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 March 27, 2010





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








For the
Transition Period from _______ to _______





Commission
File Number 0-27026








Pericom
Semiconductor Corporation


(Exact
Name of Registrant as Specified in Its Charter)




California
            77-0254621(State or Other
      Jurisdiction of
              Incorporation or
      Organization)
            (I.R.S.
      Employer
              Identification
      No.)




3545
North First Street


San Jose,
California  95134


(408)
435-0800


(Address
of Principal Executive Offices and


Issuer’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 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  o





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





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




Large Accelerated
      Filer  o
            Accelerated
      Filer  xNon-accelerated
      Filer  o
            Smaller Reporting
      Company  o





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
126-2 of the Exchange Act)





Yes 
o   
 No  x





As of May
4, 2010 the Registrant had outstanding 25,351,000 shares of Common
Stock.










Pericom
Semiconductor Corporation





Form 10-Q
for the Quarter Ended March 27, 2010





INDEX







PART
      I.  FINANCIAL INFORMATION
            PageItem 1: 
      Condensed Consolidated Financial Statements (Unaudited)Condensed
      Consolidated Balance Sheets as of
              March 27, 2010 and June 27,
      2009
            3Condensed Consolidated Statements
      of Operations
              for the three and nine months
      ended March 27, 2010
              and
      March 28, 2009
            4Condensed Consolidated Statements
      of Cash Flows
              for the nine months ended March
      27, 2010
              and
      March 28, 2009
            5Notes to Condensed
      Consolidated Financial Statements
            6Item 2:  Management’s
      Discussion and Analysis of
              Financial
      Condition and Results of Operations
            21Item 3:  Quantitative and
      Qualitative Disclosures about
              Market
      Risk
            31Item 4: 
      Controls and Procedures
            31PART
      II.  OTHER INFORMATIONItem
      1A:  Risk Factors
            32Item 2: 
      Unregistered Sales of Equity Securities and Use of
Proceeds
            42Item 6: 
      Exhibits
            43Signatures




2


PART
I.  FINANCIAL INFORMATION


Item 1:
Condensed Consolidated Financial Statements





Pericom
Semiconductor Corporation


Condensed
Consolidated Balance Sheets


(In
thousands, except share data)




March
      27
              
              
              June
      27,2010
              
              
              2009(Unaudited)
              
              
              
              (1)ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              34,528
              
              
              $
              37,321Restricted
      cash
              
              
              -
              
              
              
              3,200Short-term
      investments
              
              
              74,933
              
              
              
              75,471Accounts
      receivableTrade
      (net of allowances of $2,195 and $2,163)
              
              
              22,458
              
              
              
              22,875Other
      receivables
              
              
              1,537
              
              
              
              1,663Inventories
              
              
              18,605
              
              
              
              16,340Prepaid
      expenses and other current assets
              
              
              2,610
              
              
              
              2,075Deferred
      income taxes
              
              
              2,674
              
              
              
              2,433Total
      current assets
              
              
              157,345
              
              
              
              161,378Property,
      plant and equipment – net
              
              
              49,274
              
              
              
              47,238Investments
      in unconsolidated affiliates
              
              
              12,495
              
              
              
              10,826Deferred
      income taxes – non-current
              
              
              3,767
              
              
              
              4,657Long-term
      investments in marketable securities
              
              
              16,898
              
              
              
              11,780Goodwill
              
              
              1,685
              
              
              
              1,673Intangible
      assets
              
              
              1,543
              
              
              
              1,764Other
      assets
              
              
              7,440
              
              
              
              6,742Total
      assets
              
              $
              250,447
              
              
              $
              246,058LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              11,140
              
              
              $
              10,824Accrued
      liabilities and other
              
              
              10,555
              
              
              
              15,118Current
      portion of long term debt
              
              
              123
              
              
              
              60Total
      current liabilities
              
              
              21,818
              
              
              
              26,002Long
      term debt
              
              
              1,570
              
              
              
              1,610Industrial
      development subsidy
              
              
              4,822
              
              
              
              3,718Other
      long-term liabilities
              
              
              1,522
              
              
              
              1,287Total
      liabilities
              
              
              29,732
              
              
              
              32,617Commitments
      (Note 7)Shareholders’
      equity:Common
      stock and paid in capital - no par value, 60,000,000
shares
              
              
              133,297
              
              
              
              133,162authorized;
      shares issued and outstanding: March 27, 2010,25,288,000;
      June 27, 2009, 25,462,000Retained
      earnings
              
              
              85,125
              
              
              
              78,249Accumulated
      other comprehensive income, net of tax
              
              
              2,293
              
              
              
              797Total
      Pericom shareholders’ equity
              
              
              220,715
              
              
              
              212,208Noncontrolling
      interests in consolidated subsidiaries
              
              
              -
              
              
              
              1,233Total
      shareholders' equity
              
              
              220,715
              
              
              
              213,441Total
      liabilities and shareholders' equity
              
              $
              250,447
              
              
              $
              246,058


(1) The
information in this column was derived from the Company’s audited consolidated
financial statements for the year ended June 27, 2009.




See notes
to condensed consolidated financial statements.





3





Pericom
Semiconductor Corporation


Condensed
Consolidated Statements of Operations


(In
thousands, except per share amounts)


(Unaudited)







Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      27,
              
              
              March
      28,
              
              
              March
      27,
              
              
              March
      28,2010
              
              
              2009
              
              
              2010
              
              
              2009Net
      revenues
              
              $
              36,661
              
              
              $
              24,394
              
              
              $
              105,418
              
              
              $
              98,924Cost
      of revenues
              
              
              23,723
              
              
              
              15,731
              
              
              
              69,900
              
              
              
              64,321Gross
      profit
              
              
              12,938
              
              
              
              8,663
              
              
              
              35,518
              
              
              
              34,603Operating
      expenses:Research
      and development
              
              
              4,251
              
              
              
              3,996
              
              
              
              12,633
              
              
              
              12,580Selling,
      general and administrative
              
              
              6,201
              
              
              
              5,136
              
              
              
              19,065
              
              
              
              17,490Restructuring
      charge
              
              
              -
              
              
              
              293
              
              
              
              -
              
              
              
              510Total
      operating expenses
              
              
              10,452
              
              
              
              9,425
              
              
              
              31,698
              
              
              
              30,580Income
      (loss) from operations
              
              
              2,486
              
              
              
              (762
              )
              
              
              3,820
              
              
              
              4,023Interest
      and  other income
              
              
              1,219
              
              
              
              1,501
              
              
              
              4,150
              
              
              
              3,871Other-than-temporary
      decline in value of investment
              
              
              -
              
              
              
              (48
              )
              
              
              -
              
              
              
              (506
              )Income  before
      income taxes
              
              
              3,705
              
              
              
              691
              
              
              
              7,970
              
              
              
              7,388Income
      tax expense
              
              
              1,260
              
              
              
              460
              
              
              
              2,737
              
              
              
              2,344Net
      income from consolidated companies
              
              
              2,445
              
              
              
              231
              
              
              
              5,233
              
              
              
              5,044Equity
      in net income of unconsolidated affiliates
              
              
              608
              
              
              
              49
              
              
              
              1,671
              
              
              
              95Net
      income
              
              
              3,053
              
              
              
              280
              
              
              
              6,904
              
              
              
              5,139Net
      income attributable to noncontrolling interests
              
              
              -
              
              
              
              (24
              )
              
              
              (28
              )
              
              
              (92
              )Net
      income attributable to Pericom shareholders
              
              $
              3,053
              
              
              $
              256
              
              
              $
              6,876
              
              
              $
              5,047Basic
      income per share to Pericom shareholders
              
              $
              0.12
              
              
              $
              0.01
              
              
              $
              0.27
              
              
              $
              0.20Diluted
      income per share to Pericom shareholders
              
              $
              0.12
              
              
              $
              0.01
              
              
              $
              0.27
              
              
              $
              0.20Shares
      used in computing basic income per share
              
              
              25,386
              
              
              
              25,218
              
              
              
              25,479
              
              
              
              25,438Shares
      used in computing diluted income per share
              
              
              25,697
              
              
              
              25,282
              
              
              
              25,762
              
              
              
              25,673








See notes
to condensed consolidated financial statements.




4


Pericom
Semiconductor Corporation


Condensed
Consolidated Statements of Cash Flows


(In
thousands)


(Unaudited)




Nine Months
      EndedMarch
      27,
              
              
              March
      28,2010
              
              
              2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
              
              $
              6,904
              
              
              $
              5,139Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              5,855
              
              
              
              5,844Stock
      based compensation
              
              
              2,861
              
              
              
              2,698Tax
      benefit resulting from stock option transactions
              
              
              225
              
              
              
              170Excess
      tax benefit resulting from stock option transactions
              
              
              (32
              )
              
              
              (13
              )Write
      off of in-process research and development
              
              
              -
              
              
              
              34Other
      than temporary decline in the value of investments
              
              
              -
              
              
              
              458Gain
      on sale of investments
              
              
              (1,988
              )
              
              
              (1,071
              )Loss
      on disposal of assets
              
              
              -
              
              
              
              2Equity
      in net income of unconsolidated affiliates
              
              
              (1,671
              )
              
              
              (95
              )Deferred
      taxes
              
              
              683
              
              
              
              (677
              )Changes
      in assets and liabilities:Accounts
      receivable
              
              
              1,040
              
              
              
              5,275Inventories
              
              
              (2,014
              )
              
              
              (42
              )Prepaid
      expenses and other current assets
              
              
              190
              
              
              
              4,509Other
      assets
              
              
              (754
              )
              
              
              (11
              )Accounts
      payable
              
              
              298
              
              
              
              (4,691
              )Accrued
      liabilities and other
              
              
              (5,659
              )
              
              
              (1,569
              )Other
      long-term liabilities
              
              
              1,363
              
              
              
              -Net
      cash provided by operating activities
              
              
              7,301
              
              
              
              15,960CASH
      FLOWS FROM INVESTING ACTIVITIES:Additions
      to property, plant and equipment
              
              
              (6,668
              )
              
              
              (12,683
              )Purchase
      of available-for-sale investments
              
              
              (84,278
              )
              
              
              (100,683
              )Maturities
      and sales of available-for-sale and trading investments
              
              
              81,145
              
              
              
              89,847Cash
      paid for PTL noncontrolling interest acquisition
              
              
              -
              
              
              
              (1,285
              )Cash
      paid for SRe noncontrolling interest acquisition
              
              
              (1,223
              )
              
              
              -Change
      in restricted cash balance
              
              
              3,200
              
              
              
              -Net
      cash used in investing activities
              
              
              (7,824
              )
              
              
              (24,804
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from common stock issuance under stock plans
              
              
              1,488
              
              
              
              1,544Excess
      tax benefit resulting from stock option transactions
              
              
              32
              
              
              
              13Mortgage
      financing
              
              
              (31
              )
              
              
              1,669Repurchase
      of common stock
              
              
              (4,251
              )
              
              
              (5,451
              )Net
      cash used in financing activities
              
              
              (2,762
              )
              
              
              (2,225
              )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
              
              
              492
              
              
              
              (960
              )NET
      DECREASE IN CASH AND CASH EQUIVALENTS
              
              
              (2,793
              )
              
              
              (12,029
              )CASH
      AND CASH EQUIVALENTS:Beginning
      of period
              
              
              37,321
              
              
              
              41,646End
      of period
              
              $
              34,528
              
              
              $
              29,617


See notes
to condensed consolidated financial statements.





5


Pericom
Semiconductor Corporation


Notes To
Condensed Consolidated Financial Statements


(Unaudited)







1.  BASIS
OF PRESENTATION







The
condensed consolidated financial statements have been prepared by Pericom
Semiconductor Corporation (“Pericom” or the “Company”) pursuant to the rules and
regulations of the Securities and Exchange Commission.  In the opinion
of management, these unaudited condensed consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments and
accruals, necessary for a fair presentation of the Company’s financial position
as of March 27, 2010, the results of operations for the three and nine months
ended March 27, 2010 and March 28, 2009 and cash flows for the nine months ended
March 27, 2010 and March 28, 2009.  This unaudited quarterly
information should be read in conjunction with the audited consolidated
financial statements of Pericom and the notes thereto included in the Company’s
Annual Report on Form 10-K as filed with the Securities and Exchange Commission
on September 25, 2009.





The
preparation of the interim condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the interim condensed consolidated financial
statements and the reported amounts of revenue and expenses during the
period.  Actual amounts could differ from these
estimates.  The results of operations for the three and nine months
ended March 27, 2010 and March 28, 2009 are not necessarily indicative of the
results to be expected for the entire year.  The three and nine month
periods ended March 27, 2010 and March 28, 2009 each had 13 and 39 week periods,
respectively.





The
Company participates in a dynamic high technology industry and believes that
changes in any of the following areas could have a material adverse effect on
the Company’s future financial position or results of
operations:  advances and trends in new technologies; competitive
pressures in the form of new products or price reductions on current products;
changes in the overall demand for products offered by the Company; changes in
customer relationships; acquisitions and the subsequent integration of the
acquired entity with the Company; litigation or claims against the Company based
on intellectual property, patent, product, regulatory or other factors; risks
associated with changes in domestic and international economic and/or political
conditions or regulations and environmental laws; availability of necessary
components; interruptions at wafer suppliers and subcontractors; fluctuations in
currencies given the Company’s sales and operations heavily weighted and paid in
foreign currencies; and the Company’s ability to attract and retain employees
necessary to support its growth.





