousands, except per share amounts):



|                                                                                                |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|----------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------- | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                                                                |  | Three Months Ended |        |   | Six Months Ended  |  
|                                                                                                |  | September 28,2008  |        |   | September 30,2007 |   |         | September 28,2008 |  |   | September 30,2007 |  
|Net loss                                                                                        |  | $                  | (2,187 | ) |                   | $ | (16,410 | )                 |  | $ | (4,648            | ) |  | $ | (11,799 | )
|                                                                                                |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Shares used in computation:                                                                     |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Weighted average shares of common stock outstanding used in computation of basic loss per share |  |                    | 42,735 |   |                   |   | 41,796  |                   |  |   | 42,854            |   |  |   | 38,843  |  
|Dilutive effect of stock options and restricted stock units                                     |  |                    |       |   |                   |   |        |                   |  |   |                  |   |  |   |        |  
|                                                                                                |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Shares used in computation of diluted loss per share                                            |  |                    | 42,735 |   |                   |   | 41,796  |                   |  |   | 42,854            |   |  |   | 38,843  |  
|                                                                                                |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Loss per share                                                                                  |  | $                  | (0.05  | ) |                   | $ | (0.39   | )                 |  | $ | (0.11             | ) |  | $ | (0.30   | )
|                                                                                                |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  

For the second quarter and first six months of fiscal 2009, as we incurred a net loss, the weighted average number
of common shares outstanding equals the weighted average number of common shares and common shares equivalents assuming dilution. Options to purchase common shares and RSUs or common shares in the aggregate amounts of approximately 246,000 and
239,000 shares for the second quarter and first six months of fiscal 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 amounts.

For the second quarter and first six months of fiscal 2009, options to purchase approximately 5.2 million and
5.1 million shares of our common stock, with exercise prices per share ranging from $7.34 to $86.10 and $7.19 to $86.10 respectively, and unvested RSUs for approximately 50,000 and 55,000 shares of our common stock with a grant date fair value
per share



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of $7.63 and $7.90, respectively, were outstanding and were not included in the computation of diluted net loss per share because they were anti-dilutive
under the treasury stock method. Warrants to purchase approximately 280,000 shares of our common stock at a per share exercise price of $9.63 were outstanding for both periods and were excluded in the computation of diluted net loss per share for
both periods because they were anti-dilutive under the treasury stock method.

For the second quarter and first six months of fiscal 2008, as we incurred a
net loss, the weighted average number of common shares outstanding equals the weighted average number of common shares and common share equivalents assuming dilution. Options to purchase common shares and RSUs or common shares in the aggregate
amounts of approximately 626,000 and 582,000 for the second quarter and first six months of fiscal 2008, respectively, were excluded from our loss per share calculation for those periods. Had we had income for these periods, our diluted shares would
have increased by the aforementioned amounts.

For the second quarter and first six months of fiscal 2008, options to purchase approximately
4.0 million and 4.1 million shares of our common stock with exercise prices ranging from $10.34 to $86.10 for both periods, respectively, and unvested RSUs for approximately 47,000 and 15,000 shares of our common stocks with a grant date
fair value per share of $9.52 and $10.20, 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 our common stock at per share exercise price of $9.63 were outstanding for the six months ended September 30, 2007 and were excluded from the computation of diluted loss per share for both periods because they were anti-dilutive under
the treasury stock method.

Our application of the treasury stock method includes assumed cash proceeds from option exercised, 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 12. COMMON STOCK REPURCHASES

From time to time, we acquire outstanding shares of our common stock in the open market to partially
offset dilution from our stock awards program, to increase our return on our invested capital and to bring our cash to a more appropriate level for our company. We may continue to utilize our share repurchase program described below, which would
reduce our cash, cash equivalents and/or short-term investments available to fund future operations and to meet other liquidity requirements.

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. The 2007 SRP was in addition to a share repurchase plan announced on March 6, 2001
(2001 SRP), which covered the repurchase of up to $40 million of our common stock.

We repurchased a total of 1.5 million shares of our
common stock at an aggregate cost of $12.9 million under the 2007 SRP during the first six months of fiscal 2009. We did not repurchase any shares during the second quarter of fiscal 2009.

During the second quarter and first six months of fiscal 2008, we repurchased a total of 2.1 million and 2.4 million shares, respectively, of our common stock
at an aggregate cost of $28.4 million and $32.4 million, respectively, under both SRPs. In addition, we repurchased 10,000 shares at an aggregate cost of $1 from a former executive officer pursuant to a restricted stock purchase agreement in the
first fiscal quarter of 2008.

We have fully utilized the 2001 SRP. As of September 28, 2008, the remaining authorized amount for the share
repurchases under the 2007 SRP was $12.3 million. The 2007 SRP does not have a termination date.

NOTE 13. 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 under the Statement
of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment (FAS 123R).



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We are authorized to issue 4.5 million shares of common stock under our ESPP. There were approximately 1,637,000
shares of common stock reserved for future issuance under our ESPP at September 28, 2008.

For the first six months of fiscal 2009 and fiscal 2008, we
issued approximately 26,000 shares and 16,000 shares, respectively, of our common stock at weighted average prices of $7.55 and $12.66, respectively, to the participating employees under our ESPP.

Equity Incentive Plans

We currently have five equity incentive plans
including the Exar Corporation 2006 Equity Incentive Plan (the 2006 Plan) and four other equity plans assumed upon merger with Sipex: the Sipex Corporation 1999 Stock Plan, 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. Restricted stock units 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 the combined company hired after the merger. At September 28, 2008, there were approximately 3.6 million
shares available for future grant under all our equity incentive plans.

There were options to purchase approximately 5.5 million and 5.1 million
shares of our common stock outstanding under all equity incentive plans at September 28, 2008 and March 30, 2008, respectively.

Stock Options

Our stock option transactions during the first six months of fiscal 2009 were summarized as follows:



|                                                |  |             |   |  |                                       |       |                                                    |      |                         |   |          
|----------------------------------------------- |  | ----------- | - |  | ------------------------------------- | ----- | -------------------------------------------------- | ---- | ----------------------- | - | ---------
|                                                |  | Outstanding |   |  | WeightedAverageExercisePrice perShare |       | WeightedAverageRemainingContractualLife (in Years) |      | AggregateIntrinsicValue
|Balance at March 30, 2008                       |  | 5,086,297   |   |  | $                                     | 13.23 |                                                    | 3.85 |                         | $ | 2,383,110
|Options granted                                 |  | 1,729,875   |   |  |                                       | 8.25  |                                                    |      |                         |   |          
|Options exercised                               |  | (405,284    | ) |  |                                       | 5.35  |                                                    |      |                         |   |          
|Options cancelled                               |  | (677,318    | ) |  |                                       | 17.28 |                                                    |      |                         |   |          
|Options forfeited                               |  | (248,402    | ) |  |                                       | 9.68  |                                                    |      |                         |   |          
|                                                |  |             |   |  |                                       |       |                                                    |      |                         |   |          
|Balance at September 30, 2008                   |  | 5,485,168   |   |  | $                                     | 11.90 |                                                    | 4.57 |                         | $ | 830,499  
|                                                |  |             |   |  |                                       |       |                                                    |      |                         |   |          
|Vested and expected to vest, September 28, 2008 |  | 5,063,964   |   |  | $                                     | 12.09 |                                                    | 4.43 |                         | $ | 800,588  
|                                                |  |             |   |  |                                       |       |                                                    |      |                         |   |          
|Vested and exercisable, September 28, 2008      |  | 2,777,490   |   |  | $                                     | 14.22 |                                                    | 2.91 |                         | $ | 659,182  
|                                                |  |             |   |  |                                       |       |                                                    |      |                         |   |          

The aggregate intrinsic values in the table above represented the total pre-tax intrinsic value, which was based
on the closing price of our common stock at the end of the periods. These were 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 0.6 million and 3.9 million at the end of the second quarters of fiscal 2009 and fiscal
2008, respectively.

Total unrecognized stock-based compensation cost was $5.8 million at the end of the second fiscal quarter of 2009, which was expected
to be recognized over a weighted average period of 3.10 years.



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Restricted Stock Awards and Units

Our RSA and RSU transactions during the first six months of fiscal 2009 were summarized as follows:



|                                                  |  |         |   |  |                                             |       |                                                   |      |                         |   |          
|------------------------------------------------- |  | ------- | - |  | ------------------------------------------- | ----- | ------------------------------------------------- | ---- | ----------------------- | - | ---------
|                                                  |  | Shares  |   |  | Weighted AverageGrant-DateFair Market Value |       | Weighted AverageRemaining ContractualTerm (years) |      | AggregateIntrinsicValue
|Unvested at March 30, 2008                        |  | 304,933 |   |  | $                                           | 12.20 |                                                   | 1.41 |                         | $ | 2,497,401
|Granted                                           |  | 220,434 |   |  |                                             | 8.27  |                                                   |      |                         |   |          
|Issued and released                               |  | (34,350 | ) |  |                                             | 7.82  |                                                   |      |                         |   |          
|Cancelled                                         |  | (26,740 | ) |  |                                             | 9.98  |                                                   |      |                         |   |          
|                                                  |  |         |   |  |                                             |       |                                                   |      |                         |   |          
|Unvested at September 28, 2008                    |  | 464,277 |   |  | $                                           | 10.38 |                                                   | 1.41 |                         | $ | 3,500,649
|                                                  |  |         |   |  |                                             |       |                                                   |      |                         |   |          
|Vested and expected to vest at September 28, 2008 |  | 398,552 |   |  | $                                           | 9.94  |                                                   | 1.35 |                         | $ | 3,005,081
|                                                  |  |         |   |  |                                             |       |                                                   |      |                         |   |          

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, and vested and expected to vest RSUs at the end of each period.

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, was recognized on a straight-line basis, over the vesting
period.

At the end of the second quarter of fiscal 2009, there were RSUs for approximately 464,000 shares of our common stock outstanding with an
unrecognized stock-based compensation cost of approximately $2.7 million to be recognized as compensation expense over a weighted average period of 1.41 years.

At the end of the second quarter of fiscal 2008, there were RSUs for approximately 212,000 shares of our common stock outstanding with an unrecognized stock-based compensation cost of approximately $2.6 million to be recognized as
compensation expense over a weighted average period of 1.65 years.