These
interim condensed consolidated financial statements include the accounts of
Pericom Semiconductor Corporation and its wholly owned subsidiaries,
SaRonix-eCERA Corporation (“SRe”), Pericom Taiwan Limited Corporation (“PTL”),
Pericom Semiconductor Hong Kong Limited (“PSC-­HK”) and Pericom Asia Limited
(“PAL”). In addition PAL has a wholly-owned subsidiary, PSE Technology
(Shandong) Corporation ("PSE"), in China to operate a factory for the
development and manufacture of frequency control products (“FCPs”). The Company
eliminates all intercompany balances and transactions in
consolidation.





WARRANTY
The Company offers a standard one-year product replacement
warranty.  In the past, the Company has not had to accrue for a
general warranty reserve, but assesses the level and materiality of RMAs and
determines whether it is appropriate to accrue for estimated returns of
defective products at the time revenue is recognized.  On occasion,
management may determine to accept product returns beyond the standard one-year
warranty period.  In those instances, the Company accrues for the
estimated cost at the time management decides to accept the
return.  Because of the Company’s standardized manufacturing processes
and product testing procedures, returns of defective product are infrequent and
the quantities have not been significant.  Accordingly, historical
warranty costs have not been material.





6


RECENTLY
ISSUED ACCOUNTING STANDARDS





In
February 2010, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2010-09, which amends the
Subsequent Events Topic of the Accounting Standards Codification (ASC) to
eliminate the requirement for public companies to disclose the date through
which subsequent events have been evaluated. The Company will continue to
evaluate subsequent events through the date of the issuance of the financial
statements, however, consistent with the guidance, this date will no longer be
disclosed. ASU 2010-09 does not have any impact on the Company’s results of
operations, financial condition or liquidity.





In
January 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No.
2010-06, Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements. ASU No. 2010-06 amends ASC 820 and clarifies and provides
additional disclosure requirements on the transfers of assets and liabilities
between Level 1 (quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable inputs) of the fair value
measurement hierarchy, including the reasons for and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities on
purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance is effective for Pericom with the reporting period
beginning December 27, 2009, except for the disclosure on the roll forward
activities for Level 3 fair value measurements, which will become effective for
Pericom with the fiscal year beginning after December 15, 2010. Other than
requiring additional disclosures, adoption of this new guidance will not have a
material impact on our financial statements.




In June
2009, the FASB amended certain guidance for determining whether an entity is a
variable interest entity (VIE), requires a qualitative rather than a
quantitative analysis to determine the primary beneficiary for a VIE, requires
continuous assessments of whether an enterprise is the primary beneficiary of a
VIE and requires enhanced disclosures about an enterprise’s involvement with a
VIE. The guidance is effective for fiscal years beginning after
November 15, 2009, for interim periods within those fiscal years, and for
interim and annual reporting periods thereafter. We are currently evaluating the
impact this guidance will have on our consolidated financial position, results
of operations and cash flows.





In
December 2007, the FASB issued ASC No. 805, Business Combinations (“ASC
805”), previously referred to as  SFAS 141(R), Business Combinations. ASC 805 establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree. ASC 805
also provides guidance for recognizing and measuring the goodwill acquired in
the business combination and determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. The provisions of ASC 805 are effective for the
fiscal year beginning June 28, 2009.  The adoption of  ASC
805 did not have an impact on the Company’s consolidated financial position,
results of operations or cash flows.





In
December 2007, the FASB issued ASC No. 810-10-65, Transition Related to Noncontrolling
Interests in Consolidated Financial Statement(“ASC 810-10-65”),
previously referred to asSFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of Accounting Research Bulletin
(“ARB”) No. 51. ASC 810-10-65 establishes new accounting and reporting
standards for a non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the
recognition of a noncontrolling interest as equity in the consolidated financial
statements separate from the parent’s equity. The amount of net income
attributable to the noncontrolling interest will be included in consolidated net
income on the face of the income statement. ASC 810-10-65 clarifies that changes
in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the non-controlling equity
investment on the deconsolidation date. ASC 810-10-65 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. The provisions of ASC 810-10-65 are effective for the
fiscal year beginning June 28, 2009 and the presentation and disclosure
requirements must be applied retrospectively for all periods presented at that
date. The Company has adopted this standard, and prior periods have been
restated to reflect the presentation and disclosure requirements of the new
guidance.





7


2.
INTANGIBLE ASSETS






Pericom’s
intangible assets are derived from completed acquisitions and for each of the
following period-ending dates are composed of:




March
      27, 2010
              
              
              June
      27, 2009(in
      thousands)
              
              Gross
              
              
              Accumulated
      Amortization
              
              
              Net
              
              
              Gross
              
              
              Accumulated
      Amortization
              
              
              NeteCERA
      trade name
              
              $
              41
              
              
              $
              (27
              )
              
              $
              14
              
              
              $
              40
              
              
              $
              (22
              )
              
              $
              18Core
      developed technology
              
              
              1,868
              
              
              
              (960
              )
              
              
              908
              
              
              
              1,833
              
              
              
              (757
              )
              
              
              1,076SaRonix
      supplier relationship
              
              
              398
              
              
              
              (192
              )
              
              
              206
              
              
              
              398
              
              
              
              (143
              )
              
              
              255Total
      amortizable purchased intangible assets
              
              
              2,307
              
              
              
              (1,179
              )
              
              
              1,128
              
              
              
              2,271
              
              
              
              (922
              )
              
              
              1,349SaRonix
      trade name
              
              
              415
              
              
              
              -
              
              
              
              415
              
              
              
              415
              
              
              
              -
              
              
              
              415Total
      purchased intangible assets
              
              $
              2,722
              
              
              $
              (1,179
              )
              
              $
              1,543
              
              
              $
              2,686
              
              
              $
              (922
              )
              
              $
              1,764





Amortization
expense related to finite-lived purchased intangible assets was approximately
$83,000 and $247,000 for the three and nine month periods ended March 27, 2010
and $76,000 and $177,000 for the three and nine month periods ended March 28,
2009, respectively.





The Company performs an impairment review of its
intangible assets at least annually.  Based on the results of its most
recent impairment review, the Company determined that no impairment of its
intangible assets existed as of June 27, 2009. However, future impairment
reviews could result in a charge to earnings.





The
finite-lived purchased intangible assets consist of supplier relationships,
trade names and core developed technology, which have remaining weighted average
useful lives of approximately four years.  We expect our future
amortization expense associated with the Company’s intangible assets over the
next five years to be:





Months
      from March 27, 2010(in
      thousands)
              
              Next
      12 Months
              
              
              13-24 Months
              
              
              25-36 Months
              
              
              37-48 Months
              
              
              49-60 MonthsExpected
      amortization-PTL
              
              $
              187
              
              
              $
              187
              
              
              $
              187
              
              
              $
              110
              
              
              $
              -Expected
      amortization-SaRonix
              
              
              117
              
              
              
              117
              
              
              
              117
              
              
              
              36
              
              
              
              -Expected
      amortization-eCERA
              
              
              29
              
              
              
              29
              
              
              
              12
              
              
              
              -
              
              
              
              -$
              333
              
              
              $
              333
              
              
              $
              316
              
              
              $
              146
              
              
              $
              -







3.  INCOME
PER SHARE







Basic
income per share is based upon the weighted average number of common shares
outstanding.  Diluted income per share reflects the additional
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.





Basic and
diluted income per share attributable to Pericom shareholders for the three and
nine month periods ended March 27, 2010 and March 28, 2009 are computed as
follows:





8


Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      27,
              
              
              March
      28,
              
              
              March
      27,
              
              
              March
      28,(in
      thousands, except per share data)
              
              2010
              
              
              2009
              
              
              2010
              
              
              2009Net
      income attributable to Pericom shareholders
              
              $
              3,053
              
              
              $
              256
              
              
              $
              6,876
              
              
              $
              5,047Computation
      of common shares outstanding – basic earnings per share:Weighted
      average shares of common stock
              
              
              25,386
              
              
              
              25,218
              
              
              
              25,479
              
              
              
              25,438Basic
      earnings per share attributable to Pericom shareholders
              
              $
              0.12
              
              
              $
              0.01
              
              
              $
              0.27
              
              
              $
              0.20Computation
      of common shares outstanding – diluted earnings per share:Weighted
      average shares of common stock
              
              
              25,386
              
              
              
              25,218
              
              
              
              25,479
              
              
              
              25,438Dilutive
      shares using the treasury stock method
              
              
              311
              
              
              
              64
              
              
              
              283
              
              
              
              235Shares
      used in computing diluted earnings per share
              
              
              25,697
              
              
              
              25,282
              
              
              
              25,762
              
              
              
              25,673Diluted
      earnings per share attributable to Pericom shareholders
              
              $
              0.12
              
              
              $
              0.01
              
              
              $
              0.27
              
              
              $
              0.20





Options
to purchase 2,897,000 and 2,819,000 shares of common stock, and restricted stock
units of 75,000 and 80,000 were outstanding as of March 27, 2010 for the three
and nine months ended respectively, but not included in the computation of
diluted earnings per share because the options and units would be anti-dilutive
under the treasury stock method. Options to purchase 3,816,000 and 3,165,000
shares of common stock and restricted stock units of 217,000 and 130,000 were
outstanding as of March 28, 2009 for the three and nine months ended
respectively, but not included in the computation of diluted earnings per share
because the options and units would be anti-dilutive under the treasury stock
method.




4.  INVENTORIES







Inventories
consist of:




March
      27,
              
              
              June
      27,(in
      thousands)
              
              2010
              
              
              2009Raw
      materials
              
              $
              7,919
              
              
              $
              5,529Work
      in process
              
              
              5,485
              
              
              
              5,369Finished
      goods
              
              
              5,201
              
              
              
              5,442$
              18,605
              
              
              $
              16,340


The
higher inventory levels at March 27, 2010 reflect improved sales levels during
the first nine months of  fiscal 2010 as well as the anticipation of
continued sales increases.





The
Company considers raw material inventory obsolete and reserves it if the raw
material has not moved in 365 days.  The Company reviews its assembled
devices for excess and writes them off if the quantity of assembled devices in
inventory is in excess of the greater of the quantity shipped in the previous
twelve months, the quantity in backlog or the quantity forecasted to be shipped
in the following twelve months.  In certain circumstances, management
will determine, based on expected usage or other factors, that inventory
considered excess by these guidelines should not be written off. The Company
does occasionally determine that last twelve months’ sales levels will not
continue and reserves inventory in line with the quantity forecasted. As of
March 27, 2010, the Company had $3.3 million of written-off inventory as
compared to $4.1 million at June 27, 2009.  The Company attributes
this reduction of approximately $735,000 in obsolete inventory between March 27,
2010 and June 27, 2009 to sales of previously reserved inventory and physically
scrapping products previously written-off, partially offset by additional
write-offs.







5.  ACCRUED
LIABILITIES







Accrued
liabilities consist of:





9


March
      27,
              
              
              June
      27,(in
      thousands)
              
              2010
              
              
              2009Accrued
      construction liabilities
              
              $
              2,564
              
              
              $
              8,958Accrued
      compensation
              
              
              4,463
              
              
              
              3,815Accrued
      income tax
              
              
              1,988
              
              
              
              971External
      sales representative commissions
              
              
              581
              
              
              
              470Other
      accrued expenses
              
              
              959
              
              
              
              904$
              10,555
              
              
              $
              15,118


6.
DEBT




The short
and long term debt as reported in the consolidated balance sheet as of March 27,
2010is as
follows:




Annual
              
              
              
              
              
              Total
      Amounts Due(in
      thousands)
              
              Interest
      Rate
              
              
              Total
      due
              
              
              Within 12
      Months
              
              
              After 12
      MonthsMortgage
      loan - PTL
              
              
              1.67
              %
              
              $
              1,693
              
              
              $
              123
              
              
              $
              1,570




PTL took
out a 15-year mortgage on its building in December 2008 in the amount of $1.7
million. The debt carries a variable rate of interest at the 1-year time deposit
rate plus 0.64% for the first two years and plus 1.34% afterwards. The loan is
denominated in New Taiwanese Dollars and only interest was required to be paid
until January 2010, after which it became a fully amortizing loan.




As
discussed in Note 16, Subsequent Events, the Company paid off this mortgage in
April 2010.






7.  COMMITMENTS




The
Company’s future minimum commitments at March 27, 2010 are as
follows:




Months
      from 3/27/2010(in
      thousands)
              
              Less
      than 12 Months
              
              
              12-24
      Months
              
              
              24-36
      Months
              
              
              36-48
      Months
              
              
              48-60
      Months
              
              
              Thereafter
              
              
              TotalOperating
      lease payments
              
              $
              1,412
              
              
              $
              1,244
              
              
              $
              1,261
              
              
              $
              1,002
              
              
              $
              25
              
              
              $
              -
              
              
              $
              4,944Mortgage
      loan
              
              
              153
              
              
              
              159
              
              
              
              156
              
              
              
              153
              
              
              
              150
              
              
              
              1,191
              
              
              
              1,962Capital
      equipment purchase commitments
              
              
              13,693
              
              
              
              8,601
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              22,294Total
              
              $
              15,258
              
              
              $
              10,004
              
              
              $
              1,417
              
              
              $
              1,155
              
              
              $
              175
              
              
              $
              1,191
              
              
              $
              29,200





The
operating lease commitments are primarily the lease on the Company’s corporate
headquarters, which expires in 2013 but with two consecutive options to extend
for an additional five years each. The capital equipment purchase commitments
are in PSE for the new FCP facility inthe Jinan Development
Zone,China. The mortgage loan commitment is described further in Note 6
above, and our commitment may fluctuate due to changes in interest
rates.