During the second quarter of fiscal 2008, we granted performance based RSUs for
approximately 20,000 shares of our common stock to certain executives, issuable on March 31, 2008. Based on our assessment of meeting the performance targets established for each individual and probability that these targets would be achieved,
we recorded approximately $22,000 in compensation expenses related to the grants. Approximately 10,000 shares were subsequently granted based on the achievements of each individuals goals.

Upon the merger with Sipex, we entered into an agreement with our former chief executive officer whereby he would be granted 20,000 shares of our common stock if certain
financial targets were met; 10,000 shares of common stock were issuable on March 31, 2008 and September 30, 2008, respectively. Based on our assessment of the probability of achieving the performance targets, no compensation expense was
recorded in connection with this agreement during the second fiscal quarter of 2008. Neither of these grants was made due to his termination.



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##### Table of Contents

Stock-Based Compensation Expense

Our stock-based compensation expense related to stock options, RSAs and RSUs under FAS 123R for the fiscal periods presented were summarized as follows (in thousands):



|                                    |  |                    |       |                   |   |                   |  |                   |       |  |   |      
|----------------------------------- |  | ------------------ | ----- | ----------------- | - | ----------------- |  | ----------------- | ----- |  | - | -----
|                                    |  | Three Months Ended |       | Six Months Ended 
|                                    |  | September 28,2008  |       | September 30,2007 |   | September 28,2008 |  | September 30,2007
|Cost of sales                       |  | $                  | 174   |                   | $ | 106               |  | $                 | 366   |  | $ | 134  
|Research and development            |  |                    | 481   |                   |   | 324               |  |                   | 839   |  |   | 548  
|Selling, general and administrative |  |                    | 435   |                   |   | 938               |  |                   | 1,244 |  |   | 1,447
|                                    |  |                    |       |                   |   |                   |  |                   |       |  |   |      
|Stock-based compensation expense    |  | $                  | 1,090 |                   | $ | 1,368             |  | $                 | 2,449 |  | $ | 2,129
|                                    |  |                    |       |                   |   |                   |  |                   |       |  |   |      

There was no stock-based compensation cost capitalized in inventory at September 28, 2008. There was
approximately $33,000 of total unamortized stock-based compensation cost capitalized in inventory at March 30, 2008.

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 stock-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 assumptions to calculate the fair values of options granted during the fiscal periods presented:



|                                      |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|------------------------------------- |  | ------------------ | --------- | - | ----------------- | - | --------- | ----------------- |  | - | ----------------- | - |  | - | --------- | -
|                                      |  | Three Months Ended |           |   | Six Months Ended  |  
|                                      |  | September 28,2008  |           |   | September 30,2007 |   |           | September 28,2008 |  |   | September 30,2007 |  
|Expected term of options (years)      |  |                    | 4.6 -4.8  |   |                   |   | 4.5 -5.0  |                   |  |   | 4.6 -4.8          |   |  |   | 4.5 -5.0  |  
|Risk-free interest rate               |  |                    | 3.1 - 3.2 | % |                   |   | 4.3 - 4.4 | %                 |  |   | 3.1 - 3.2         | % |  |   | 4.4 - 4.8 | %
|Expected volatility                   |  |                    | 30 - 31   | % |                   |   | 31 - 35   | %                 |  |   | 30 - 31           | % |  |   | 30 - 36   | %
|Expected dividend yield               |  |                    |          |   |                   |   |          |                   |  |   |                  |   |  |   |          |  
|Weighted average estimated fair value |  | $                  | 2.34      |   |                   | $ | 4.95      |                   |  | $ | 2.65              |   |  | $ | 4.89      |  



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NOTE 14. COMPREHENSIVE LOSS

Our comprehensive loss was summarized as follows for the fiscal periods presented (in thousands):



|                                                                         |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------------------ | ------ | - | ----------------- | - | ------- | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                                         |  | Three Months Ended |        |   | Six Months Ended  |  
|                                                                         |  | September 28,2008  |        |   | September 30,2007 |   |         | September 28,2008 |  |   | September 30,2007 |  
|Net loss                                                                 |  | $                  | (2,187 | ) |                   | $ | (16,410 | )                 |  | $ | (4,648            | ) |  | $ | (11,799 | )
|Other comprehensive income (loss):                                       |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Cumulative translation adjustments                                       |  |                    |       |   |                   |   | (48     | )                 |  |   |                  |   |  |   | (57     | )
|Change in unrealized gain and loss, on marketable securities, net of tax |  |                    | (781   | ) |                   |   | 516     |                   |  |   | (2,007            | ) |  |   | 352     |  
|                                                                         |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total other comprehensive income (loss)                                  |  |                    | (781   | ) |                   |   | 468     |                   |  |   | (2,007            | ) |  |   | 295     |  
|                                                                         |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Comprehensive loss                                                       |  | $                  | (2,968 | ) |                   | $ | (15,942 | )                 |  | $ | (6,655            | ) |  | $ | (11,504 | )
|                                                                         |  |                    |        |   |                   |   |         |                   |  |   |                   |   |  |   |         |  

NOTE 15. LEASE OBLIGATIONS

In connection with the Sipex merger, we assumed a lease financing obligation related to a facility, located at 233 South Hillview Drive 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 merger and was included in the Property, plant and equipment, net line item on the condensed consolidated balance sheets. In accordance 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 sheets. The effective interest rate is 8.2%. Depreciation for the Hillview facility is
recorded using the straight-line method over the remaining useful life and was $0.1 million and $0.2 million, respectively, for the second quarter and the first six months of fiscal 2009 and was insignificant for the same periods a year ago.

At the end of the lease term, the estimated final lease obligation is approximately $12.2 million, which we will settle by returning the Hillview
facility.

We sublet the Hillview facility in April 2008. The sublease expires in March 2011 and we expect annual sublease income of approximately $1.4
million for the duration of the sublease term. The sublease income for the second fiscal quarter and first six months of fiscal 2009 was approximately $0.4 million and $0.6 million, respectively, and was recorded in the Other income and
expense, net line item in our condensed consolidated statements of operations.

In addition to the Hillview facility, we 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, which were accounted for as a capital lease and recorded in the Property, plant and equipment,
net line item on the condensed consolidated balance sheets. The related design tools obligation was included in the Long-term lease financing obligations line on our condensed consolidated balance sheets. The effective interest
rate for the design tools is 7.25%. Amortization on the design tools is recorded using the straight-line method over the remaining useful life and was $0.3 million and $0.6 million, for the second quarter and the first six months of fiscal 2009,
respectively.



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Future minimum lease payments for our lease financing obligations as of the end of the second fiscal quarter of 2009 were
as follows (in thousands):



|                                                    |  |                  |        |   |             |   |       |       |  |   |                |   |  |   |      
|--------------------------------------------------- |  | ---------------- | ------ | - | ----------- | - | ----- | ----- |  | - | -------------- | - |  | - | -----
|Fiscal Years                                        |  | HillviewFacility |        |   | DesignTools |   |       | Total |  |   | SubleaseIncome
|Remainder of 2009                                   |  | $                | 687    |   |             | $ | 222   |       |  | $ | 909            |   |  | $ | 706  
|2010                                                |  |                  | 1,415  |   |             |   | 1,450 |       |  |   | 2,865          |   |  |   | 1,412
|2011                                                |  |                  | 13,624 |   |             |   | 1,450 |       |  |   | 15,074         |   |  |   | 1,412
|2012                                                |  |                  |       |   |             |   | 1,087 |       |  |   | 1,087          |   |  |   |     
|                                                    |  |                  |        |   |             |   |       |       |  |   |                |   |  |   |      
|Total minimum lease payments                        |  |                  | 15,726 |   |             |   | 4,209 |       |  |   | 19,935         |   |  |   | 3,530
|Less: amount representing interest                  |  |                  | (2,610 | ) |             |   | (605  | )     |  |   | (3,215         | ) |  |   |     
|                                                    |  |                  |        |   |             |   |       |       |  |   |                |   |  |   |      
|Present value of minimum lease payments             |  |                  | 13,116 |   |             |   | 3,604 |       |  |   | 16,720         |   |  |   | 3,530
|Less: current portion of lease financing obligation |  |                  | 328    |   |             |   | 811   |       |  |   | 1,139          |   |  |   |     
|                                                    |  |                  |        |   |             |   |       |       |  |   |                |   |  |   |      
|Long-term lease financing obligation                |  | $                | 12,788 |   |             | $ | 2,793 |       |  | $ | 15,581         |   |  | $ | 3,530
|                                                    |  |                  |        |   |             |   |       |       |  |   |                |   |  |   |      

Interest expense for the Hillview lease financing for the second quarter and first six months of fiscal 2009
totaled approximately $269,000 and $537,000, respectively. Interest expense for the design tools lease obligations for the second quarter and first six months of fiscal 2009 totaled approximately $44,000 and $89,000, respectively.

Interest expense for the HIllview lease financing for both the second and first six months of fiscal 2008 totaled approximately $92,000.

NOTE 16. 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. Although the area and extent of the contamination appear to have been defined, the source of the
contamination has not been identified. 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 during its two-year plume stability evaluation. In July 2008, we evaluated the effectiveness of the plume stability and decided to initiate a treatment program and pursue a no further action order for the site. As such, we accrued an additional
$58,000 and increased our liability to $250,000. This accrual includes about $200,000 for the initial treatment process and $50,000 for future annual monitoring.

In February 2006, we 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 our wafer fabrication operations located in Milpitas, California. Under this agreement, Exar and Silan would work together to enable Silan to manufacture semiconductor wafers using our 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 two years beginning January 1, 2007. As of
September 28, 2008, we have completed the transfer of the process technology and Silan has started the commercial manufacturing for us. There were open purchase orders for approximately $1.1 million outstanding at the end of the second quarter
of fiscal 2009.

Generally, we warrant all of our products against defects in materials and workmanship for a period ranging from ninety days to two years
from the delivery date. 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 liability related to our
products was immaterial at the end of the second quarter of fiscal 2009.



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Additionally, our sales agreements indemnify our customers for expenses or liability resulting from alleged or claimed
infringement by our products of any United States letter patents of third parties. However, we are not liable for any collateral, incidental or consequential damages arising out of patent infringement. The terms of these indemnification agreements
are perpetual, commencing after execution of the sales agreement or the date indicated on our order acknowledgement. The maximum amount of potential future indemnification is unlimited. However, to date, we have not paid any claims or been required
to defend any lawsuits with respect to any such indemnity claim.

NOTE 17. LEGAL PROCEEDINGS

From time to time, we are involved in various claims, legal actions and complaints arising in the normal course of business. Although the ultimate outcome of the matters
discussed below and other matters is not presently determinable, management currently believes that the resolution of all such pending matters will not have a material adverse effect on our financial condition, results of operations or liquidity.

Ericsson Wireless Communication, Inc. and Vicor Corporation

On November 16, 2004, Ericsson Wireless Communications, Inc. (now known as Ericsson Inc.) (Ericsson) initiated a lawsuit against us in San Diego County Superior Court. In its Third Amended Complaint, Ericsson asserted
causes of action against us for negligence, strict product liability, and unfair competition, seeking monetary damages and unspecified injunctive relief. Based on discovery responses, Ericsson claimed that its damages exceeded $1 billion. The case
is based on Ericssons purchase of allegedly defective products from Vicor Corporation, our former customer to whom we sold untested, semi-custom wafers. We disputed the allegations in Ericssons Third Amended Complaint, believed that we
had meritorious defenses, and defended the lawsuit vigorously. On December 1, 2006, we entered into a Settlement Agreement with Ericsson to resolve the claims it asserted. Based on further events in the case, our total liability to
Ericsson under the Settlement Agreement was $500,000, which was paid by our insurance carriers. Following payment, Ericsson dismissed its claims against us with prejudice.

On April 5, 2005, Vicor Corporation (Vicor) filed a cross-complaint against us in San Diego County Superior Court that asserted various contract, tort, and indemnity based claims. Vicor alleged,
among other things, that we sold it integrated circuits that were defective and failed to meet agreed-upon specifications, and that we intentionally concealed material facts regarding the specifications of the integrated circuits that Vicor alleges
it bought from us. Vicor alleged that it is entitled to indemnification from us for the damages that Vicor paid to Ericsson because of Ericssons direct claims against Vicor. On May 9, 2005, we filed a demurrer to all but one of
Vicors causes of action against us, which the San Diego Superior Court sustained without leave to amend on June 17, 2005, except for Vicors claims for indemnity. We answered those causes of action on July 5, 2005. We
disputed the allegations in Vicors cross-complaint, believed that we had meritorious defenses, and defended the lawsuit vigorously.

After entering
the Settlement Agreement with Ericsson, we filed a motion on December 20, 2006 for an order finding the Settlement Agreement was in good faith. On January 22, 2007, the Court entered an order finding that we entered into the Settlement
Agreement in good faith. The result of the finding of good faith was that Vicors indemnity claims were subject to dismissal. Vicor filed a petition for writ of mandate with the California Court of Appeal challenging the good faith finding,
which the Court of Appeal summarily denied on February 28, 2007. The San Diego Superior Court dismissed Vicors indemnity claims and entered judgment in our favor on July 10, 2007. After entering judgment, the San Diego Superior Court
awarded us costs against Vicor in the amount of $84,405 and monetary sanctions against Vicor in the amount of $44,266.91. Vicor filed a notice of appeal on September 6, 2007. The appeal is fully briefed, but oral argument as not yet been
set.

On March 4, 2005, we filed a complaint in Santa Clara County Superior Court against Vicor. In the complaint, we sought a declaration regarding
the respective rights and obligations, including warranty and indemnity rights and obligations, under the written contracts between us and Vicor for the sale of untested, semi-custom wafers. In addition, we sought a declaration that we were not
responsible for any damages that Vicor must pay to Ericsson or any other customer of Vicor arising from claims that Vicor sold allegedly defective products.

On March 17, 2005, Vicor filed a cross-complaint against us and Rohm Device USA, LLC and Rohm Co., Ltd, the owners and operators of the foundry which supplied the untested, semi-custom wafers that we sold to Vicor. In the
cross-complaint, Vicor asserted allegations similar to those in its cross-complaint in the Ericsson San Diego County action discussed above, and also alleged that it is entitled to indemnification from us for any damages that Vicor must pay to
Ericsson or other Vicor customers that may make claims against Vicor. In the cross-complaint, Vicor asserted various contract, tort, and indemnity based causes of action against us. On May 23, 2005, we filed a demurrer to each cause of action
in Vicors cross-complaint,



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and on July 15, 2005, the Santa Clara County Superior Court sustained our demurrer to each of the causes of action. The Court granted Vicor leave to
amend the cross-complaint to assert a reciprocal cause of action for declaratory relief only. On August 1, 2005, Vicor filed its amended cross-complaint asserting a reciprocal declaratory relief claim against us and a declaration
that we were obligated to indemnify it for any damages resulting from claims brought against Vicor by its customers. Vicors amended cross-complaint does not seek damages. We answered Vicors amended cross-complaint on September 2,
2005. The Santa Clara action was transferred to San Diego for coordination with the Ericsson San Diego County action on August 18, 2006. No trial date has been set.

DiPietro v. Sipex

In April 2003, plaintiff Frank DiPietro (former chief financial officer of Sipex) brought an
action for breach of contract against Sipex in the Middlesex Superior Court in the state of Massachusetts. Mr. DiPietro was seeking approximately $800,000 in severance benefits. Sipex counterclaimed for approximately $150,000, which it was owed
under a promissory note signed by Mr. DiPietro. In August 2004, Sipex filed two motions for summary judgment (one for Mr. DiPietros claims against it and one for its counterclaim against Mr. DiPietro). In June 2005, the
Middlesex Superior Court granted both Sipexs motions for summary judgment. Soon thereafter, Mr. DiPietro filed a notice of appeal. Sipex then filed motions for costs and pre-judgment interest. Sipex was successful in its motion for
prejudgment interest and it was successful in requiring Mr. DiPietro to pay over $900 in deposition costs.

On June 21, 2006, Mr. DiPietro
served Sipex with his appeal brief. On July 20, 2006, Sipex served its Opposition and Mr. DiPietros reply brief was served on August 3, 2006. On December 12, 2006, the Massachusetts Appeals Court heard arguments in DiPietro
v. Sipex and asked for a letter clarifying a legal issue that Sipex provided on December 28, 2006. On January 12, 2007, Mr. DiPietro sent a letter responding to Sipexs letter.

On May 14, 2007, the Appeals Court issued its decision reversing the Middlesex Superior Courts grant of summary judgment and remanding the case for further
proceedings. Sipex immediately filed a motion for enlargement of time to file a petition for rehearing and an application for further appellate review. Sipexs petition for rehearing was filed on June 13, 2007, in the Massachusetts Appeals
Court and its application for further appellate review was filed on June 28, 2007, in the Massachusetts Supreme Judicial Court. Thereafter, on July 9, 2007, DiPietro filed his opposition to Sipexs Application for further appellate
review and on July 18, 2007, filed his response to Sipexs petition for rehearing. In early September 2007, the Massachusetts Appeals Court amended its decision to clarify issues addressed in Sipexs petition for rehearing.

On October 31, 2007, Sipexs application for further appellate review was denied. The case was remanded to Middlesex Superior Court and will
proceed.

On June 16, 2008, we attended a pretrial conference. At the Court clerks suggestion, Sipex served its motion for leave to file
renewed motions for summary judgment on August 11, 2008, and Mr. DiPietro served his opposition on August 21, 2008. The parties attended a status conference on October 14, 2008, and at that time, the Court heard arguments on
Sipexs motion for leave to file renewed motions for summary judgment. The outcome of that motion is pending. Trial is currently scheduled for the week of February 9, 2009.

Cypress v. Sipex, Exar and Ralph Schmitt

On October 12, 2007, Cypress Semiconductor Corporation
(Cypress) filed an action against Sipex, Exar, Ralph Schmitt and Does 1 through 50 in the Superior Court of the State of California, County of Santa Clara, Cypress Semiconductor Corp. v. Sipex Corp., et al., Case No. 1-07-CV096311,
alleging claims for: (1) misappropriation of trade secrets; (2) violation of the Computer Fraud and Abuse Act, 18 U.S.C. §1030; (3) unfair competition under Cal. Bus. & Prof. Code §§17200 et seq.;
(4) tortious interference with contract; (5) interference with actual and prospective economic advantage; (6) breach of fiduciary duty and breach of the duty of loyalty; (7) inducement of breach of fiduciary duty; (8) breach
of written contract; (9) breach of the covenant of good faith and fair dealing; (10) conversion; and (11) unjust enrichment. The second, sixth, eighth and ninth causes of action are alleged against Mr. Schmitt only.
Mr. Schmitt was Chief Executive Officer and President and a member of the board of directors of Exar from August 25, 2007 to December 6, 2007. Prior to Exars merger with Sipex, he was Chief Executive Officer and a member of the
board of directors of Sipex. Exar filed an answer to the complaint on November 13, 2007. The case was removed to federal court on November 14, 2007, Cypress Semiconductor Corp. v. Sipex Corp., et al., United States District Court, Northern
District of California, Case No. C 07-05778 JF. The parties exchanged Initial Disclosures pursuant to Federal Rules of Civil Procedure, Rule 26(a)(1) on March 7, 2008. A Case Management Conference was held on March 14, 2008 before the
Honorable Jeremy Fogel. At the Case Management Conference, Judge Fogel ordered that discovery be stayed for 60 days to allow the parties the opportunity to discuss



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settlement. A Settlement Conference took place before Magistrate Judge Seeborg on May 13, 2008 which resulted in a settlement of the case. The terms of
the settlement are confidential and the settlement amount was not material to our financial condition, results of operations or liquidity. On May 28, 2008, Judge Fogel issued a conditional Order of Dismissal of the case with prejudice.

NOTE 18. INCOME TAX

During the second quarter and
first six months of fiscal 2009, we recorded an income tax provision of $64,000 and an income tax benefit of $59,000, respectively. During the second quarter and first six months of fiscal 2008, we recorded an income tax provision of $6.2 million
and $5.8 million, respectively. The recorded income tax provision in fiscal 2008 was primarily due to the establishment of an $8.3 million valuation allowance against our deferred tax assets as a result of the Sipex merger in August 2007.

During the second quarter and first six months of fiscal 2009, the unrecognized tax benefits increased by $0.3 million and $0.4 million, respectively, to
$9.8 million at September 28, 2008. The increase was primarily as a result of increased unrecognized tax benefit on R&D tax credits generated in the first six months of fiscal 2009. If recognized, all of these unrecognized tax benefits
would be recorded as a reduction of future income tax provision before consideration of changes in the valuation allowance on our deferred tax assets.