On
December 1, 2009, the Company entered into an R&D Center Investment
Agreement (the “R&D Agreement”) with the Administrative Committee of the
Yangzhou Economic and Technology Development Zone (the “Zone”) for the Company’s
investment in the Zone, located in Jiangsu Province, People’s Republic of China.
Under the R&D Agreement, the Company or its majority-owned affiliate will
invest in and establish a research and development center to engage in the
research and development of the IC design technologies related to “high-speed
serial connectivity” and the “XO crystal oscillator” and the manufacture of
relevant products.  It is expected that the Company’s total
investment, over a period of two to three years, will be approximately $30
million U.S. Dollars. As of March 27, 2010, the Company’s commitment for the
Yangzhou project is $21 million, which is included in the table
above.




10


8.  INDUSTRY
AND SEGMENT INFORMATION







The
Company operates and tracks its results in one reportable
segment.  The Company designs, develops, manufactures and markets a
broad range of interface integrated circuits and frequency control
products.





The
following table indicates the percentage of our net revenues and accounts
receivable in excess of 10 percent with any single customer:





Net
      RevenuesThree
      Months Ended
              
              Nine
      Months EndedMarch
      27,
              
              March
      28,
              
              March
      27,
              
              March
      28,2010
              
              2009
              
              2010
              
              2009Customer
      A
              22%
              
              21%
              
              21%
              
              18%Customer
      B
              14%
              
              10%
              
              14%
              
              14%All
      others
              64%
              
              69%
              
              65%
              
              68%100%
              
              100%
              
              100%
              
              100%Accounts
      ReceivableMarch
      27,
              
              June
      27,2010
              
              2009Customer
      A
              26%
              
              21%Customer
      B
              8%
              
              9%All
      others
              66%
              
              70%100%
              
              100%





For
geographical reporting, the Company attributes net revenues to the country where
customers are located (the “bill to” location). The Company neither conducts
business in nor sells to persons in Iran, Syria, Sudan, or North Korea,
countries located in referenced regions identified as state sponsors of
terrorism by the U.S. Department of State and subject to U.S. economic sanctions
and export controls. The following table sets forth net revenues by country for
the three and nine month periods ended March 27, 2010 and March 28,
2009:





Net
      RevenuesThree
      Months Ended
              
              
              Nine
      Months EndedMarch
      27,
              
              
              March
      28,
              
              
              March
      27,
              
              
              March
      28,2010
              
              
              2009
              
              
              2010
              
              
              2009Taiwan
              
              $
              17,851
              
              
              $
              10,264
              
              
              $
              53,410
              
              
              $
              41,976China
      (including Hong Kong)
              
              
              10,130
              
              
              
              8,547
              
              
              
              29,381
              
              
              
              33,320United States
              
              
              3,272
              
              
              
              2,164
              
              
              
              8,427
              
              
              
              7,668Singapore
              
              
              738
              
              
              
              479
              
              
              
              2,013
              
              
              
              3,434Other
      (less than 10% each)
              
              
              4,670
              
              
              
              2,940
              
              
              
              12,187
              
              
              
              12,526Total
      net revenues
              
              $
              36,661
              
              
              $
              24,394
              
              
              $
              105,418
              
              
              $
              98,924





Long-lived
assets consist of all non-monetary assets, excluding financial assets, deferred
taxes, goodwill and intangible assets. The Company attributes long-lived assets
to the country where they are located. The following table sets forth the
Company’s long-lived assets by country of location as of March 27, 2010 and June
27, 2009:





March
      27,
              
              
              June
      27,2010
              
              
              2009China
      (including Hong Kong)
              
              $
              25,531
              
              
              $
              21,806Taiwan
              
              
              18,287
              
              
              
              19,424United
      States
              
              
              3,970
              
              
              
              4,445Other
      countries
              
              
              1,486
              
              
              
              1,563Total
              
              $
              49,274
              
              
              $
              47,238




11


9.  STOCK
REPURCHASE PROGRAM







On April
26, 2007, the Company’s Board of Directors authorized the repurchase of 2.0
million shares of the Company’s common stock, and on April 29, 2008, the Board
of Directors authorized the repurchase of an additional $30 million of common
stock. The Company may repurchase the shares from time to time in open market or
private transactions, at the discretion of the Company’s
management.





During
the three and nine month periods ended March 27, 2010, the Company repurchased
approximately 337,600 and 440,100 shares for an aggregate cost of approximately
$3.2 and $4.3 million, respectively. During the nine month period ended March
28, 2009, the Company repurchased approximately 712,000 shares for an aggregate
cost of $5.5 million, which included the shares needed to complete the
repurchase of 2.0 million shares under the 2007 authority.





Current
cash balances and the proceeds from stock option exercises and purchases in the
stock purchase plan have funded stock repurchases in the past, and the Company
expects to fund future stock repurchases from these same sources.






10.
SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION







PREFERRED
STOCK





The
Company’s shareholders have authorized the Board of Directors to issue 5,000,000
shares of preferred stock from time to time in one or more series and to fix the
rights, privileges and restrictions of each series.  As of March 27,
2010, the Company has issued no shares of preferred stock.





STOCK OPTION
PLANS





At March
27, 2010 the Company had four stock option plans and an employee stock purchase
plan, consisting of the 1995 Stock Option Plan, 2001 Stock Option Plan, SaRonix
Acquisition Stock Option Plan, 2004 Stock Incentive Plan and the 2000 Employee
Stock Purchase Plan.





Under the
four stock option plans, the Company has reserved an aggregate of 7.4 million
shares of common stock as of March 27, 2010 for issuance to employees, officers,
directors, independent contractors and consultants of the Company in the form of
incentive or nonqualified stock options, or grants of restricted
stock.





The
Company may grant options at the fair value on the grant date for incentive
stock options and nonqualified stock options.  Options vest over
periods of generally 48 months as determined by the Board of
Directors.  Options granted under the Plans expire 10 years from the
grant date.





The
Company estimates the fair value of each employee option on the date of grant
using the Black-Scholes option valuation model and expenses that value as
compensation using a straight-line method over the option’s vesting period,
which corresponds to the requisite employee service period.  The
Company estimates expected stock price volatility based on actual historical
volatility for periods that the Company believes represent predictors of future
volatility.  The Company uses historical data to estimate option
exercises, expected option holding periods and option
forfeitures.  The Company bases the risk-free interest rate for
periods within the contractual life of the option on the U.S. Treasury yield
corresponding to the expected life of the underlying option.





The value
of the Company’s stock options granted under its stock option plans during the
three months ended March 27, 2010 and March 28, 2009 was estimated at the date
of grant using the following weighted average assumptions:





12




Three
      Months EndedMarch
      27,
              
              March
      28,2010
              
              2009Expected
      Life
              
              5.5
      years
              
              5.2
      yearsRisk-free
      interest rate
              2.60%
              
              1.70%Volatility
              
              53%
              
              51%Dividend
      Yield
              
              0%
              
              0%





The
weighted average fair value of options granted during the three months ended
March 27, 2010 and March 28, 2009 was $4.86 and $3.19,
respectively.





The
following table summarizes the Company’s stock option activity for the nine
months ended March 27, 2010:





Shares
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Term
              
              
              Aggregate
      Intrinsic Value(in
      thousands)
              
              
              
              
              
              (years)
              
              
              (in
      millions)Options
      outstanding at June 27, 2009
              
              
              3,755
              
              
              $
              14.00
              
              
              
              4.86
              
              
              $
              0.4Granted
      (weighted average grant date fair value of $5.00)
              
              
              384
              
              
              
              10.05Exercised
              
              
              (80
              )
              
              
              8.50Cancelled
      or expired
              
              
              (259
              )
              
              
              18.37Options
      outstanding at March 27, 2010
              
              
              3,800
              
              
              $
              13.42
              
              
              
              4.82
              
              
              $
              2.2Options
      vested and expected to vest at March 27, 2010
              
              
              3,684
              
              
              $
              13.49
              
              
              
              4.69
              
              
              $
              2.1Options
      exercisable at March 27, 2010
              
              
              2,939
              
              
              $
              13.98
              
              
              
              3.71
              
              
              $
              1.8





At March
27, 2010, 2.9 million shares were available for future grants under the option
plans.  The aggregate intrinsic value of options exercised during the
nine months ended March 27, 2010 was $186,000.





At March
27, 2010, expected future compensation expense relating to options outstanding
is $3.6 million, which will be amortized to expense over a weighted average
period of 2.6 years.





Additional
information regarding options outstanding and exercisable as of March 27, 2010
is as follows:





Options
      Outstanding
              
              
              Exercisable
      OptionsRange
      of Exercise Prices
              
              
              Number
      Outstanding as of March 27, 2010
              
              
              Weighted
      Average Remaining Contractual Term (years)
              
              
              Weighted
      Average Exercise Price
              
              
              Number
      Exercisable as of March 27, 2010
              
              
              Weighted
      Average Exercise Price$
              4.89
              
              
              $
              8.70
              
              
              
              800,000
              
              
              
              5.50
              
              
              $
              8.07
              
              
              
              695,000
              
              
              $
              8.17$
              8.71
              
              
              $
              10.68
              
              
              
              940,000
              
              
              
              7.21
              
              
              $
              10.01
              
              
              
              519,000
              
              
              $
              9.98$
              10.74
              
              
              $
              13.96
              
              
              
              782,000
              
              
              
              3.36
              
              
              $
              12.24
              
              
              
              693,000
              
              
              $
              12.36$
              14.00
              
              
              $
              16.56
              
              
              
              780,000
              
              
              
              5.20
              
              
              $
              15.46
              
              
              
              545,000
              
              
              $
              15.41$
              16.59
              
              
              $
              37.22
              
              
              
              498,000
              
              
              
              0.90
              
              
              $
              27.07
              
              
              
              487,000
              
              
              $
              27.28$
              4.89
              
              
              $
              37.22
              
              
              
              3,800,000
              
              
              
              4.82
              
              
              $
              13.42
              
              
              
              2,939,000
              
              
              $
              13.98








Restricted
Stock Units





Restricted
stock units (“RSUs”) are converted into shares of the Company’s common stock
upon vesting on a one-for-one basis. Typically, vesting of RSUs is subject to
the employee’s continuing service to the Company. RSUs generally vest over a
period of 4 years and are expensed ratably on a straight-line basis over their
respective vesting period net of estimated forfeitures.  The fair value of
RSUs granted pursuant to the Company’s 2004 Stock Incentive Plan is the product
of the number of shares granted and the grant date fair value of our common
stock. A summary of activity of RSUs for the nine months ended March 27, 2010 is
presented below:





13




Shares
              
              
              Weighted
      Average Award Date Fair Value
              
              
              Weighted
      Average Remaining Contractual Term
              
              
              Aggregate
      Intrinsic Value(in
      thousands)
              
              
              
              
              
              (years)
              
              
              (in
      millions)RSUs
      outstanding at June 27, 2009
              
              
              349
              
              
              $
              10.18
              
              
              
              2.08
              
              
              $
              3.0Awarded
              
              
              188
              
              
              
              9.94Released
              
              
              (35
              )
              
              
              13.31Forfeited
              
              
              (18
              )
              
              
              10.42RSUs
      outstanding at March 27, 2010
              
              
              484
              
              
              $
              9.86
              
              
              
              1.75
              
              
              $
              5.0RSUs
      expected to vest after March 27, 2010
              
              
              397
              
              
              $
              9.88
              
              
              
              1.64
              
              
              $
              4.1





At March
27, 2010, expected future compensation expense relating to RSUs is $3.0 million,
which will be amortized to expense over a weighted average period of 3.0
years.








2000 EMPLOYEE STOCK PURCHASE
PLAN





The
Company’s 2000 Employee Stock Purchase Plan (the “Stock Purchase Plan”) allows
eligible employees of the Company to purchase shares of Common Stock through
payroll deductions.  The Company reserved 3.3 million shares of the
Company’s Common Stock for issuance under this Plan, of which 2.0 million remain
available at March 27, 2010 and which may be released at the Board of Directors’
discretion.  The Stock Purchase Plan permits eligible employees to
purchase Common Stock at a discount through payroll deductions during 24-month
purchase periods.  The Company divides each purchase period into eight
consecutive three-month accrual periods.  Participants in the Stock
Purchase Plan may purchase stock at 85% of the lower of the stock’s fair market
value on the first day of the purchase period or the last day of the accrual
period.  The maximum number of shares of Common Stock that any
employee may purchase under the Stock Purchase Plan during any three-month
accrual period is 1,000 shares.  During the first nine months of
fiscal years 2010 and 2009, the Company issued 152,497 and 135,075 shares of
common stock under the Stock Purchase Plan at weighted average prices of $5.32
and $6.47, respectively.  The weighted average fair value of the
awards for the first nine months of fiscal 2010 and 2009 were $3.10 and $1.70
per share, respectively.





The
Company estimates the fair value of stock purchase rights granted under the
Company’s Stock Purchase Plan on the date of grant using the Black-Scholes
option valuation model. ASC Topic 718 (formerly
FAS123(R) and Technical Bulletin No. 97-1) states that a “lookback” pricing
provision with a share limit should be considered a combination of stock and a
call option. The valuation results for these elements have been combined to
value the specific features of the stock purchase rights.The
Company bases volatility on the expected volatility of the Company’s stock
during the accrual period.  The expected term is determined by the
time from enrollment until purchase, and the Company uses the U.S. Treasury
yield for the risk-free interest rate for the contractual period.





The
following table lists the values of the assumptions the Company used to
calculate stock compensation in the Stock Purchase Plan:




Three
      Months EndedMarch
      27,
              
              March
      28,2010
              
              2009Expected
      Life
              
              6
      months
              
              13.5
      monthsRisk-free
      interest rate
              0.17%
              
              0.58%Volatility
              
              52%
              
              67%Dividend
      Yield
              
              0%
              
              0%





The
following table summarizes activity in the Company’s employee stock purchase
plan during the nine months ended March 27, 2010:




14




Shares
              
              
              Weighted
      Average Purchase PriceBeginning
      Available
              
              
              363,906Shares
      added
              
              
              1,800,000Purchases
              
              
              (152,497
              )
              
              $
              5.32Ending
      Available
              
              
              2,011,409





At March
27, 2010, the Company had $349,000 in unamortized share-based compensation
related to its employee stock purchase plan.  The Company estimates
this expense will be amortized and recognized in the consolidated statement of
operations over the next 0.7 years.





2010 EMPLOYEE STOCK PURCHASE
PLAN





The
Company’s 2010 Employee Stock Purchase Plan (the “2010 Plan”) was approved at
the annual meeting of shareholders on December 11, 2009 as replacement for the
2000 Stock Purchase Plan which is scheduled to expire in October 2010. The 2010
Plan becomes effective on the day preceding the last exercise date of the 2000
Stock Purchase Plan. The Company reserved 2.0 million shares of the Company’s
Common Stock for issuance under this Plan.  The 2010 Plan permits
eligible employees to purchase Common Stock at a discount through payroll
deductions during 6-month purchase periods. Participants in the 2010 Plan may
purchase stock at 85% of the lower of the stock’s fair market value on the first
day and last day of the offering period. The maximum number of shares of Common
Stock that any employee may purchase during any offering period under the plan
is 1,000 shares, and an employee may not accrue more than $10,000 for share
purchases in any offering period.





SHARE-BASED
COMPENSATION





The
following table shows total share-based compensation expense classified by
Consolidated Statements of Operations reporting caption for the three and nine
months ended March 27, 2010 and March 28, 2009 generated from the plans
described above:





Three
      Months Ended
                      
                      
                      Nine Months
      EndedMarch
      27,
                      
                      
                      March
      28,
                      
                      
                      March
      27,
                      
                      
                      March
      28,(In
      Thousands)
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Cost
      of goods sold
                      
                      $
                      70
                      
                      
                      $
                      72
                      
                      
                      $
                      198
                      
                      
                      $
                      192Research
      and development
                      
                      
                      371
                      
                      
                      
                      393
                      
                      
                      
                      1,065
                      
                      
                      
                      1,048Selling,
      general and administrative
                      
                      
                      557
                      
                      
                      
                      533
                      
                      
                      
                      1,598
                      
                      
                      
                      1,458Pre-tax
      share-based compensation expense
                      
                      
                      998
                      
                      
                      
                      998
                      
                      
                      
                      2,861
                      
                      
                      
                      2,698Income
      tax impact
                      
                      
                      299
                      
                      
                      
                      196
                      
                      
                      
                      798
                      
                      
                      
                      574Net
      share-based compensation expense
                      
                      $
                      699
                      
                      
                      $
                      802
                      
                      
                      $
                      2,063
                      
                      
                      $
                      2,124





Share-based
compensation by type of award is as follows:





Three
      Months Ended
                  
                  
                  Nine
      Months EndedMarch
      27,
                  
                  
                  March
      28,
                  
                  
                  March
      27,
                  
                  
                  March
      28,(In
      Thousands)
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Stock
      options
                  
                  $
                  587
                  
                  
                  $
                  602
                  
                  
                  $
                  1,616
                  
                  
                  $
                  1,783Restricted
      stock units
                  
                  
                  293
                  
                  
                  
                  151
                  
                  
                  
                  734
                  
                  
                  
                  301Stock
      purchase plan
                  
                  
                  118
                  
                  
                  
                  245
                  
                  
                  
                  511
                  
                  
                  
                  614Total
      share-based compensation expense
                  
                  $
                  998
                  
                  
                  $
                  998
                  
                  
                  $
                  2,861
                  
                  
                  $
                  2,698





15


The
amount of share-based compensation expense in inventory at March 27, 2010 and
June 27, 2009 is immaterial.







11.
INCOME TAXES




Accounting
for Uncertainty in Income Taxes




The
Company’s total amount of unrecognized tax benefits as of March 27, 2010 was
$756,000.  All of this amount would affect the corporation’s tax rate
if recognized. In addition, as of March 27, 2010 the Company had accrued $84,000
for any interest and penalties related to unrecognized tax
benefits.





The
Company is subject to examination by Federal, foreign, and various state
jurisdictions for the years 2004 through 2009. To the Company’s knowledge, there
are currently no examinations underway.







Income Tax
Expense




Income
tax expense for the nine months ended March 27, 2010 and March 28, 2009 was $2.7
million and $2.3 million, respectively, and was comprised of domestic federal
and state income tax and foreign income and withholding tax. As of March 27,
2010, the Company has recorded a valuation allowance of $819,000 against its
deferred tax assets.






12.
INVESTMENTS IN AFFILIATES




Our
investments in unconsolidated affiliates are comprised of the
following:




March
      27,
              
              
              June
      27,(in
      thousands)
              
              2010
              
              
              2009Pericom
      Technology, Inc.
              
              $
              10,223
              
              
              $
              8,806Jiyuan
      Crystal Photoelectric Frequency Technology Ltd.
              
              
              2,272
              
              
              
              2,020Total
              
              $
              12,495
              
              
              $
              10,826




The
Company has an approximate 42.7% ownership interest in Pericom Technology, Inc.
(“PTI”).  Pericom accounts for its investment in PTI using the equity
method due to the Company’s significant influence over its
operations.  In addition, certain of the directors of the Company are
directors of PTI, and certain shareholders of the Company are shareholders of
PTI. PTI was incorporated in 1994 and in 1995 established a design center and
sales office to pursue opportunities and participate in joint ventures in the
People’s Republic of China. For the first nine months of fiscal 2010 and
2009, the Company’s allocated portion of PTI’s results was income of $1.4
million and  $64,000, respectively. Condensed operating results of PTI
were as follows:





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      27,
              
              
              March
      28,
              
              
              March
      27,
              
              
              March
      28,(in
      thousands)
              
              2010
              
              
              2009
              
              
              2010
              
              
              2009Revenue
              
              $
              4,651
              
              
              $
              2,516
              
              
              $
              12,404
              
              
              $
              8,976Gross
      profit
              
              
              2,321
              
              
              
              1,447
              
              
              
              6,182
              
              
              
              4,585Operating
      income
              
              
              1,240
              
              
              
              321
              
              
              
              2,983
              
              
              
              976Net
      income (loss)
              
              
              1,220
              
              
              
              258
              
              
              
              3,317
              
              
              
              254





SRe has a
49% equity interest in Jiyuan Crystal Photoelectric Frequency Technology Ltd.
(“JCP”), an FCP manufacturing company located in Science Park of Jiyuan City,
Henan Province, China. JCP is a key manufacturing partner of SRe and supplies SRe with
blanks for its surface mount device (SMD) production lines.For the first
nine months of fiscal 2010 and 2009, the Company’s allocated portion of JCP’s
results was income of $253,000 and $31,000, respectively.




16


13. EQUITY ANDCOMPREHENSIVE INCOME






Effective
June 28, 2009, the Company adopted the FASB’s new guidance regarding the
accounting for noncontrolling interests. The new rules require the recognition
of a noncontrolling interest as equity in the consolidated financial statements
and separate from the parent’s equity. The amount of net income attributable to
the noncontrolling interest is shown on the face of the condensed consolidated
statement of operations.





The
Company consolidates its subsidiary SRe, which had noncontrolling interests for
the first four months of fiscal 2010. Parties other than the Company owned
approximately 2.71% of the outstanding shares of SRe, and these shares were
acquired by the Company in November 2009 for approximately $1.2
million.






Comprehensive income consists of net
income, net unrealized gain (loss) on available-for-sale securities and foreign
currency translation gain (loss) generated by the Company’s consolidated
subsidiaries.  Changes in equity including
comprehensive income for the nine months ended March 27, 2010 and March 28, 2009
are as follows:





(In
      Thousands)
              
              Pericom
      Shareholders' Equity
              
              
              Noncontrolling
      Interests
              
              
              Total
      Shareholders' EquityBalance
      June 28, 2008
              
              $
              207,455
              
              
              $
              1,118
              
              
              $
              208,573Net
      income
              
              
              5,047
              
              
              
              92
              
              
              
              5,139Other
      comprehensive incomeUnrealized
      gain (loss) on securities available for sale, net
              
              
              (337
              )
              
              
              -
              
              
              
              (336
              )Translation
      gain (loss), net
              
              
              (3,898
              )
              
              
              -
              
              
              
              (3,898
              )Total
      comprehensive income
              
              
              812
              
              
              
              92
              
              
              
              905Issuance
      of common stock - options and ESPP
              
              
              1,544
              
              
              
              -
              
              
              
              1,544Stock
      expense - APIC
              
              
              2,698
              
              
              
              -
              
              
              
              2,698Stock
      repurchases
              
              
              (5,451
              )
              
              
              -
              
              
              
              (5,451
              )Balance
      March 28, 2009
              
              $
              207,058
              
              
              $
              1,210
              
              
              $
              208,269Balance
      June 27, 2009
              
              $
              212,208
              
              
              $
              1,233
              
              
              $
              213,441Net
      income
              
              
              6,876
              
              
              
              28
              
              
              
              6,904Other
      comprehensive incomeUnrealized
      gain (loss) on securities available for sale, net
              
              
              106
              
              
              
              -
              
              
              
              106Translation
      gain (loss), net
              
              
              1,390
              
              
              
              -
              
              
              
              1,390Total
      comprehensive income
              
              
              8,372
              
              
              
              28
              
              
              
              8,400Issuance
      of common stock - options and ESPP
              
              
              1,488
              
              
              
              -
              
              
              
              1,488Stock
      expense - APIC
              
              
              2,861
              
              
              
              -
              
              
              
              2,861Stock
      repurchases
              
              
              (4,252
              )
              
              
              -
              
              
              
              (4,252
              )Cash
      paid for noncontrolling interest
              
              
              38
              
              
              
              (1,261
              )
              
              
              (1,223
              )Balance
      March 27, 2010
              
              $
              220,715
              
              
              $
              -
              
              
              $
              220,715





14.INVESTMENTS IN MARKETABLE
SECURITIES





The
Company’s policy is to invest in instruments with investment grade credit
ratings.  The Company classifies its short-term investments as
“available-for-sale” securities and the Company bases the cost of securities
sold using the specific identification method.  The Company accounts
for unrealized gains and losses on its available-for-sale securities as a
separate component of shareholders’ equity in the consolidated balance sheets in
the period in which the gain or loss occurs.  The Company recognizes
unrealized gains and losses in its trading securities in other income in the
consolidated statements of operations in the period in which the gain or loss
occurs.  The Company classifies its available-for-sale securities as
current or noncurrent based on each security’s attributes.  At March
27, 2010 a summary of our investments by major security type is as
follows:





17




As
      of March 27, 2010(in
      thousands)
              
              Amortized Cost
              
              
              Unrealized Gains
              
              
              Unrealized Losses
              
              
              Net Unrealized Gains
    (Losses)
              
              
              Fair Market ValueAvailable-for-Sale
      SecuritiesUS
      Treasury securities
              
              $
              204
              
              
              $
              -
              
              
              $
              (2
              )
              
              $
              (2
              )
              
              $
              202National
      government and agency securities
              
              
              15,215
              
              
              
              99
              
              
              
              (13
              )
              
              
              85
              
              
              
              15,300State
      and municipal bond obligations
              
              
              16,366
              
              
              
              125
              
              
              
              -
              
              
              
              125
              
              
              
              16,491Corporate
      bonds and notes
              
              
              42,270
              
              
              
              1,089
              
              
              
              (40
              )
              
              
              1,049
              
              
              
              43,319Asset
      backed securities
              
              
              7,785
              
              
              
              35
              
              
              
              (33
              )
              
              
              2
              
              
              
              7,787Mortgage
      backed securities
              
              
              8,787
              
              
              
              57
              
              
              
              (113
              )
              
              
              (55
              )
              
              
              8,732Total
              
              $
              90,626
              
              
              $
              1,405
              
              
              $
              (201
              )
              
              $
              1,205
              
              
              $
              91,831





At June
27, 2009 a summary of our investments by major security type is as
follows:





As
      of June 27, 2009(in
      thousands)
              
              Amortized Cost
              
              
              Unrealized Gains
              
              
              Unrealized Losses
              
              
              Net Unrealized Gains
    (Losses)
              
              
              Fair Market ValueAvailable-for-Sale
      SecuritiesUS
      Treasury securities
              
              $
              3,008
              
              
              $
              28
              
              
              $
              -
              
              
              $
              28
              
              
              $
              3,036National
      government and agency securities
              
              
              4,856
              
              
              
              30
              
              
              
              (10
              )
              
              
              20
              
              
              
              4,876State
      and municipal bond obligations
              
              
              21,658
              
              
              
              270
              
              
              
              (23
              )
              
              
              247
              
              
              
              21,905Corporate
      bonds and notes
              
              
              45,875
              
              
              
              1,107
              
              
              
              (14
              )
              
              
              1,093
              
              
              
              46,968Asset
      backed securities
              
              
              1,954
              
              
              
              4
              
              
              
              (107
              )
              
              
              (103
              )
              
              
              1,851Mortgage
      backed securities
              
              
              8,748
              
              
              
              94
              
              
              
              (300
              )
              
              
              (206
              )
              
              
              8,542Total
              
              $
              86,099
              
              
              $
              1,533
              
              
              $
              (454
              )
              
              $
              1,079
              
              
              $
              87,178





The above
investments are included in short-term and long-term investments in marketable
securities on our condensed consolidated balance sheets.