Estimated interest and penalties related to the income taxes are classified as a component of the provision for income taxes in the condensed consolidated statements of operations. Accrued interest and penalties were $0.3 million and
$0.2 million at the end of the second quarters of fiscal 2009 and fiscal 2008, respectively.

Our only major tax jurisdictions are the United States
federal and various U.S. states. The fiscal years 1998 through 2008 remain open and subject to examinations by the appropriate governmental agencies of the United States, with fiscal years 2001 through 2008 open to audits by certain U.S. states.

Emergency Economic Stabilization Act of 2008

The
Emergency Economic Stabilization Act of 2008, which contains the Tax Extenders and Alternative Minimum Tax Relief Act of 2008, was signed into law on October 3, 2008. Under the Act, the research credit was retroactively
extended for amounts paid or incurred after December 31, 2007 and before January 1, 2010. We do not expect any impact to our effective tax rate or tax provision during fiscal year 2009 as the result of this law change.

California Assembly Bill 1452

On
September 30, 2008, California enacted Assembly Bill 1452 which among other provisions, suspends net operating loss deductions for 2008 and 2009 and extends the carryforward period of any net operating losses not utilized due to such
suspension; adopts the federal 20-year net operating loss carryforward period; phases-in the federal two-year net operating loss carryback periods beginning in 2011 and limits the utilization of tax credits to 50 percent of a taxpayers taxable
income. We do not expect any impact to our effective tax rate or tax provision during fiscal year 2009 as the result of this law change.

NOTE 19.
SEGMENT AND GEOGRAPHIC INFORMATION

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



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Our net sales by product line were summarized as follows for the fiscal periods presented (in thousands):



|                 |  |                    |        |                   |   |                   |  |                   |        |  |   |       
|---------------- |  | ------------------ | ------ | ----------------- | - | ----------------- |  | ----------------- | ------ |  | - | ------
|                 |  | Three Months Ended |        | Six Months Ended 
|                 |  | September 28,2008  |        | September 302007* |   | September 28,2008 |  | September 302007*
|Communications   |  | $                  | 8,426  |                   | $ | 6,780             |  | $                 | 15,322 |  | $ | 13,926
|Interface        |  |                    | 17,954 |                   |   | 10,619            |  |                   | 36,479 |  |   | 20,574
|Power management |  |                    | 6,368  |                   |   | 1,774             |  |                   | 13,158 |  |   | 1,774 
|                 |  |                    |        |                   |   |                   |  |                   |        |  |   |       
|Total net sales  |  | $                  | 32,748 |                   | $ | 19,173            |  | $                 | 64,959 |  | $ | 36,274
|                 |  |                    |        |                   |   |                   |  |                   |        |  |   |       



|* | Revenue from Sipex products was included starting from August 26, 2007.
|- | -----------------------------------------------------------------------

Our net sales by geographic areas were summarized as follows for the fiscal periods presented (in thousands):



|                        |  |                    |        |                   |   |                   |  |                   |        |  |   |       
|----------------------- |  | ------------------ | ------ | ----------------- | - | ----------------- |  | ----------------- | ------ |  | - | ------
|                        |  | Three Months Ended |        | Six Months Ended 
|                        |  | September 28,2008  |        | September 302007* |   | September 28,2008 |  | September 302007*
|United States           |  | $                  | 8,401  |                   | $ | 6,318             |  | $                 | 16,427 |  | $ | 13,203
|China                   |  |                    | 7,032  |                   |   | 4,101             |  |                   | 14,247 |  |   | 7,068 
|Singapore               |  |                    | 4,237  |                   |   | 982               |  |                   | 8,442  |  |   | 1,906 
|Japan                   |  |                    | 2,302  |                   |   | 1,157             |  |                   | 4,695  |  |   | 2,272 
|Italy                   |  |                    | 1,524  |                   |   | 2,048             |  |                   | 2,707  |  |   | 3,843 
|Europe (excludes Italy) |  |                    | 5,049  |                   |   | 3,034             |  |                   | 10,902 |  |   | 5,929 
|Rest of world           |  |                    | 4,203  |                   |   | 1,533             |  |                   | 7,539  |  |   | 2,053 
|                        |  |                    |        |                   |   |                   |  |                   |        |  |   |       
|Total net sales         |  | $                  | 32,748 |                   | $ | 19,173            |  | $                 | 64,959 |  | $ | 36,274
|                        |  |                    |        |                   |   |                   |  |                   |        |  |   |       



|* | Revenue from Sipex products was included starting from August 26, 2007.
|- | -----------------------------------------------------------------------

Substantially all of our long-lived assets at the end of the second quarter of fiscal 2009 were located in the United States.

NOTE 20.
SUBSEQUENT EVENT

At our Annual Meeting of Stockholders held on October 16, 2008, our stockholders approved the proposed Stock Option Exchange
Program. Under the Stock Option Exchange Program, which we commenced on October 23, 2008, eligible employees have the opportunity to exchange certain outstanding options with exercise prices equal to or greater than $11.00 per share and an
expiration date after March 31, 2009 for restricted stock unit awards that cover a lesser number of shares of our common stock. The exchange ratio of shares subject to such eligible options to new awards issued will be 4-to-1, 5-to-1 or 6-to-1,
depending on the exercise price of the option being exchanged. We will follow FAS 123R to recognize the incremental compensation cost of the new awards granted in the exchange. The incremental compensation cost will be measured as the excess,
if any, of the fair value of each new award granted to employees in exchange for surrendered stock options, measured as of the date the new awards are granted, over the fair value of the stock options surrendered in exchange for the new awards,
measured immediately prior to the cancellation. This incremental compensation cost will be recognized ratably over the vesting period of the new awards. In the event that any of the new awards are forfeited prior to their vesting due to termination
of employment, the compensation cost for the forfeited new awards will not be recognized.



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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 Risk Factors below and elsewhere in this Quarterly Report,
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, (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 and (9) our ability to
estimate and reconcile distributors reported inventories to their activities. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors. 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. We disclaim any obligation to update information in any forward-looking statement.

BUSINESS
OVERVIEW

Exar Corporation (together with its subsidiaries, Exar or we) is a fabless semiconductor company that designs,
develops, markets and sells connectivity and power management products to the consumer, communications and industrial markets. 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 and industrial automation equipment. Our product portfolio spans a wide range of performance solutions from direct current to direct current (DC-DC)
regulators and controllers, voltage references, microprocessor supervisors, charge pump regulators and light-emitting diode (LED) drivers, single and multi-channel Universal Asynchronous Receiver/Transmitters (UART) for
portable and wireless applications, serial interfaces, port multipliers for storage applications, to T/E (T: North America and Asia transmission interface; E: European transmission interface) and Synchronous Optical Network/Synchronous Data
Hierarchy (Sonet/SDH) communications. Our products are designed working directly with large original equipment manufacturer (OEM) customers who help drive our technology roadmap and system solutions.

We market our products worldwide with sales offices and personnel located throughout the Americas, Europe, Asia and Japan. 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 in thirty-three countries 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
primarily of sales that are denominated in U.S. Dollars. Such 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 inPart II, Item 1A  Risk FactorsOur Financial Results May Fluctuate Significantly Because Of A Number Of Factors, Many Of Which Are Beyond Our Control.

In December 2007, we changed our fiscal year end from a fiscal year ending as of the last day of March to a 52-53 week fiscal year ending on the Sunday closest to
March 31. As part of this change, each fiscal quarter also ends on the Sunday closest to the end of the corresponding calendar quarter. The second fiscal quarters of 2009 and 2008 included 91 and 92 days from June 30, 2008 to
September 28, 2008 and July 1, 2007 to September 30, 2007, respectively.



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On August 25, 2007, we acquired Sipex Corporation (Sipex) through the merger of Sipex and a subsidiary
of Exar. Accordingly, the results of operations of Sipex and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning August 26, 2007.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our
financial statements and accompanying disclosures in conformity with U.S. GAAP, the accounting principles generally accepted in the United States, 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 U.S. Securities and Exchange Commission (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; and (6) long-lived assets. 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 can be found inItem 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 30, 2008.

RESULTS OF OPERATIONS

Net Sales by Product Line

We began to recognize revenue on shipments to our two primary distributors, Future Electronics Inc. (Future), a related party, and Nu Horizons Electronics Corp. (Nu Horizons), on a sell-through
basis beginning August 26, 2007. On that same date, we began to include sales from products acquired from Sipex. Certain net sales by product line for prior periods have been reclassified to be consistent with the presentation of the fiscal
year of 2009.

Our net sales by product line in absolute dollars and as a percentage of net sales were summarized for the periods presented (in thousands):



|                 |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |     |   |  |   |        |  |     |   |  |     |  
|---------------- |  | ------------------ | ------ |  | ------------------ | - |  | ---------------- | ------ |  | ----------------- | - |  | ------------------ | - |  | ------ | ------ |  | --- | - |  | - | ------ |  | --- | - |  | --- | -
|                 |  | Three Months Ended |        |  |                    |   |  | Six Months Ended |        |  |                   |  
|                 |  | September 28,2008  |        |  | September 30,2007* |   |  | Change           |        |  | September 28,2008 |   |  | September 30,2007* |   |  | Change |       
|Net sales:       |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |     |   |  |   |        |  |     |   |  |     |  
|Communications   |  | $                  | 8,426  |  | 26                 | % |  | $                | 6,780  |  | 36                | % |  | 24                 | % |  | $      | 15,322 |  | 24  | % |  | $ | 13,926 |  | 38  | % |  | 10  | %
|Interface        |  |                    | 17,954 |  | 55                 | % |  |                  | 10,619 |  | 55                | % |  | 69                 | % |  |        | 36,479 |  | 56  | % |  |   | 20,574 |  | 57  | % |  | 77  | %
|Power management |  |                    | 6,368  |  | 19                 | % |  |                  | 1,774  |  | 9                 | % |  | 259                | % |  |        | 13,158 |  | 20  | % |  |   | 1,774  |  | 5   | % |  | 642 | %
|                 |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |     |   |  |   |        |  |     |   |  |     |  
|Total            |  | $                  | 32,748 |  | 100                | % |  | $                | 19,173 |  | 100               | % |  |                    |   |  | $      | 64,959 |  | 100 | % |  | $ | 36,274 |  | 100 | % |  |     |  
|                 |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |     |   |  |   |        |  |     |   |  |     |  



|* | Revenue from Sipex products was included starting from August 26, 2007.
|- | -----------------------------------------------------------------------

Communications

Communications products include network access and transmission products and storage products as well as optical products
acquired from the Sipex merger. We estimate that the change of revenue recognition to a sell-through basis at our two primary distributors reduced sales of network access and transmission products by $0.6 million in the second quarter and first six
months of fiscal 2008. Additionally, the remaining revenue fluctuations are as follows:

For the second quarter of fiscal 2009, net sales of
communication products increased $1.0 million compared to the second quarter of fiscal 2008. Net sales of optical products increased $0.8 million as the merger occurred in mid second quarter of fiscal 2008. Net sales of network access and
transmission products increased $0.2 million, primarily due to increased sales volume of SONET products at lower prices.