The
following tables show the unrealized losses and fair market values of the
Company’s investments that have unrealized losses, aggregated by investment
category and length of time that individual securities have been in a continuous
unrealized loss position, at March 27, 2010 and June 27, 2009:





Continuous
      Unrealized Losses at March 27, 2010Less
      Than 12 Months
              
              
              12
      Months or Longer
              
              
              TotalFair
      Market
              
              Unrealized
              
              
              Fair
      Market
              
              
              Unrealized
              
              
              Fair
      Market
              
              
              Unrealized(In
      thousands)
              
              Value
              
              Losses
              
              
              Value
              
              
              Losses
              
              
              Value
              
              
              LossesUS
      Treasury securities
              
              $
              203
              
              
              $
              2
              
              
              $
              -
              
              
              $
              -
              
              
              $
              203
              
              
              $
              2National
      government and agency securities
              
              
              4,123
              
              
              
              39
              
              
              
              -
              
              
              
              -
              
              
              
              4,123
              
              
              
              39State
      and municipal bond obligations
              
              
              242
              
              
              
              0
              
              
              
              -
              
              
              
              -
              
              
              
              242
              
              
              
              0Corporate
      bonds and notes
              
              
              7,520
              
              
              
              40
              
              
              
              -
              
              
              
              -
              
              
              
              7,520
              
              
              
              40Asset
      backed securities
              
              
              1,726
              
              
              
              3
              
              
              
              468
              
              
              
              5
              
              
              
              2,194
              
              
              
              8Mortgage
      backed securities
              
              
              2,440
              
              
              
              9
              
              
              
              529
              
              
              
              104
              
              
              
              2,969
              
              
              
              113$
              16,254
              
              
              $
              92
              
              
              $
              997
              
              
              $
              109
              
              
              $
              17,251
              
              
              $
              201Continuous
      Unrealized Losses at June 27, 2009Less
      Than 12 Months
              
              
              12
      Months or Longer
              
              
              TotalFair
      Market
              
              Unrealized
              
              
              Fair
      Market
              
              
              Unrealized
              
              
              Fair
      Market
              
              
              Unrealized(In
      thousands)
              
              Value
              
              Losses
              
              
              Value
              
              
              Losses
              
              
              Value
              
              
              LossesUS
      Treasury securities
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -National
      government and agency securities
              
              
              1,582
              
              
              
              10
              
              
              
              -
              
              
              
              -
              
              
              
              1,582
              
              
              
              10State
      and municipal bond obligations
              
              
              1,644
              
              
              
              23
              
              
              
              -
              
              
              
              -
              
              
              
              1,644
              
              
              
              23Corporate
      bonds and notes
              
              
              4,504
              
              
              
              12
              
              
              
              494
              
              
              
              2
              
              
              
              4,998
              
              
              
              14Asset
      backed securities
              
              
              -
              
              
              
              -
              
              
              
              434
              
              
              
              107
              
              
              
              434
              
              
              
              107Mortgage
      backed securities
              
              
              2,203
              
              
              
              29
              
              
              
              1,893
              
              
              
              271
              
              
              
              4,096
              
              
              
              300$
              9,933
              
              
              $
              74
              
              
              $
              2,821
              
              
              $
              380
              
              
              $
              12,754
              
              
              $
              454




The
unrealized losses are of a temporary nature due to the Company’s intent and
ability to hold the investments until maturity or until the cost is
recoverable.  The unrealized losses are primarily due to fluctuations
in market interest rates. The Company reports unrealized gains and losses on its
“available-for-sale” securities in accumulated other comprehensive income in
shareholders’ equity.





18


The
Company records gains or losses realized on sales of available-for-sale
securities in interest and other income on its condensed consolidated income
statement. The cost of securities sold is based on the specific identification
of the security and its amortized cost. For the nine months ended March 27, 2010
and March 28, 2009, proceeds from sales and maturities of available-for-sale
securities were $81.1 million and $89.8 million, respectively, and realized
gains were $2.0 million and $1.1 million, respectively.





In
addition, the Company recognized an other-than-temporary impairment (“OTTI”)
credit loss of $414,000 in the nine months ended March 28, 2009 which was
reclassified out of other comprehensive income. Activity for the nine months
ended March 27, 2010 related to the pretax available-for-sale credit loss
component reflected within retained earnings for securities still held at March
27, 2010 was as follows:





NineMonths
      endedMarch
      27,(In
      Thousands)
              
              2010Beginning
      balance of credit losses on available-for-sale securities
              
              $
              414Addditional
      credit losses for which an OTTI loss was previously
    recognized
              
              
              -Addditional
      credit losses for which an OTTI loss was not previously
      recognized
              
              
              -Reductions
      for securities sold during the period
              
              
              -Reductions
      for securities the Company intends to sell or more likely than not will be
      required to sell
              
              
              -Ending
      balance of credit losses on available-for-sale securities
              
              $
              414





The
following table lists the fair market value of the Company’s short- and
long-term investments by length of time to maturity as of March 27, 2010.
Securities with maturities over multiple dates are mortgage-backed (MBS) or
asset-backed securities (ABS) featuring periodic principle paydowns through
2048.





(in
      thousands)
              
              March
      27, 2010Contractual
      MaturitiesLess
      than 12 months
              
              $
              11,535One
      to three years
              
              
              35,470Over
      three years
              
              
              28,725Multiple
      dates
              
              
              16,101Total
              
              $
              91,831




15.FAIR VALUE
MEASUREMENTS





The
Company 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. Valuation techniques used to
measure fair value must maximize the use of observable inputs and minimize the
use of unobservable inputs. The standard describes a fair value hierarchy based
on three levels of inputs that may be used to measure fair value, of which the
first two are considered observable and the last is considered
unobservable:




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




The
adoption of this statement with respect to our financial assets and liabilities
did not impact our consolidated results of operations and financial condition,
but requires additional disclosure for assets and liabilities measured at fair
value.  The following table represents our fair value hierarchy for
financial assets (cash equivalents and investments) measured at fair value on a
recurring basis.  Most of our investments are classified as Level 2 at
March 27, 2010. Level 2 investment valuations are obtained from
readily-available pricing sources for comparable instruments. A majority of our
investments are priced by pricing vendors and are classified as Level 2
investments based on the use of observable inputs from comparable
securities.





19




(in
      thousands)
              
              Fair Value
              
              
              Level 1
              
              
              Level 2
              
              
              Level 3Investments
      (1)US
      Treasury securities
              
              $
              202
              
              
              $
              202
              
              
              $
              -
              
              
              $
              -Government
      and agency securities
              
              
              15,300
              
              
              
              -
              
              
              
              15,300
              
              
              
              -State
      and municipal bond obligations
              
              
              16,491
              
              
              
              -
              
              
              
              16,491
              
              
              
              -Corporate
      bonds and notes
              
              
              43,319
              
              
              
              -
              
              
              
              43,319
              
              
              
              -Asset
      backed securities
              
              
              7,787
              
              
              
              -
              
              
              
              7,787
              
              
              
              -Mortgage
      backed securities
              
              
              8,732
              
              
              
              -
              
              
              
              8,732
              
              
              
              -Total
              
              $
              91,831
              
              
              $
              202
              
              
              $
              91,629
              
              
              $
              -
  (1)
              Included
      in short-term and long-term investments in marketable securities on
      ourcondensed
      consolidated balance sheet




The
Company had no transfers into or out of Level 2 during the nine months ended
March 27, 2010.





The
Company’s investment in debt securities includes government securities,
commercial paper, corporate debt securities and mortgage-backed and asset-backed
securities. Government securities include US treasury securities, US federal
agency securities, foreign government and agency securities, and US state and
municipal bond obligations. Many of the municipal bonds are insured; those that
are not are nearly all AAA/Aaa rated. The corporate debt securities are all
investment grade and nearly all are single A-rated or better. The asset-backed
securities are AAA/Aaa rated and are backed by auto loans, student loans, credit
card balances and residential or commercial mortgages. When assessing marketable
securities for other-than-temporary declines in value, we consider a number of
factors. Our analyses of the severity and duration of price declines, portfolio
manager reports, economic forecasts and the specific circumstances of issuers
indicate that it is reasonable to expect marketable securities with unrealized
losses at March 27, 2010 to recover in fair value up to our cost bases within a
reasonable period of time. We do not intend to sell investments with unrealized
losses before maturity, when the obligors are required to redeem them at full
face value or par, and we believe the obligors have the financial resources to
redeem the debt securities. Accordingly, we do not consider our investments to
be other-than-temporarily impaired at March 27, 2010.





The
Company has determined that the amounts reported for cash and cash equivalents,
accounts receivable, deposits, accounts payable, accrued liabilities and debt
approximate fair value because of their short
maturities and/or variable interest rates.






16.
SUBSEQUENT EVENTS






On April
22, 2010, the Company repaid the mortgage of $1.7 million that had been taken
out on PTL’s building in December 2008.




20


Item 2:
Management’s Discussion and Analysis


of
Financial Condition and Results of Operations





Pericom
Semiconductor Corporation





The
following information should be read in conjunction with the unaudited financial
statements and notes thereto included in Part 1 - Item 1 of this Quarterly
Report and the audited financial statements and notes thereto and Management’s
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company’s Annual Report on Form 10-K for the year ended June
27, 2009 (the “Form 10-K”).





Factors
That May Affect Operating Results





This
Quarterly Report on Form 10-Q includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act.  All statements other than statements of historical fact are
“forward-looking statements” for purposes of these provisions, including any
statements regarding the Company’s sales to Taiwan and China, plans to remediate
the material weaknesses in our internal control over financial reporting, the
Company’s total investment in the Jinan Hi-Tech Industries Development Zone and
the Yangzhou Economic and Technology Development Zone, the continuation of a
high level of turns orders, higher or lower levels of inventory, future gross
profit and gross margin; the plans and objectives of management for future
operations; the Company’s tax rate; currency fluctuations; the adequacy of
allowances for returns, price protection and other concessions; the sufficiency
of cash generated from operations and cash balances; the Company’s exposure to
interest rate risk; expectations regarding our R&D and SG&A expenses;
and our possible future acquisitions and assumptions underlying any of the
foregoing. In some cases, forward-looking statements can be identified by the
use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,”
“estimates,” “potential,” or “continue,” or the negative thereof or other
comparable terminology. Although the Company believes that the expectations
reflected in the forward-looking statements contained herein are reasonable,
there can be no assurance that such expectations or any of the forward-looking
statements will prove to be correct, and actual results could differ materially
from those projected or assumed in the forward-looking statements. The Company’s
future financial condition and results of operations, as well as any
forward-looking statements, are subject to risks and uncertainties, including
but not limited to the factors set forth (i) in Item 1A, Risk Factors, of Part
II of this Form 10-Q, and (ii) in Note 1 to the Notes to Condensed Consolidated
Financial Statements. All forward-looking statements and reasons why results may
differ included in this Quarterly Report are made as of the date hereof, and the
Company assumes no obligation to update any such forward-looking statement or
reason why actual results may differ.





21


Results
of Operations





The
following table sets forth certain statement of operations data as a percentage
of net revenues for the periods indicated.





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      27,
              
              
              March
      28,
              
              
              March
      27,
              
              
              March
      28,2010
              
              
              2009
              
              
              2010
              
              
              2009Net
      revenues
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %Cost
      of revenues
              
              
              64.7
              %
              
              
              64.5
              %
              
              
              66.3
              %
              
              
              65.0
              %Gross
      profit
              
              
              35.3
              %
              
              
              35.5
              %
              
              
              33.7
              %
              
              
              35.0
              %Operating
      expenses:Research
      and development
              
              
              11.6
              %
              
              
              16.4
              %
              
              
              12.0
              %
              
              
              12.7
              %Selling,
      general and administrative
              
              
              16.9
              %
              
              
              21.1
              %
              
              
              18.1
              %
              
              
              17.7
              %Restructuring
      charge
              
              
              -
              
              
              
              1.2
              %
              
              
              -
              
              
              
              0.5
              %Total
              
              
              28.5
              %
              
              
              38.7
              %
              
              
              30.1
              %
              
              
              30.9
              %Income
      (loss) from operations
              
              
              6.8
              %
              
              
              (3.2
              )%
              
              
              3.6
              %
              
              
              4.1
              %Interest
      and other income
              
              
              3.3
              %
              
              
              6.2
              %
              
              
              3.9
              %
              
              
              3.9
              %Other-than-temporary
      decline in value of investment
              
              
              -
              
              
              
              (0.2
              )%
              
              
              -
              
              
              
              (0.5
              )%Income
      before income taxes
              
              
              10.1
              %
              
              
              2.8
              %
              
              
              7.6
              %
              
              
              7.5
              %Income
      tax expense (benefit)
              
              
              3.4
              %
              
              
              1.9
              %
              
              
              2.6
              %
              
              
              2.4
              %Income
      from consolidated companies
              
              
              6.7
              %
              
              
              0.9
              %
              
              
              5.0
              %
              
              
              5.1
              %Equity
      in net income (loss) of unconsolidated affiliates
              
              
              1.7
              %
              
              
              0.2
              %
              
              
              1.5
              %
              
              
              0.1
              %Net
      income
              
              
              8.4
              %
              
              
              1.1
              %
              
              
              6.5
              %
              
              
              5.2
              %Net
      income attributable to the noncontrolling interests
              
              
              -
              
              
              
              (0.1
              )%
              
              
              -
              
              
              
              (0.1
              )%Net
      income attributable to Pericom shareholders
              
              
              8.4
              %
              
              
              1.0
              %
              
              
              6.5
              %
              
              
              5.1
              %





Net
Revenues





The
following table sets forth our revenues and the customer concentrations with
respect to such revenues for the periods indicated.




Three
      Months Ended
              
              
              Nine
      Months Ended(In
      thousands)
              
              March
      27,
              
              
              March
      28,
              
              
              %
              
              
              March
      27,
              
              
              March
      28,
              
              
              %2010
              
              
              2009
              
              
              Change
              
              
              2010
              
              
              2009
              
              
              ChangeNet
      revenues
              
              $
              36,661
              
              
              $
              24,394
              
              
              
              50.3
              %
              
              $
              105,418
              
              
              $
              98,924
              
              
              
              6.6
              %%
      of net sales accounted for by top 5 direct customers (1)
              
              
              54.7
              %
              
              
              52.4
              %
              
              
              
              
              
              
              54.5
              %
              
              
              50.1
              %Number
      of direct customers that each account for more than 10% of net
      sales
              
              
              2
              
              
              
              2
              
              
              
              
              
              
              
              2
              
              
              
              2%
      of net sales accounted for by top 5 end customers (2)
              
              
              30.3
              %
              
              
              30.1
              %
              
              
              
              
              
              
              30.7
              %
              
              
              27.5
              %Number
      of end customers that each account for more than 10% of net
      sales
              
              
              1
              
              
              
              1
              
              
              
              
              
              
              
              1
              
              
              
              1





(1)
            Direct
      customers purchase products directly from the Company.  These
      include distributors and contract manufacturers that in turn sell to many
      end customers as well as OEMs that also purchase directly from the
      Company.





(2)
            End
      customers are OEMs whose products include the Company’s
      products.  End customers may purchase directly from the Company
      or from distributors or contract manufacturers.  We rely on the
      end customer data provided by our direct distribution and contract
      manufacturing customers to provide this
  information.





The
Company designs, develops and markets high-performance integrated circuits
(“ICs” or IC products) and frequency control products (“FCPs” or FCP products)
used in many of today's advanced electronic systems. Our IC products include
products that support the connectivity, timing and signal conditioning of
high-speed parallel and serial protocols that transfer data among a system's
microprocessor, memory and various peripherals, such as displays and monitors,
and between interconnected systems. Our FCPs are electronic components that
provide frequency references such as crystals, oscillators, and hybrid timing
generation products for computer, communication and consumer electronic
products. Our analog, digital and mixed-signal ICs, together with our FCP
products enable higher system bandwidth and signal quality, resulting in better
operating reliability, signal integrity, and lower overall system cost in
applications such as notebook computers, servers, network switches and routers,
storage area networks, digital TVs, cell phones, GPS and digital media
players.





22


Net
revenues consist of product sales, which are recognized upon shipment, less an
estimate for returns and allowances. Net revenue increased $12.3 million or
50.3% in the third quarter of fiscal 2010 versus the third quarter of fiscal
2009. This significant increase is primarily the result of improving business
conditions since the quarter ended March 28, 2009, which was our low point of
quarterly sales during the 2009 global recession. Net revenue for IC and FCP
products in the third quarter of fiscal 2010 versus the third quarter of fiscal
2009 reflected:


·
            a
      $7.9 million increase in sales of IC products to $22.9 million, for a
      52.1% sales increase, and·
            an
      increase of $4.4 million or 47.4% in sales of our FCP products to $13.8
      million.





Net
revenue increased $6.5 million or 6.6% in the first nine months of fiscal 2010
versus the first nine months of fiscal 2009 primarily as the result
of:


·
            an
      increase of $7.1 million or 12.0% in sales of our IC products to $66.1
      million, partially offset by·
            a
      $0.6 million decline in sales of FCP products to $39.3 million, for a 1.5%
      sales decrease.








The
following table sets forth net revenues by country as a percentage of total net
revenues for the three and nine months ended March 27, 2010 and March 28,
2009:





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      27,
              
              
              March
      28,
              
              
              March
      27,
              
              
              March
      28,2010
              
              
              2009
              
              
              2010
              
              
              2009Taiwan
              
              
              49
              %
              
              
              42
              %
              
              
              51
              %
              
              
              42
              %China
      (including Hong Kong)
              
              
              28
              %
              
              
              35
              %
              
              
              28
              %
              
              
              34
              %United
      States
              
              
              9
              %
              
              
              9
              %
              
              
              8
              %
              
              
              8
              %Singapore
              
              
              2
              %
              
              
              2
              %
              
              
              2
              %
              
              
              3
              %Other
      (less than 10% each)
              
              
              12
              %
              
              
              12
              %
              
              
              11
              %
              
              
              13
              %Total
              
              
              100
              %
              
              
              100
              %
              
              
              100
              %
              
              
              100
              %





For the
three and nine months ended March 27, 2010 as compared with the same period of
the prior year, the percentage of our net revenues derived from sales to Taiwan
increased as a result of continued demand for technological devices and an
increasing concentration of contract manufacturing there. We expect our future
sales to continue to grow, as a percentage of net revenues, in both Taiwan and
China in future periods.  As the migration of assembly operations to
Asia continues, we expect our net revenues from sales in North America to
continue a modest decline.





Our net revenue levels have been highly dependent on the number of new
orders that are received for products to be delivered to the customer within the
same quarter, also called “turns” orders.  Because of our lack of
visibility into demand when turns orders are high, it is difficult to predict
which products to build to match future demand.  We believe the current
high level of turns orders will continue indefinitely.  The
sustainability of customer demand is uncertain and our markets are highly
dependent on worldwide economic conditions.  The high level of turns orders
together with the uncertainty of product mix and pricing makes it difficult to
predict future levels of sales and may require us to carry higher levels of
inventory.








Gross
Profit





The
following table sets forth our gross profit for the periods
indicated.





23




Three
      Months Ended
              
              
              
              
              
              Nine
      Months EndedMarch
      27,
              
              
              March
      28,
              
              
              %
              
              
              March
      27,
              
              
              March
      28,
              
              
              %(In
      thousands)
              
              2010
              
              
              2009
              
              
              Change
              
              
              2010
              
              
              2009
              
              
              ChangeNet
      revenues
              
              $
              36,661
              
              
              $
              24,394
              
              
              
              50.3
              %
              
              $
              105,418
              
              
              $
              98,924
              
              
              
              6.6
              %Gross
      profit
              
              
              12,938
              
              
              
              8,663
              
              
              
              49.3
              %
              
              
              35,518
              
              
              
              34,603
              
              
              
              2.6
              %Gross
      profit as a percentage of net revenues (gross margin)
              
              
              35.3
              %
              
              
              35.5
              %
              
              
              
              
              
              
              33.7
              %
              
              
              35.0
              %





The
increase in gross profit for the three months ended March 27, 2010 as compared
with the same period of the prior year was due to increased sales in IC and FCP
products of 52.1% and 47.4%, respectively. Specifically,
the increase in gross profit was primarily from:


·
            increased
      IC sales, which led to $3.3 million of increased gross profit,
      and·
            higher
      FCP sales, resulting in $1.0 million of increased gross
      profit.





Gross
margin of 35.3% for the three months ended March 27, 2010 was 0.2% lower than
gross margin for the same period of the prior year.





With
respect to the increase in gross profit in the first nine months of fiscal 2010
as compared to the first nine months of fiscal 2009 of $0.9 million is the
result of:


·
            A
      6.6% increase in sales, which led to $2.2 million of increased gross
      profit, partiallyoffset
      by·
            lower
      margins at 33.7%, resulting in a $1.3 million reduction in gross
      profit.





Future
gross profit and gross margin are highly dependent on the level and product mix
of net revenues. This includes the mix of sales between lower margin FCP
products and our higher margin integrated circuit products.  Although
we have been successful at favorably improving our integrated circuit product
mix and penetrating new end markets, there can be no assurance that this will
continue. Accordingly, we are not able to predict future gross profit levels or
gross margins with certainty.





During
the three and nine months ended March 27, 2010, gross profit and gross margin
benefited as a result of the sale of inventory of $51,000 and $183,000
respectively, that we had previously identified as excess and written down to
zero value, as compared with $23,000 and $100,000, respectively, for the same
periods of the prior year.





Research
and Development (“R&D”)





Three
      Months Ended
                            
                            
                            
                            
                            
                            Nine
      Months EndedMarch
      27,
                            
                            
                            March
      28,
                            
                            
                            %
                            
                            
                            March
      27,
                            
                            
                            March
      28,
                            
                            
                            %(In
      thousands)
                            
                            2010
                            
                            
                            2009
                            
                            
                            Change
                            
                            
                            2010
                            
                            
                            2009
                            
                            
                            ChangeNet
      revenues
                            
                            $
                            36,661
                            
                            
                            $
                            24,394
                            
                            
                            
                            50.3
                            %
                            
                            $
                            105,418
                            
                            
                            $
                            98,924
                            
                            
                            
                            6.6
                            %Research
      and development
                            
                            
                            4,251
                            
                            
                            
                            3,996
                            
                            
                            
                            6.4
                            %
                            
                            
                            12,633
                            
                            
                            
                            12,580
                            
                            
                            
                            0.4
                            %R&D
      as a percentage of net revenues
                            
                            
                            11.6
                            %
                            
                            
                            16.4
                            %
                            
                            
                            
                            
                            
                            
                            12.0
                            %
                            
                            
                            12.7
                            %





Research
and development expenses consist primarily of costs related to personnel and
overhead, non-recurring engineering charges, and other costs associated with the
design, prototyping, testing, manufacturing process design support, and
technical customer applications support of our products.  The $255,000
expense increase for the three months ended March 27, 2010 as compared to the
same period of the prior year is primarily attributable to $359,000 of increased
expenditures for employee wages and benefits, partially offset by a $142,000
reduction in depreciation charges and software maintenance expenses. The $53,000
expense increase for the nine month period ended March 27, 2010 as compared to
the same period of the prior year is attributable to $220,000 of increased
expenditures for employee wages and benefits, partially offset by a $146,000
reduction in expenditures for masks, tooling, fabrication and
assembly.





24


The
Company believes that continued spending on research and development to develop
new products and improve manufacturing processes is critical to the Company’s
long-term success, and as a result expects to continue to invest in research and
development projects.  In the short term, the Company intends to
continue to focus on cost control as business conditions improve.  If
business conditions deteriorate or the rate of improvement does not meet our
expectations, the Company may implement further cost-cutting
actions.





Selling,
General and Administrative (“SG&A”)





Three
      Months Ended
              
              
              
              
              
              Nine
      Months EndedMarch
      27,
              
              
              March
      28,
              
              
              %
              
              
              March
      27,
              
              
              March
      28,
              
              
              %(In
      thousands)
              
              2010
              
              
              2009
              
              
              Change
              
              
              2010
              
              
              2009
              
              
              ChangeNet
      revenues
              
              $
              36,661
              
              
              $
              24,394
              
              
              
              50.3
              %
              
              $
              105,418
              
              
              $
              98,924
              
              
              
              6.6
              %Selling,
      general and administrative
              
              
              6,201
              
              
              
              5,136
              
              
              
              20.7
              %
              
              
              19,065
              
              
              
              17,490
              
              
              
              9.0
              %SG&A
      as a percentage of net revenues
              
              
              16.9
              %
              
              
              21.1
              %
              
              
              
              
              
              
              18.1
              %
              
              
              17.7
              %





Selling,
general and administrative expenses consist primarily of personnel and related
overhead costs for sales, marketing, finance, administration, human resources
and general management.  The expense increase of $1.1 million for the
three month period ended March 27, 2010 as compared to the same period of the
prior year is attributable primarily to increased wages and benefits of
$380,000, sales commissions of $253,000, consultant expenditures of $132,000 and
travel and entertainment expenses of $58,000. The expense increase of $1.6
million for the nine month period ended March 27, 2010 as compared to the same
period of the prior year is attributable primarily to increased expenditures of
$1.2 million for legal and accounting fees in connection with the fiscal 2009
year-end accounting review, quarterly restatements and delayed 10-K filing,
sales commissions of $253,000, and travel and entertainment expenses of
$58,000.