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For the first six months of fiscal 2009, net sales of communication products increased $0.8 million
compared to the first six months of fiscal 2008. Net sales of optical products increased $1.8 million as the merger occurred in mid second quarter of fiscal 2008. Net sales of network access and transmission products decreased $1.0 million,
primarily due to price erosion on a SONET product.

Interface

Interface products include UARTs, video, imaging and other products as well as transceiver products acquired from the Sipex merger. We estimate that the change of revenue recognition to a sell-through basis at our two primary distributors
reduced sales of UART products by $1.5 million in the second quarter and first six months of fiscal 2008. Additionally, the remaining revenue fluctuations are as follows:

For the second quarter of fiscal 2009, net sales of interface products increased $5.8 million compared to the second quarter of fiscal 2008. Net sales of transceiver products increased $8.3 million as the merger
occurred in mid second quarter of fiscal 2008. Net sales of UARTs decreased $2.5 million, primarily due to decreased sales volume.

For the
first six months of fiscal 2009, net sales of interface products increased $14.4 million compared to the first six months of fiscal 2008. Net sales of transceiver products increased $18.0 million as the merger occurred in mid second quarter of
fiscal 2008. Net sales of UARTs decreased $3.6 million, primarily due to decreased sales volume.

Power Management

Power management products, including DC-DC regulators and LED drivers, were acquired from the Sipex. For the second quarter and first six months of fiscal 2009, our power
management products increased by $4.6 million and $11.4 million, respectively, compared to the same periods a year ago as the merger occurred in mid second quarter of fiscal 2008.

Net Sales by Channel

Our net sales by channel in absolute dollars and as a percentage of net sales were summarized
for the periods presented (in thousands):



|                          |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |     |   |  |   |        |  |     |   |  |     |  
|------------------------- |  | ------------------ | ------ |  | ------------------ | - |  | ---------------- | ------ |  | ----------------- | - |  | ------------------ | - |  | ------ | ------ |  | --- | - |  | - | ------ |  | --- | - |  | --- | -
|                          |  | Three Months Ended |        |  |                    |   |  | Six Months Ended |        |  |                   |  
|                          |  | September 28,2008  |        |  | September 30,2007* |   |  | Change           |        |  | September 28,2008 |   |  | September 30,2007* |   |  | Change |       
|Net sales:                |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |     |   |  |   |        |  |     |   |  |     |  
|Sell-through distributors |  | $                  | 19,097 |  | 58                 | % |  | $                | 7,135  |  | 37                | % |  | 168                | % |  | $      | 38,445 |  | 59  | % |  | $ | 13,732 |  | 38  | % |  | 180 | %
|Direct and others         |  |                    | 13,651 |  | 42                 | % |  |                  | 12,038 |  | 63                | % |  | 13                 | % |  |        | 26,514 |  | 41  | % |  |   | 22,542 |  | 62  | % |  | 18  | %
|                          |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |     |   |  |   |        |  |     |   |  |     |  
|Total                     |  | $                  | 32,748 |  | 100                | % |  | $                | 19,173 |  | 100               | % |  |                    |   |  | $      | 64,959 |  | 100 | % |  | $ | 36,274 |  | 100 | % |  |     |  
|                          |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |     |   |  |   |        |  |     |   |  |     |  



|* | Revenue from Sipex products was included starting from August 26, 2007.
|- | -----------------------------------------------------------------------

For the second quarter and first six months of fiscal 2009, net sales to our distributors for which we recognize revenue on the sell-through method, included $12.5 million and $25.4 million, respectively, from the sale of Sipex products and
net sales to direct customers and others included $4.1 million and $8.7 million, respectively, from the sale of Sipex products. In addition, we estimate that the change of revenue recognition to a sell-through basis at our two primary distributors
reduced sales by $2.1 million in the second quarter and first six months of fiscal 2008.

For the second quarter and first six months of fiscal 2008, net
sales from our sell-through distributors included $0.9 million from the sale of Sipex products. Net sales to direct customers and others for both the second quarter and first six months of fiscal 2008 included $2.0 million from the sale of Sipex
products.



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##### Table of Contents

Net Sales by Geography

Our net sales by geography in absolute dollars and as a percentage of net sales were summarized for the periods presented (in thousands):



|           |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |     |   |  |   |        |  |     |   |  |     |  
|---------- |  | ------------------ | ------ |  | ------------------ | - |  | ---------------- | ------ |  | ----------------- | - |  | ------------------ | - |  | ------ | ------ |  | --- | - |  | - | ------ |  | --- | - |  | --- | -
|           |  | Three Months Ended |        |  |                    |   |  | Six Months Ended |        |  |                   |  
|           |  | September 28,2008  |        |  | September 30,2007* |   |  | Change           |        |  | September 28,2008 |   |  | September 30,2007* |   |  | Change |       
|Net sales: |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |     |   |  |   |        |  |     |   |  |     |  
|Americas   |  | $                  | 8,562  |  | 26                 | % |  | $                | 6,318  |  | 33                | % |  | 36                 | % |  | $      | 16,605 |  | 26  | % |  | $ | 13,203 |  | 37  | % |  | 26  | %
|Asia       |  |                    | 17,602 |  | 54                 | % |  |                  | 7,773  |  | 40                | % |  | 126                | % |  |        | 34,728 |  | 53  | % |  |   | 13,300 |  | 36  | % |  | 161 | %
|Europe     |  |                    | 6,584  |  | 20                 | % |  |                  | 5,082  |  | 27                | % |  | 30                 | % |  |        | 13,626 |  | 21  | % |  |   | 9,771  |  | 27  | % |  | 39  | %
|           |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |     |   |  |   |        |  |     |   |  |     |  
|Total      |  | $                  | 32,748 |  | 100                | % |  | $                | 19,173 |  | 100               | % |  |                    |   |  | $      | 64,959 |  | 100 | % |  | $ | 36,274 |  | 100 | % |  |     |  
|           |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |     |   |  |   |        |  |     |   |  |     |  



|* | Revenue from Sipex products was included starting from August 26, 2007.
|- | -----------------------------------------------------------------------

For the second quarter and first six months of fiscal 2009, net sales in the Americas included $5.2 million and $9.9 million, respectively; and net sales in Asia included $8.7 million and $18.0 million respectively, and Europe included $1.6
million and $3.3 million, respectively, of sales of products acquired in the Sipex merger. In addition, we estimate that the change of revenue recognition to a sell-through basis at our two primary distributors reduced sales in the Americas by $2.1
million in the second quarter and first six months of fiscal 2008.

For the second quarter and first six months of fiscal 2008, net sales in the Americas
included $0.4 million from the sale of Sipex products; and net sales in Asia included $1.9 million and Europe included $0.6 million from the sale of Sipex products.

Gross Profit

Our gross profit in absolute dollars and as a percentage of net sales was summarized for the periods
indicated (in thousands):



|             |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |    |   |  |   |        |  |    |   |  |    |  
|------------ |  | ------------------ | ------ |  | ------------------ | - |  | ---------------- | ------ |  | ----------------- | - |  | ------------------ | - |  | ------ | ------ |  | -- | - |  | - | ------ |  | -- | - |  | -- | -
|             |  | Three Months Ended |        |  |                    |   |  | Six Months Ended |        |  |                   |  
|             |  | September 28,2008  |        |  | September 30,2007* |   |  | Change           |        |  | September 28,2008 |   |  | September 30,2007* |   |  | Change |       
|Net sales    |  | $                  | 32,748 |  |                    |   |  | $                | 19,173 |  |                   |   |  |                    |   |  | $      | 64,959 |  |    |   |  | $ | 36,274 |  |    |   |  |    |  
|Gross profit |  | $                  | 15,005 |  | 46                 | % |  | $                | 10,484 |  | 55                | % |  | 43                 | % |  | $      | 29,475 |  | 45 | % |  | $ | 21,841 |  | 60 | % |  | 35 | %



|* | Incremental revenue and gross profit from Sipex products was included starting from August 26, 2007.
|- | ----------------------------------------------------------------------------------------------------

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 manufacturing engineering;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | the cost of stock-based compensation;
| | - |  | -------------------------------------



| |  |  | the amortization of purchased intangible assets in connection with acquisitions; and
| | - |  | ------------------------------------------------------------------------------------



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

The decrease in gross profit, as a percentage of net sales, for the second quarter and first six months of fiscal 2009 as compared to the same periods a year ago, was primarily due to lower margins on products acquired with the Sipex
merger. Amortization expense for the purchased intangible assets decreased $0.5 million in the second quarter of fiscal 2009 as compared to the same period a year ago because the carrying value of the underlying assets were reduced by an impairment
charge we recorded in the fourth quarter of fiscal 2008. Amortization expense for the purchased intangible assets increased $0.2 million in the first six months of fiscal 2009 as compared to the same period a year ago, primarily due to amortization
expense in all six months in fiscal 2009, partially offset by lower amortization expense due to the impairment charge we recorded in the fourth quarter of fiscal 2008.



27



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##### Table of Contents

Stock-based compensation expense recorded in cost of sales was approximately $0.2 million and $0.4 million, respectively,
for the second quarter and first six months of fiscal 2009, as compared to approximately $0.1 million for both periods a year ago. The increase in stock-based compensation expense when compared to the same periods a year ago was primarily
attributable to unvested stock options assumed in connection with the Sipex merger.