The
Company anticipates that selling, general and administrative expenses will
increase in future periods over the long term due to increased staffing levels,
particularly in sales and marketing, as well as increased commission expense to
the extent the Company achieves higher sales levels.  The Company
intends to continue its focus on controlling costs.  If business
conditions deteriorate or the rate of improvement does not meet our
expectations, the Company may implement further cost-cutting
actions.





Interest
and Other Income, Net





Three
      Months Ended
              
              
              
              
              
              Nine
      Months EndedMarch
      27,
              
              
              March
      28,
              
              
              %
              
              
              March
      27,
              
              
              March
      28,
              
              
              %(In
      thousands)
              
              2010
              
              
              2009
              
              
              Change
              
              
              2010
              
              
              2009
              
              
              ChangeInterest
      and other income, net
              
              $
              1,219
              
              
              $
              1,501
              
              
              
              -18.8
              %
              
              $
              4,150
              
              
              $
              3,871
              
              
              
              7.2
              %





Interest
and other income for the three month period ended March 27, 2010 decreased
$282,000 as compared with the same period of the prior year due primarily to
annualized rates of interest on invested balances declining to 3.1% for the
current quarter as compared with 4.3% for the same quarter of the prior year.
The $279,000 increase in interest and other income for the nine month period
ended March 27, 2010 was primarily the result of $2.0 million of realized gains
on sales of short-term investments this year as compared with realized gains of
$1.1 million in the prior year, partially offset by somewhat lower rates of
interest on invested balances this year.





Other-Than-Temporary
Decline in Value of Investment





Other-than-temporary
decline in value of investment was zero for the three and nine month periods
ended March 27, 2010 as compared with $506,000 in the nine month period of the
prior year. The prior year decline was primarily caused by a $414,000 loss in
value of an investment security held in our short-term investment portfolio,
which resulted from the issuing company filing for Chapter 11 bankruptcy
protection. The Company’s investment guidelines require a diversified portfolio
of investment grade instruments, and it is unlikely that any future impairments
on individual securities would be material to the Company’s liquidity and
financial position.





25


Income
Tax Expense





Three
      Months Ended
              
              
              
              
              
              Nine
      Months EndedMarch
      27,
              
              
              March
      28,
              
              
              %
              
              
              March
      27,
              
              
              March
      28,
              
              
              %(In
      thousands)
              
              2010
              
              
              2009
              
              
              Change
              
              
              2010
              
              
              2009
              
              
              ChangePre-tax
      income
              
              $
              3,705
              
              
              $
              691
              
              
              
              436.2
              %
              
              $
              7,970
              
              
              $
              7,388
              
              
              
              7.9
              %Income
      tax expense
              
              
              1,260
              
              
              
              460
              
              
              
              173.9
              %
              
              
              2,737
              
              
              
              2,344
              
              
              
              16.8
              %Effective
      tax rate
              
              
              34
              %
              
              
              67
              %
              
              
              
              
              
              
              34
              %
              
              
              32
              %





The
increase in income tax expense for the three months ended March 27, 2010 over
the same period of the prior year is due to the significant increase in income
before income taxes. The effective tax rates for the nine month periods ended
March 27, 2010 and March 28, 2009 were comparable at 34% and 32%,
respectively.





Our
effective tax rate may differ from the federal statutory rate primarily due to
state income taxes, research and development tax credits, stock-based
compensation from incentive stock options, tax-exempt interest income, and
differing tax rates in income-earning foreign jurisdictions.








Equity
in Net Income of Unconsolidated Affiliates





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      27,
              
              
              March
      28,
              
              
              
              
              
              March
      27,
              
              
              March
      28,(In
      thousands)
              
              2010
              
              
              2009
              
              
              Change
              
              
              2010
              
              
              2009
              
              
              ChangeEquity
      in net income of PTI
              
              $
              521
              
              
              $
              64
              
              
              $
              457
              
              
              $
              1,418
              
              
              $
              64
              
              
              $
              1,354Equity
      in net income of JCP
              
              
              87
              
              
              
              (15
              )
              
              
              102
              
              
              
              253
              
              
              
              31
              
              
              
              222Total
              
              $
              608
              
              
              $
              49
              
              
              $
              559
              
              
              $
              1,671
              
              
              $
              95
              
              
              $
              1,576





Equity in
net income of unconsolidated affiliates includes our allocated portion of the
net income of Pericom Technology, Inc. (“PTI”), a British Virgin Islands
corporation based in Shanghai, People’s Republic of China and Hong Kong. Our
allocated portion of PTI’s results was income of $521,000 and $1.4 million for
the three and nine month periods ended March 27, 2010, respectively, as compared
with income of $64,000 for each of the same periods of the prior
year.





Equity in
net income of unconsolidated affiliates also includes the Company’s allocated
portion of the net income of Jiyuan Crystal Photoelectric Frequency Technology
Ltd. (“JCP”), an FCP manufacturing company located in Science Park of Jiyuan
City, Henan Province, China. JCP is a key manufacturing partner of SRe, and SRe
has acquired a 49% equity interest in JCP. For the three and nine month periods
ended March 27, 2010, the Company’s allocated portion of JCP’s results was
income of $87,000 and $253,000, respectively, as compared with a loss of $15,000
and income of $31,000 for the three and nine month periods ended March 28, 2009,
respectively.





Liquidity
and Capital Resources





As of
March 27, 2010, the Company’s principal sources of liquidity included cash, cash
equivalents and short-term and long-term investments of approximately $126.4
million as compared with $124.6 million on June 27, 2009.





The
Company’s investment in debt securities includes government securities,
commercial paper, corporate debt securities and mortgage-backed and asset-backed
securities. Government securities include US treasury securities, US federal
agency securities, foreign government and agency securities, and US state and
municipal bond obligations. Many of the municipal bonds are insured; those that
are not are nearly all AAA/Aaa rated. The corporate debt securities are all
investment grade and nearly all are single A-rated or better. The asset-backed
securities are AAA/Aaa rated and are backed by auto loans, student loans, credit
card balances and residential or commercial mortgages. Most of our
mortgage-backed securities are collateralized by prime residential mortgages
issued by government agencies including FNMA, FHLMC and FHLB. Those issued by
banks are AAA-rated. At March 27, 2010, unrealized gains on marketable
securities net of taxes were $795,000. When assessing marketable securities for
other than temporary declines in value, we consider a number of factors. Our
analyses of the severity and duration of price declines, portfolio manager
reports, economic forecasts and the specific circumstances of issuers indicate
that it is reasonable to expect marketable securities with unrealized losses at
March 27, 2010 to recover in fair value up to our cost bases within a reasonable
period of time. We have the ability and intent to hold investments with
unrealized losses until maturity, when the obligors are required to redeem them
at full face value or par, and we believe the obligors have the financial
resources to redeem the debt securities. Accordingly, we do not consider our
investments to be other than temporarily impaired at March 27,
2010.





26


As of
March 27, 2010, $34.5 million was classified as cash and cash equivalents
compared with $37.3 million as of June 27, 2009.  The maturities of
the Company’s short term investments are staggered throughout the year so that
cash requirements are met.  Because the Company is a fabless
semiconductor manufacturer, it has lower capital equipment requirements than
other semiconductor manufacturers that own wafer fabrication
facilities.  For the nine month period ended March 27, 2010, the
Company spent approximately $6.7 million on property and equipment compared to
$12.7 million for the nine month period ended March 28, 2009.  The
Company generated approximately $4.2 million of interest and other income, net
for the nine month period ended March 27, 2010, as compared with $3.9 million of
interest and other income, net for the nine month period ended March 28, 2009.
In the longer term the Company may generate less interest income if its total
invested balance decreases and these decreases are not offset by rising interest
rates or increased cash generated from operations or other sources.





The
Company’s net cash provided by operating activities of $7.3 million for the nine
months ended March 27, 2010 was primarily the result of net income of $6.9
million, non-cash expenses of $5.9 million in depreciation and amortization,
$2.9 million of share-based compensation expense and $683,000 of deferred taxes,
partially offset by a $2.0 million gain on sale of investments in marketable
securities and $1.7 million equity in net income of unconsolidated affiliates.
Additional contributions to cash included decreases of $1.0 million in accounts
receivable, $190,000 in prepaid expenses and other current assets, and increases
of $1.4 million in long-term liabilities and $298,000 in accounts payable. Such
contributions were partially offset by increases of $2.0 million in inventory
and $754,000 in other assets, and a decrease of $5.7 million in other current
liabilities. The Company’s net cash provided by operating activities was $16.0
million in the nine months ended March 28, 2009.





Generally,
as sales levels rise, the Company expects accounts receivable and accounts
payable, and to a lesser extent inventories, to increase. However, there will be
routine fluctuations in these accounts from period to period that may be
significant in amount.





The
Company’s cash used in investing activities of $7.8 million for the nine months
ended March 27, 2010 was due to purchases of short-term investments exceeding
sales and maturities of short term investments by approximately $3.1 million,
additions to property and equipment of approximately $6.7 million and $1.2
million used for the buyout of SRe’s noncontrolling interest, partially offset
by a $3.2 million reduction in restricted cash balances. The Company’s cash used
in investing activities was $24.8 million for the nine months ended March 28,
2009.





The
Company’s cash used in financing activities for the nine months ended March 27,
2010 of $2.8 million was primarily the result of using $4.3 million for
repurchase of the Company’s common stock, partially offset by $1.5 million in
proceeds generated from the issuance of common stock in the Company’s employee
stock plans. The Company used $2.2 million of cash in financing activities for
the nine months ended March 28, 2009.





A portion
of our cash may be used to acquire or invest in complementary businesses or
products or to obtain the right to use complementary
technologies.  From time to time, in the ordinary course of business,
we may evaluate potential acquisitions of such businesses, products or
technologies.





Our
long-term future capital requirements will depend on many factors, including our
level of revenues, the timing and extent of spending to support our product
development efforts, the expansion of sales and marketing efforts, the timing of
our introductions of new products, the costs to ensure access to adequate
manufacturing capacity, and the continuing market acceptance of our products. We
could be required, or could elect, to seek additional funding through public or
private equity or debt financing and additional funds may not be available on
terms acceptable to us or at all. We believe our current cash balances and cash
flows generated by operations will be sufficient to satisfy our anticipated cash
needs for working capital and capital expenditures.





27


Contractual
Obligations and Commitments





The
Company’s contractual obligations and commitments at March 27, 2010 are as
follows:





Payments
      Due by Period(In
      thousands)
              
              Total
              
              
              Less
      than 1 Year
              
              
              1
      – 3 Years
              
              
              3
      – 5 Years
              
              
              ThereafterOperating
      leases
              
              $
              4,944
              
              
              $
              1,412
              
              
              $
              2,504
              
              
              $
              1,028
              
              
              $
              -PTL
      debt
              
              
              1,962
              
              
              
              153
              
              
              
              315
              
              
              
              303
              
              
              
              1,191Capital
      equipment purchase obligations
              
              
              22,294
              
              
              
              13,693
              
              
              
              8,601
              
              
              
              -
              
              
              
              -Total
      obligations
              
              $
              29,200
              
              
              $
              15,258
              
              
              $
              11,420
              
              
              $
              1,331
              
              
              $
              1,191





The
Company leases certain facilities under operating leases with termination dates
on or before December 2013.  Generally, these leases have multiple
options to extend for a period of years upon termination of the original lease
term or previously exercised option to extend.





We have
no purchase obligations other than routine purchase orders and the capital
equipment purchase commitments shown in the table as of March 27, 2010. The
capital equipment purchase commitmentsare associated with the
construction and outfitting of our factory in the Jinan Development Zone, China
for the development and manufacture of frequency control products (FCPs). The
mortgage loan is at the Company’s subsidiaryPTL, which took out a
15-year $1.7 million mortgage to acquire its building in December 2008, and the
related commitment may fluctuate based on changes in interest
rates.





On
December 1, 2009, the Company entered into an R&D Center Investment
Agreement (the “R&D Agreement”) with the Administrative Committee of the
Yangzhou Economic and Technology Development Zone (the “Zone”) for the Company’s
investment in the Zone, located in Jiangsu Province, People’s Republic of China.
Under the R&D Agreement, the Company or its majority-owned affiliate will
invest in and establish a research and development center to engage in the
research and development of the IC design technologies related to “high-speed
serial connectivity” and the “XO crystal oscillator” and the manufacture of
relevant products.  It is expected that the Company’s total
investment, over a period of two to three years, will be approximately $30
million U.S. Dollars. As of March 27, 2010, the Company’s commitment for the
Yangzhou project is $21 million, which is included in the table
above.








Off-Balance
Sheet Arrangements





The
Company has no off-balance sheet arrangements, defined by Regulation S-K item
303(a)(4), other than operating leases on our buildings and the commitment for
capital expenditures in Jinan and Yangzhou.





Critical
Accounting Policies





Our
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America.  The preparation of such statements requires us to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period and the reported amounts of assets and
liabilities as of the date of the financial statements.  Our estimates
are based on historical experience and other assumptions that we consider to be
reasonable given the circumstances.  Actual results may vary from our
estimates.