Other Costs and Expenses



|                                    |  |                    |        |  |                    |   |  |                  |        |  |                   |   |  |                    |   |  |        |        |  |    |   |  |   |        |  |    |   |  |    |  
|----------------------------------- |  | ------------------ | ------ |  | ------------------ | - |  | ---------------- | ------ |  | ----------------- | - |  | ------------------ | - |  | ------ | ------ |  | -- | - |  | - | ------ |  | -- | - |  | -- | -
|                                    |  | Three Months Ended |        |  |                    |   |  | Six Months Ended |        |  |                   |  
|                                    |  | September 28,2008  |        |  | September 30,2007* |   |  | Change           |        |  | September 28,2008 |   |  | September 30,2007* |   |  | Change |       
|Net sales                           |  | $                  | 32,748 |  |                    |   |  | $                | 19,173 |  |                   |   |  |                    |   |  | $      | 64,959 |  |    |   |  | $ | 36,274 |  |    |   |  |    |  
|Research and development            |  |                    | 8,133  |  | 25                 | % |  |                  | 7,452  |  | 39                | % |  | 9                  | % |  |        | 16,225 |  | 25 | % |  |   | 13,511 |  | 37 | % |  | 20 | %
|Selling, general and administrative |  |                    | 9,746  |  | 30                 | % |  |                  | 8,503  |  | 44                | % |  | 15                 | % |  |        | 21,047 |  | 32 | % |  |   | 14,033 |  | 39 | % |  | 50 | %



|* | Incremental expenses from Sipex merger was included starting from August 26, 2007.
|- | ----------------------------------------------------------------------------------

Research and Development (R&D)

Our research and development costs consisted 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, test hardware, engineering supplies and services, and use of in-house test equipment;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Amortization of purchase intellectual property; and
| | - |  | ---------------------------------------------------



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

The increase in R&D
expenses for the second quarter and first six months of fiscal 2009 as compared to the same periods a year ago was primarily a result of incremental expense of $0.2 million and $1.7 million, respectively, due to our growth as a result of the Sipex
merger, amortization expense of $0.3 million and $0.5 million, respectively, of purchased intellectual property and higher labor-related costs.

Stock-based compensation expense recorded in R&D expenses was $0.5 million and $0.8 million, respectively, for the second quarter and first six months of fiscal 2009 as compared to $0.3 million and $0.5 million, respectively, for the
same periods a year ago. The increase in stock-based compensation expense when compared to the same periods a year ago was primarily attributable to assumed unvested stock options in connection with the Sipex merger.

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

Selling,
general and administrative expenses consisted primarily of:



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



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



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



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



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



28



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##### Table of Contents

The increase in SG&A expenses for the second quarter of fiscal 2009 as compared to the same period a year ago was
primarily as a result of incremental expense of $1.8 million due to our growth as a result of the Sipex merger, partially offset by decreased professional fees of $0.2 million.

The increase in SG&A expenses for the first six months of fiscal 2009 as compared to the same period a year ago was primarily as a result of incremental expense of $6.1 million due to our growth as a result of the
Sipex merger and increased professional fees of $1.2 million.

Stock-based compensation expense recorded in SG&A expenses was $0.4 million and $1.2
million, respectively, for the second quarter and first six months of fiscal 2009, as compared to $0.9 million and $1.4 million, respectively, for the same periods a year ago. The decrease in stock-based compensation expense when compared to the
same periods a year ago was primarily attributable to adjustments for pre-vesting forfeitures within our executive staff.

Acquired In-process Research
and Development

We recorded a charge of $8.8 million in acquired in-process research and development (IPR&D), associated with our
merger with Sipex in the second quarter of fiscal 2008. We allocated the purchase price related to IPR&D through established valuation techniques. IPR&D was expensed upon acquisition because technological feasibility had not been established
and no future alternative uses existed. The fair value of technology under development was determined using the income approach, which discounted expected future cash flows to present value, taking into account 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 derived from the IPR&D were discounted at discount rates ranging from 25% to 40%. The percentage of
completion for these projects ranged from 20% to 87% at the merger date.

The IPR&D projects underway at Sipex at the merger date were in the interface
and power management product families. Within interface, specific projects relate to new products in its Multiprotocol and RS485 families. Within power management, development activities relate to the commercialization of its digital power
technology, LED drivers, DC-DC regulators and controllers. Of these projects, three have been cancelled, seven require further development and testing to bring them up to production and three have been released to production. IPR&D projects for
power management requires an additional $0.6 million to complete and some product shipments began in late calendar year 2007. IPR&D projects for interface are expected to require $0.8 million to complete with expected revenue generation
beginning in mid calendar year 2009. All power management and interface projects are scheduled to complete by the end of fiscal year 2009.

Other Income
and Expenses



|                                                          |  |                    |   |  |                   |   |  |                  |    |  |                   |   |  |                   |   |  |        |   
|--------------------------------------------------------- |  | ------------------ | - |  | ----------------- | - |  | ---------------- | -- |  | ----------------- | - |  | ----------------- | - |  | ------ | --
|                                                          |  | Three Months Ended |   |  |                   |   |  | Six Months Ended |    |  |                   |  
|                                                          |  | September 28,2008  |   |  | September 30,2007 |   |  | Change           |    |  | September 28,2008 |   |  | September 30,2007 |   |  | Change |   
|Interest income and other, net                            |  | 2,508              |   |  | 4,588             |   |  | (45              | %) |  | 4,960             |   |  | 9,064             |   |  | (45    | %)
|Interest expense                                          |  | (330               | ) |  | (152              | ) |  | 117              | %  |  | (661              | ) |  | (152              | ) |  | 335    | % 
|Impairment charges on investments, net of realized gains: |  |                    |   |  |                   |   |  |                  |    |  |                   |   |  |                   |   |  |        |   
|Impairment charges on non-marketable securities           |  | (901               | ) |  | (449              | ) |  | 101              | %  |  | (901              | ) |  | (449              | ) |  | 101    | % 
|Loss on investments in short-term marketable securities   |  | (553               | ) |  |                  |   |  | 100              | %  |  | (553              | ) |  |                  |   |  | 100    | % 
|Realized gains on marketable securities                   |  | 27                 |   |  | 31                |   |  | (13              | %) |  | 245               |   |  | 52                |   |  | 371    | % 

Interest Income and Other, Net

Our interest income and other, net primarily consisted of:



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



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



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



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

The decrease in interest income and other, net during the second quarter and first six months of fiscal 2009 as compared to the same periods a year ago was primarily attributable to a decrease in interest income as a result of lower
invested cash balances and lower yield of the investments, partially offset by sublease income.



29



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##### Table of Contents

Our Hillview facility located in Milpitas, California, which we originally leased from Mission West Properties, L.P.
(See Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 15  Lease Obligations), was sublet to a subtenant in April 2008. The sublease expires on March 31, 2011 with average annual rent of approximately
$1.4 million. The sublease also requires the subtenant to pay certain operating costs associated with subleasing the facility. The sublease income for the second quarter and first six months of fiscal 2009 was approximately $0.4 million and $0.6
million, respectively.

Interest Expense

In connection
with the Sipex merger, we assumed a lease financing obligation related to a facility, located at 233 South Hillview Drive in Milpitas, California (the Hillview facility). 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 the condensed consolidated balance sheets. The effective interest rate is 8.2%. The interest expense for the second quarter and first six
months of fiscal 2009 was primarily attributable to the Hillview facility financing transaction.

Impairment Charges on Investments, Net of Realized
Gains

We follow the guidance provided by the FASB Staff Position No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments, (FSP 115-1), to assess whether our investments with unrealized loss positions are other-than-temporarily impaired. Realized gains and losses and declines in value judged to be other than temporary are
determined based on the specific identification method and are reported in the Other income and expense, net line item in our condensed consolidated statements of operations.

In September 2008, Lehman Brothers Holdings Inc. (Lehman) filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York. As a result of
Lehmans bankruptcy filing, we recorded an other-than-temporary impairment charge of a debt security in the amount of $0.6 million which was recorded in the Other income and expense, net line item in our condensed consolidated
statement of operations in the second quarter of fiscal 2009. Our unrealized loss, reported in the Accumulated other comprehensive income (loss) line item in the condensed consolidated balance sheets, was therefore reduced by this
amount.

In the second quarter of fiscal 2009, we analyzed the fair value of the underlying investment in TechFarm Fund and concluded that the remaining
carrying value in TechFarm Fund was other-than-temporarily impaired and recorded an impairment charge of $0.5 million. As such, we reduced the carrying value of our investment in TechFarm Fund to zero as of September 28, 2008. During the same
period, we also 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 $0.4 million.

In the second quarter of fiscal 2008, we performed a review of our investments and determined that two of the portfolio companies in the Skypoint Fund had limited cash
on hand and financing opportunities were minimal. We concluded that a portion of the carrying value had been other-than-temporarily impaired and recorded an impairment charge against our earnings of $0.4 million. No impairment charged was recorded
for TechFarm Fund in the second quarter of fiscal 2008.

Provision (Benefit) for Income Taxes

During the second quarter and first six months of fiscal 2009, we recorded an income tax provision of $64,000 and an income tax benefit of $59,000, respectively. During
the second quarter and first six months of fiscal 2008, we recorded an income tax provision of $6.2 million and $5.8 million, respectively. The recorded income tax provision in fiscal 2008 was primarily due to the establishment of an $8.3 million
valuation allowance against our deferred tax assets as a result of the Sipex merger in August 2007.



30



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##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES



|                                                         |  |                                |         |   |                   |   |         |  
|-------------------------------------------------------- |  | ------------------------------ | ------- | - | ----------------- | - | ------- | -
|                                                         |  | As of and For Six Months Ended |        
|(dollars in thousands)                                   |  | September 28,2008              |         |   | September 30,2007 |  
|Cash and cash equivalents                                |  | $                              | 58,377  |   |                   | $ | 99,637  |  
|Short-term investments                                   |  |                                | 202,375 |   |                   |   | 224,725 |  
|                                                         |  |                                |         |   |                   |   |         |  
|Total cash, cash equivalents, and short-term investments |  | $                              | 260,752 |   |                   | $ | 324,362 |  
|                                                         |  |                                |         |   |                   |   |         |  
|Percentage of total assets                               |  |                                | 64      | % |                   |   | 50      | %
|Net cash provided by operating activities                |  | $                              | 7,402   |   |                   | $ | 6,943   |  
|Net cash provided by (used in) investing activities      |  |                                | (59,956 | ) |                   |   | 8,490   |  
|Net cash used in financing activities                    |  |                                | (11,085 | ) |                   |   | (35,513 | )
|Effect of exchange rate change on cash                   |  |                                |        |   |                   |   | (92     | )
|                                                         |  |                                |         |   |                   |   |         |  
|Net decrease in cash and cash equivalents                |  | $                              | (63,639 | ) |                   | $ | (20,172 | )
|                                                         |  |                                |         |   |                   |   |         |  

Our net loss was approximately $4.6 million for the first six months of fiscal 2009. After adjustments for
non-cash items and changes in working capital, we generated $7.4 million of cash from operating activities.

Significant non-cash charges included:



| |  |  | Deprecation and amortization expenses of $7.1 million; and
| | - |  | ----------------------------------------------------------



| |  |  | Stock-based compensation expense of $2.4 million.
| | - |  | -------------------------------------------------

Working capital changes included:



| |  |  | a $1.2 million decrease in accounts receivable primarily due to higher collections of accounts receivable balances;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | a $1.3 million increase in inventory associated with our efforts to improve on-time delivery to our customer; and
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | a $0.8 million decrease in prepaid expenses such as prepaid insurance.
| | - |  | ----------------------------------------------------------------------

In the first six months of fiscal 2009, net cash used by investing activities reflects net purchase of short-term marketable securities of $58.5 million and $1.3 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
stock awards program, to increase our return on our invested capital and to bring our cash to a more appropriate level for our company. We may continue to utilize our share repurchase program described below, which would reduce our cash, cash
equivalents and/or short-term investments available to fund future operations and to meet other liquidity requirements.

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. The 2007 SRP was in addition to a share repurchase plan announced on March 6, 2001 (2001 SRP), which
covered the repurchase of up to $40 million of our common stock.

We repurchased a total of 1.5 million shares of our common stock at an aggregate
cost of $12.9 million under the 2007 SRP during the first six months of fiscal 2009. We did not repurchase any shares during the second quarter of fiscal 2009.

During the second quarter and first six months of fiscal 2008, we repurchased a total of 2.1 million and 2.4 million shares, respectively, of our common stock at an aggregate cost of $28.4 million and $32.4 million, respectively,
under both SRPs. In addition, we repurchased 10,000 shares at an aggregate cost of $1 from a former executive officer pursuant to a restricted stock purchase agreement in the first fiscal quarter of 2008.

We have fully utilized the 2001 SRP. As of September 28, 2008, the remaining authorized amount for the share repurchases under the 2007 SRP was $12.3 million. The
2007 SRP does not have a termination date.



31



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##### Table of Contents

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.

We believe that our cash and cash equivalents, short-term marketable securities and cash flows from operations will be sufficient to satisfy working capital requirements
and capital equipment 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. There can be no assurance that
additional financing could be obtained on terms acceptable to us. The sale of additional equity or convertible debt could result in dilution to our stockholders.

RECENT ACCOUNTING PRONOUNCEMENTS

Please refer toPart I, Item 1  Financial Statements andNotes to Condensed Financial Statements, Note 2  Accounting Policies.

OFF-BALANCE SHEET ARRANGEMENTS

As of September 28, 2008, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the SECs Regulation S-K.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Our contractual obligations
and commitments at September 28, 2008 were as follows (in thousands):



|                                                     |  |                  |       |      |   |       |  |      |       |                    |   |       |  |   |    |  |   |       
|---------------------------------------------------- |  | ---------------- | ----- | ---- | - | ----- |  | ---- | ----- | ------------------ | - | ----- |  | - | -- |  | - | ------
|                                                     |  | Fiscal Year      |       |     
|Contractual Obligations                              |  | Remainderof 2009 |       | 2010 |   | 2011  |  | 2012 |       | 2013 andthereafter |   | Total
|Purchase commitment (1)                              |  | $                | 4,261 |      | $ |      |  | $    |      |                    | $ |      |  | $ |   |  | $ | 4,261 
|Long-term lease financing obligation (2)             |  |                  | 909   |      |   | 2,865 |  |      | 2,906 |                    |   | 1,087 |  |   |   |  |   | 7,767 
|Lease obligations (3)                                |  |                  | 322   |      |   | 355   |  |      | 196   |                    |   | 149   |  |   |   |  |   | 1,022 
|Long-term investment commitments (Skypoint Fund) (4) |  |                  | 580   |      |   |      |  |      |      |                    |   |      |  |   |   |  |   | 580   
|Remediation commitment (5)                           |  |                  | 100   |      |   | 105   |  |      | 5     |                    |   | 5     |  |   | 35 |  |   | 250   
|                                                     |  |                  |       |      |   |       |  |      |       |                    |   |       |  |   |    |  |   |       
|Total                                                |  | $                | 6,172 |      | $ | 3,325 |  | $    | 3,107 |                    | $ | 1,241 |  | $ | 35 |  | $ | 13,880
|                                                     |  |                  |       |      |   |       |  |      |       |                    |   |       |  |   |    |  |   |       



|Note: | The table above excludes the liability for unrecognized income tax benefit of approximately $1.1 million at September 28, 2008 since we cannot predict with reasonable
reliability the timing of cash settlements with the respective taxing authorities.
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(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 contract over the next 12 to 18 months from our existing cash balances.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Lease payments (excluding $12.2 million estimated final obligation settlement with the lessor by returning the Hillview facility at the end of lease term due on our 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). It also includes $4.2 million related to a software license
for engineering design.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(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 Funds General Partner.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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##### Table of Contents

|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 28, 2008, 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 various banks and investment banking 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 $259.6 million as of
September 28, 2008 and $267.7 million as of March 30, 2008. 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 28, 2008, the increase or decline in the fair value of the portfolio would not be material. At September 28, 2008, the difference between the fair
market value and the underlying cost of the investments portfolio was net unrealized loss of $0.1 million. During the second quarter of fiscal 2009, we identified one investment to be other-than-temporary impaired and recorded an impairment charge
of $0.6 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 28, 2008, short-term investments consisted of commercial paper, asset-backed securities, corporate bonds and government securities of $202.4 million. We place our investments in instruments that meet
credit quality standards, as specified in our investment policy guidelines. The guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument. We do not use derivative financial instruments.



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

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

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 Report. This Evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer
(the CEO), as principal executive officer, and Chief Financial Officer (the CFO), as principal financial officer.

Attached as
Exhibits 31.1 and 31.2 of this Report 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 Report provides
information concerning the Evaluation referred to in the Certifications and should be read in conjunction with the Certifications.

Disclosure Controls 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 CEO and CFO, to allow timely decisions regarding required disclosure.

Based on the Evaluation, our CEO and
CFO have concluded that our Disclosure Controls are effective as of September 28, 2008.

Inherent Limitations on the Effectiveness of Disclosure
Controls

Our management, including the CEO and CFO, does not expect that the 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.



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Changes in Internal Control over Financial Reporting

There was 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.

PART II  OTHER INFORMATION



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

Please refer toPart I, Item 1
 Financial Statements andNotes to Condensed Consolidated Financial Statements, Note 17 Legal Proceedings.



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

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. Some of the
factors that affect our financial results, many of which are difficult or impossible to control or predict, include:



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



| |  |  | our 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 that has various margins;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | the effect of the timing of sales by our resellers on our reported results as a result of our sell-through revenue recognition policies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 a timely manner;
| | - |  | -------------------------------------------------------------------------------



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



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



| |  |  | 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; and
| | - |  | -----------------------------------------------------------------------------------



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



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



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



| |  |  | the ability of our suppliers and customers to obtain financing or to fund capital expenditures;
| | - |  | -----------------------------------------------------------------------------------------------



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



| |  |  | the announcement or introduction of products by our existing competitors or potential 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 life cycles;
| | - |  | -------------------------------------



| |  |  | 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 suppliers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | increase in manufacturing costs;
| | - |  | --------------------------------



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



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------



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



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | changes 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, operating results are likely to be materially adversely affected.

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:



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



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



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



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



| |  |  | 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 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 harming our business, results of operations and financial condition.



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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 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.

The general state of the U.S. and global economic uncertainties and specific conditions in the markets we address,
including the cyclical nature of and volatility in the semiconductor industry, may materially and adversely impact our business, financial condition and results of operations.

Recent general worldwide economic conditions have experienced a downturn due to many factors, including credit market conditions impacted by the subprime-mortgage turmoil and other factors, slower economic activity,
concerns about inflation and deflation, decreased consumer confidence and liquidity concerns. The tightened credit market, declines and fluctuations in the U.S. Dollar, corporate profits, interest rates, and capital markets, lower spending, the
impact of ongoing effects of the war in Iraq and other 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. Our revenue and profitability have generally followed market fluctuations in our industry, which fluctuations have affected the demand for our own and our customers products, thus affecting
our revenues and profitability. During challenging economic times, our customers may face issues gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us. If that were to occur,
we may be required to increase our allowance for doubtful accounts and our days sales outstanding would be negatively impacted. Further, our customers could experience substantial declines in demand for their products as a result of the economic
downturn and related factors, resulting in lower demand for our products. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, or in the semiconductor industry. If the economy or
markets in which we operate do not improve or continue to deteriorate, our business, financial condition and results of operations could be adversely impacted.

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, weaknesses, defects or bugs when first introduced or as
new versions are released. If any of our products contain production defects, 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 adversely affect our results of operations.

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 financial condition and results of operations.

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 technologies;
| | - |  | ----------------------



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



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



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



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



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



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| |  |  | 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);
| | - |  | --------------------------------------------------------------------



| |  |  | finite market windows for product introductions; and
| | - |  | ----------------------------------------------------



| |  |  | short end market product life cycles.
| | - |  | -------------------------------------

Our growth
depends in part on our successful development and 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.

Products for our customers applications are based on 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 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.

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 have secured a significant number of 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 and consolidations 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.



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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.

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 term, 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.

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, or a significant reduction in orders from either of them would materially and adversely affect our operating results, business and financial condition.

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.

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 undertaken a number of strategic acquisitions and investments in the past and may do so 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | 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 potential disruptions to the ongoing business.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------

Additional risks involved with acquisitions include:



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



| |  |  | difficulties in incorporating acquired technologies and intellectual property rights into 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 relationship with existing customers, distributors, channel partners and other parties;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



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



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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 balance;
| | - |  | -----------------------------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------



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



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



| |  |  | being subject to litigation.
| | - |  | ----------------------------

Risks involved with
strategic equity investments include:



| |  |  | the possibility of litigation resulting from these types of investments;
| | - |  | ------------------------------------------------------------------------



| |  |  | the possibility that we may not receive a financial return on our investments or incur losses from these investments;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | a changed or poorly executed strategic plan; and
| | - |  | ------------------------------------------------



| |  |  | the opportunity cost associated with committing capital in such investments.
| | - |  | ----------------------------------------------------------------------------

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 adversely impact
our business, financial condition and results of operations.

Because a significant portion of our total assets are 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 adversely impact our financial condition and results of operations.

We accounted for our merger using the purchase method of accounting. A significant portion of the purchase price for the business combination was
allocated to identifiable tangible and intangible assets and assumed liabilities based on estimated fair values at the date of consummation. The excess purchase price was allocated to goodwill. In accordance with the FAS 142,Goodwill and
Other Intangible Assets, goodwill is not amortized but is reviewed for impairment annually or more frequently if impairment indicators arise. We conduct our annual analysis of our goodwill in the fourth quarter of our fiscal year. Intangible
assets that are subject to amortization are reviewed for impairment in accordance with FAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that its 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 have an adverse impact on our operating results and our effective tax rate.



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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 that is in excess of our standard limited warranty
indemnification and could possibly result in greater costs, in excess of the original contract value. In an attempt to limit this liability, we have also increased our errors and omissions insurance policy to partially offset these potential
additional costs; however, our insurance coverage could be insufficient to prevent us from suffering material losses if the indemnification amounts are large enough.

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 adversely impact our financial position.

Our business may be
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 and continued
price erosion. Our competitors include many large domestic and foreign companies that have substantially greater financial, technical and management resources and leverage than we have.

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. 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 remain competitive, we
continue to evaluate our manufacturing operations for opportunities for additional cost savings and technological improvements. If we are unable to successfully implement new process technologies and to achieve volume production of new products at
acceptable yields, our operating results and financial condition may be 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 products;
| | - |  | ------------------------------------------



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| |  |  | 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; and
| | - |  | ---------------------------------------------



| |  |  | meet changing customer requirements.
| | - |  | ------------------------------------

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.

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 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 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 adversely impacted.

Affiliates of Future, Alonim Investments Inc. and two of its affiliates (collectively Alonim), own approximately 18% of our common stock, and as such, Alonim is our largest stockholder. This ownership position will allow
Future to significantly influence matters requiring stockholders approval. Futures ownership will continue to increase as a percentage of our outstanding shares if we continue to repurchase our common stock. In addition, an executive
officer of Future is on our board of directors, which could lead to actual or perceived influence from Future.

An affiliate of Future, our largest
distributor, owns a significant percentage of our outstanding shares and Pierre Guilbault, the chief financial officer of Future, is a member of our board of directors. Due to its affiliates ownership of a significant percentage of our common
stock, Future 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, although Future
is bound by a Lock-Up and Standstill Agreement until August 25, 2009, prohibiting Future from either soliciting proxies or seeking to advise anyone with respect to voting our stock. The significant ownership percentage of Future could have the
effect of delaying or preventing a change of control or otherwise discouraging a potential acquirer from obtaining control of us. Conversely, by virtue of Futures percentage ownership of our stock, Future could facilitate a takeover
transaction that our board of directors did not approve.

This relationship could also result in actual or perceived attempts to influence management 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.



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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), Bipolar processes and Bipolar-CMOS (BiCMOS) process. Chartered Semiconductor Manufacturing Ltd. (Chartered), located in Singapore, manufactures the majority
of the CMOS wafers from which our communications and UART products are produced. Episil, located in Taiwan, and Silan, located in China, manufacture the majority of 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. 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. This risk is particularly significant in the near term as we have recently transferred certain of our manufacturing processes to Silan and Episil.

We do not have long-term wafer supply agreements with Chartered 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 operating results.

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:



| |  |  | 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;
| | - |  | ----------------------------------------



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



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



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Our reliance on our wafer foundries and assembly and test subcontractors in Asia 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 material 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/or expand
capacity to meet increasing demand;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | acts of terrorism or civil unrest or an unanticipated disruption due to communicable diseases, political instability or natural disasters;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ----------------------------------------------



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



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



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



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To secure foundry capacity, we may be required to enter into financial and other arrangements with foundries, which
could result in the dilution of our earnings or otherwise harm our operating results.

Allocation of a foundrys manufacturing capacity may be
influenced by a foundry customers size, the existence of a long-term agreement with the foundry or other commitments. To address foundry capacity constraints, we and other semiconductor companies that rely on third-party foundries have
utilized various arrangements, including equity investments in or loans to foundries in exchange for guaranteed production capacity, joint ventures to own and operate foundries or take or pay contracts that commit a company to purchase
specified quantities of wafers over extended periods. These arrangements may not be available to us on acceptable terms, if at all. Any of these arrangements could require us to commit substantial capital and, accordingly, could require us to reduce
our cash holdings, incur additional debt or secure equity financing. This could result in the dilution of our earnings or the ownership of our stockholders or otherwise harm our operating results. Furthermore, we may not be able to obtain sufficient
foundry capacity in the future pursuant to such arrangements.

We may experience unforeseen complications from the transfer of
manufacturing processes to Hangzhou Silan Microelectronics Co. Ltd. and Hangzhou Silan Integrated Circuit Co. Ltd. (collectively Silan) in China and Episil Technologies Inc. (Episil) in Taiwan.

We transferred our manufacturing processes to foundries operated by Silan and Episil in conjunction with the closure of our Milpitas, California wafer
fabrication facility. Unforeseen transferring or quality issues may arise in the future that could cause additional delays which could materially adversely impact our ability to produce our products in time to meet customer demand. In addition, the
parties may be unable to achieve all or any of the expected benefits of the relationship within the anticipated time-frames. The anticipated synergies between us and Silan or Episil may not be as significant as originally expected. The manufacturing
processes and wafer testing for certain products may not be qualified by us following the transfer from us to Silan or Episil, or the qualification process may take significantly longer than expected. This could result in additional operating costs,
loss of customers and business disruptions.

Our ability to meet current demand or any increase in demand for our products may be limited by our
ability to test our semiconductor wafers.

As part of our manufacturing process, we must test many of our semiconductor wafers using certain
probe testing equipment. As such, our ability to meet current demand or any increase in demand for our products depends, in part, on our ability to have sufficient testing equipment available either through purchase or by gaining access
to equipment owned by our test subcontractors. Obtaining and installing this equipment is a time and capital intensive process and depends on our ability to accurately predict future sales. If we are unable to estimate future sales correctly or we
are unable to obtain the necessary testing equipment on a timely basis, we may be unable to meet the current demand or any increased demand for our products.

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, merger and/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 past 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.

Our employees are employed at-will, which means that they can terminate their employment at any time. The failure to
recruit and retain, as necessary, key design engineers, technical, sales, marketing and executive personnel could harm our business, financial condition and results of operations.



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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 significantly impact our 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.

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 mergers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | changes in share-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 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 acquired significant net operating loss (NOL) carryforwards as a result of
the merger. 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:



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



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



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| |  |  | 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;
| | - |  | ------------------------------------------------



| |  |  | 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; 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 circuits 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 present for an extended period of time.

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 current economic downturn 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.



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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.

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, it may not be commercially feasible to enforce. Moreover, we cannot be certain that our competitors will not 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 substantial 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.

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 of our products and harm our business.



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##### Table of Contents

|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
|------- | ----------------------------------------------------

We held our Annual Meeting of Stockholders on October 16, 2008 in Fremont, California. The number of shares issued, outstanding and eligible to vote as of the record date was 42,747,173. The following numbers of votes were cast for the
matters indicated:



| | 1. | The proposal of election of Directors.
| | -- | --------------------------------------



|                          |  |            |  |          
|------------------------- |  | ---------- |  | ---------
|Name                      |  | For        |  | Withheld 
|Pierre Guilbault          |  | 38,889,437 |  | 1,379,709
|Brian Hilton              |  | 39,335,703 |  | 933,443  
|Richard L. Leza           |  | 38,444,352 |  | 1,824,794
|Gary Meyers               |  | 39,944,916 |  | 324,230  
|Juan (Oscar) Rodriguez    |  | 38,617,307 |  | 1,651,839
|Pedro (Pete) P. Rodriguez |  | 39,284,148 |  | 984,998  



| | 2. | The proposal of ratifying the appointment of PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm for the fiscal year ending March 29,
2009.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|        |  |           
|------- |  | ----------
|FOR     |  | 39,502,246
|AGAINST |  | 754,834   
|ABSTAIN |  | 12,066    



| | 3. | The proposal of approving a stock option exchange program to permit eligible employees to voluntarily exchange eligible options to purchase shares of the Companys common stock
outstanding under the Companys existing equity incentive plans for a lesser number of restricted stock units to be granted under the Companys 2006 Equity Incentive Plan.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|        |  |           
|------- |  | ----------
|FOR     |  | 21,764,742
|AGAINST |  | 13,988,662
|ABSTAIN |  | 17,305    



|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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##### Table of Contents

SIGNATURES

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



|                 |  |  |  |                               |  |                               |  |                                                                              
|---------------- |  |  |  | ----------------------------- |  | ----------------------------- |  | -----------------------------------------------------------------------------
|                 |  |  |  | EXAR CORPORATION (Registrant)
|                 |  |  | 
|November 7, 2008 |  |  |  | By                            |  | /s/ Pedro (Pete) P. Rodriguez
|                 |  |  |  |                               |  |                               |  | Pedro (Pete) P. Rodriguez                                                    
|                 |  |  |  |                               |  |                               |  | Chief Executive Officer, President and Director (Principal Executive Officer)



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##### Table of Contents

EXHIBIT INDEX



|                 |  |                |  |                                                                                                                                                    
|---------------- |  | -------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Footnote |  | Exhibit Number |  | Description                                                                                                                                        
|                 |  |               
|(b)              |  | 3.1            |  | Amended and Restated Certificate of Incorporation.                                                                                                 
|                 |  |               
|(c)              |  | 3.2            |  | Amended and Restated Bylaws.                                                                                                                       
|                 |  |               
|(a)              |  | 31.1           |  | Principal Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|                 |  |               
|(a)              |  | 31.2           |  | Principal Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|                 |  |               
|(a)              |  | 32.1           |  | Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|                 |  |               
|(a)              |  | 32.2           |  | Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



|(a) | Filed herewith.
|--- | ---------------



|(b) | Filed as an exhibit to Exars Annual Report on Form 10-K for the fiscal year ended March 31, 2007 and incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



|(c) | Filed as an exhibit to Exars Current Report on Form 8-K filed on December 12, 2007 and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------



51