The
methods, estimates and judgments the Company uses in applying its most critical
accounting policies have a significant impact on the results the Company reports
in its financial statements. The Securities and Exchange Commission has defined
the most critical accounting policies as the ones that are most important to the
portrayal of the Company’s financial condition and results of operations, and
require the Company to make its most difficult and subjective accounting
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based on this definition, the Company’s most critical
accounting policies include revenue recognition and accounts receivable
allowances, which impact the recording of revenues; valuation of inventories,
which impacts costs of goods sold and gross margins; accounting for income
taxes, which impacts the income tax provision and net
income;  impairment of goodwill, other intangible assets and
investments, which impacts the goodwill, intangible asset and investment
accounts; and stock-based compensation, which impacts costs of goods sold and
operating expenses. These policies and the estimates and judgments involved are
discussed further below.





28


REVENUE
RECOGNITION. The Company recognizes revenue from the sale of its products
upon shipment, provided title and risk of loss has passed to the customer, the
price is fixed or determinable and collection of the revenue is reasonably
assured.  A provision for estimated future returns and other charges
against revenue is recorded at the time of shipment.  For the nine
months ended March 27, 2010 the majority of the Company’s revenues were from
sales to distributors.





The
Company sells products to large, domestic distributors at the price listed in
its price book for that distributor. The Company recognizes revenue at the time
of shipment. At the time of sale the Company books a sales reserve for ship from
stock and debits (“SSD”s), stock rotations, return material authorizations
(“RMA”s), authorized price protection programs, and any special programs
approved by management. The sales reserve is offset against revenues, which then
leads to the net revenue amount reported.





The
market price for the Company’s products can be significantly different from the
book price at which the product was sold to the distributor. When the market
price, as compared with the book price, of a particular sales opportunity from
the distributor to their customer would result in low or negative margins to the
distributor, a ship from stock and debit is negotiated with the distributor. SSD
history is analyzed and used to develop SSD rates that form the basis of the SSD
sales reserve booked each period.  The Company captures these
historical SSD rates from its historical records to estimate the ultimate net
sales price to the distributor.





The
Company’s distribution agreements provide for semi-annual stock rotation
privileges of typically 10% of net sales for the previous nine-month period. The
contractual stock rotation applies only to shipments at book price. Asian
distributors typically buy the Company’s product at less than book price and
therefore are not entitled to the 10% stock rotation privilege. In order to
provide for routine inventory refreshing, for the Company’s benefit as well as
theirs, the Company grants Asian distributors stock rotation privileges between
1% and 5% even though the Company is not contractually obligated to do so. Each
month a sales reserve is recorded for the estimated stock rotation privilege
anticipated to be utilized by the distributors that month. This reserve is the
sum of product of each distributor’s net sales for the month and their stock
rotation percentage.





From time
to time, customers may request to return parts for various reasons including the
customers’ belief that the parts are not performing to specification. Many such
return requests are the result of customers incorrectly using the parts, not
because the parts are defective. These requests are reviewed by management and
when approved result in a RMA being established. The Company is only obligated
to accept returns of defective parts. For customer convenience, the Company may
approve a particular return request even though it is not obligated to do so.
Each month a sales reserve is recorded for the approved RMAs that have not yet
been returned.  The Company does not keep a general warranty reserve
because historically valid warranty returns, which are the result of a part not
meeting specifications or being non-functional, have been immaterial and parts
can frequently be re-sold to other customers for use in other
applications.





Price
protection is granted solely at the discretion of Pericom management. The
purpose of price protection is to reduce the distributor’s cost of inventory as
market prices fall, thus reducing SSD rates.  Pericom sales management
prepares price protection proposals for individual products located at
individual distributors. Pericom general management reviews these proposals and
if a particular price protection arrangement is approved, the dollar impact will
be estimated based on the book price reduction per unit for the products
approved and the number of units of those products in the distributor’s
inventory. A sales reserve is then recorded in that period for the estimated
amount.





At the
discretion of Pericom management, the Company may offer rebates on specific
products sold to specific end customers. The purpose of the rebates is to allow
for pricing adjustments for large programs without affecting the pricing the
Company charges its distributor customers.  The rebate is recorded at
the time of shipment.





29


Customers
are typically granted payment terms of between 30 and 60 days and they generally
pay within those terms.  Relatively few customers have been granted
terms with cash discounts.  Distributors are invoiced for shipments at
book price.  When they pay those invoices, they claim debits for SSDs,
stock rotations, cash discounts, RMAs and price protection when appropriate.
Once claimed, these debits are then processed against the
approvals.





The
revenue the Company records for sales to its distributors is net of estimated
provisions for these programs. When determining this net revenue, the Company
must make significant judgments and estimates. The Company’s estimates are based
on historical experience rates, inventory levels in the distribution channel,
current trends and other related factors.  However, because of the
inherent nature of estimates, there is a risk that there could be significant
differences between actual amounts and the Company’s estimates. The Company’s
financial condition and operating results depend on its ability to make reliable
estimates and management believes such estimates are reasonable.





PRODUCT WARRANTY.The Company offers a standard one-year product replacement
warranty.  In the past the Company has not had to accrue for a general
warranty reserve, but assesses the level and materiality of RMAs and determines
whether it is appropriate to accrue for estimated returns of defective products
at the time revenue is recognized. On occasion, management may determine to
accept product returns beyond the standard one-year warranty period. In those
instances, the Company accrues for the estimated cost at the time the decision
to accept the return is made.  As a consequence of the Company’s
standardized manufacturing processes and product testing procedures, returns of
defective product are infrequent and the quantities have not been
significant.  Accordingly, historical warranty costs have not been
material.





SHIPPING
COSTS.  Shipping costs are charged to cost of revenues as
incurred.





INVENTORIES. Inventories are recorded at
the lower of standard cost (which generally approximates actual cost on a
first-in, first-out basis) or market value.  We adjust the carrying
value of inventory for excess and obsolete inventory based on inventory age,
shipment history and our forecast of demand over a specific future period of
time. Raw material inventory is considered obsolete and reserved if it has not
moved in 365 days.  The Company reviews its assembled devices for
excess and writes them off if the quantity of assembled devices in inventory is
in excess of the greater of the quantity shipped in the previous twelve months,
the quantity in backlog or the quantity forecasted to be shipped in the
following twelve months.In certain
circumstances, management will determine, based on expected usage or other
factors, that inventory considered obsolete by these guidelines should not be
written off. The Company does occasionally determine that the last twelve
months’ sales levels will not continue and reserves inventory in line with the
quantity forecasted. The
semiconductor markets that we serve are volatile and actual results may vary
from our forecast or other assumptions, potentially impacting our assessment of
excess and obsolete inventory and resulting in material effects on our gross
margin.





IMPAIRMENT OF
INTANGIBLE ASSETS.The Company performs an
impairment review of its intangible assets at least annually. Based on the
results of its most recent impairment review, the Company determined that no
impairment of its intangible assets existed as of June 27, 2009. However, future
impairment reviews could result in a charge to earnings.





INVESTMENTS.
We have made investments including loans, bridge loans convertible to equity, or
asset purchases as well as direct equity investments. These loans and
investments are made with strategic intentions and have been in privately held
technology companies, which by their nature are high risk. These investments are
included in other assets in the balance sheet and are carried at the lower of
cost, or market if the investment has experienced an other-than-temporary
decline in value. We monitor these investments quarterly and make appropriate
reductions in carrying value if a decline in value is deemed to be other than
temporary.





DEFERRED TAX
ASSETS. The Company’s deferred income tax assets represent temporary
differences between the financial statement carrying amount and the tax basis of
existing assets and liabilities that will result in deductible amounts in future
years, including net operating loss carryforwards. Based on estimates, the
carrying value of our net deferred tax assets assumes that it is more likely
than not that the Company will be able to generate sufficient future taxable
income in certain tax jurisdictions. Our judgments regarding future
profitability may change due to future market conditions, changes in U.S. or
international tax laws and other factors. If, in the future, the Company
experiences losses for a sustained period of time, the Company may not be able
to conclude that it is more likely than not that the Company will be able to
generate sufficient future taxable income to realize our deferred tax assets. If
this occurs, the Company may be required to increase the valuation allowance
against the deferred tax assets resulting in additional income tax
expense.





30


ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK





At March
27, 2010 our investment portfolio consisted of investment-grade fixed income
securities, excluding those classified as cash equivalents, of $91.8
million.  These securities are subject to interest rate risk and will
decline in value if market interest rates increase. However, we do not believe
that such a decrease would have a material effect on our results of operations
over the next fiscal year.  Due to the short duration and conservative
nature of these instruments, we do not believe that we have a material exposure
to interest rate risk.





When the
general economy weakens significantly, as it did in 2008 and 2009, the credit
profile, financial strength and growth prospects of certain issuers of
interest-bearing securities held in our investment portfolios may deteriorate,
and our interest-bearing securities may lose value either temporarily or other
than temporarily. We may implement investment strategies of different types with
varying duration and risk/return trade-offs that do not perform well. At March
27, 2010, we held a significant portion of our corporate cash in diversified
portfolios of investment-grade marketable securities, mortgage- and asset-backed
securities, and other securities that had unrealized gains net of tax of
$795,000. Although we consider unrealized gains and losses on individual
securities to be temporary, there is a risk that we may incur
other-than-temporary impairment charges if credit and equity markets are
unstable and adversely impact securities issuers.





The
Company transacts business in various non-U.S. currencies, primarily the New
Taiwan Dollar, Hong Kong Dollar, China’s Renminbi and the Japanese Yen. The
Company is exposed to fluctuations in foreign currency exchange rates on
accounts receivable and accounts payable from sales and purchases in these
foreign currencies and the net monetary assets and liabilities of our foreign
subsidiaries.  A hypothetical 10% favorable or unfavorable change in
foreign currency exchange rates would have a material impact on our financial
position and results of operations.








ITEM
4. CONTROLS AND PROCEDURES







Evaluation
of Disclosure Controls and Procedures




We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the
Exchange Act”)) that are designed to ensure that information required to be
disclosed by us in the reports we file or submit under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure.





Our
management, with the participation of our principal executive officer and
principal financial officer has evaluated the effectiveness of our disclosure
controls and procedures.  Based on such evaluation, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures were not effective as of March 27, 2010 due to the fact
that management had not fully remediated the material weakness described in our
annual report on Form 10-K for the year ended June 27, 2009.




Changes
in Internal Control over Financial Reporting




As
previously disclosed in our Form 10-K for the year ended June 27, 2009, our
Company’s management identified and reported to our Audit Committee the
following control deficiencies, each of which constitutes a material weakness in
our internal control over financial reporting as of June 27, 2009:





·
            The
      Company concluded that certain controls over period-end inventory
      accounting did not operate with sufficient precision. Misstatements were
      detected relating to inventory valuation and inventory reserves. In
      addition, the Company’s new enterprise resource planning (“ERP”) system,
      which was implemented in the second quarter of fiscal 2009, contained
      programming errors that caused certain inventory items to be incorrectly
      valued.





31


·
            The
      Company did not maintain a sufficient complement of personnel with an
      appropriate level of accounting knowledge, experience and training in the
      application of generally accepted accounting principles commensurate with
      the Company’s financial reporting requirements. As a result, the Company
      concluded that controls over the financial statement close process related
      to account reconciliations and analyses, including investment accounts,
      accounts receivable reserves, inventories, accounts payable and accrued
      liabilities, were not effective.  As a result, a large volume of
      adjustments identified as part of the audit process were necessary to
      completely and accurately present the consolidated financial statements in
      accordance with generally accepted accounting
  principles.





As a
result, we concluded that as of June 27, 2009 our internal control over
financial reporting was not effective.





We are
working to remediate the material weaknesses by making a number of improvements
to our finance department, including the implementation of improved processes
and procedures, as well as additions to and upgrades of key finance personnel.
Since June 27, 2009,
we have hired a new chief financial officer, general accounting manager, and a
cost accounting manager to our accounting staff.We have re-examined and
updated our documentation and review procedures. We are also revamping the
processes in the cost module of our enterprise resource planning (ERP) system.
We may also consider implementing other remediation measures.




We
consider the remediation of our material weaknesses in our internal control over
financial reporting which we identified in the fiscal year ended June 27, 2009 a
significant priority for the Company. We will continue our efforts in this
regard. While we
believe we have made progress, we will not be able to establish that remediation
has been effective until testing is completed later in our fiscal
year.





Except
for the changes described above, there were no changes in our internal control
over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
three months ended March 27, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.








PART
II.  OTHER INFORMATION





Item
1A: Risk Factors







This
quarterly report on Form 10-Q contains forward-looking statements which involve
risks and uncertainties. Our actual results could differ materially from those
anticipated by such forward-looking statement as a result of various factors,
including those set forth below. The listing below includes any material changes
to and supersedes the description of the risk factors affecting our business
previously disclosed in “Part I, Item 1A. Risk Factors” of our Annual
Report on Form 10-K for the fiscal year ended June 27, 2009.








FACTORS
THAT MAY AFFECT OPERATING RESULTS`





In
the past, our operating results have varied significantly and are likely to
fluctuate in the future.





We
continue to face achallenging business
environment and limited visibility on end-market demands.


Wide
varieties of factors affect our operating results. These factors include the
following:





·
            changes
      in the quantity of our products
sold;


·
            changes
      in the average selling price of our
products;


·
            general
      conditions in the semiconductor
industry;


·
            changes
      in our product mix;


·
            a
      change in the gross margins of our
products;




32


·
            the
      operating results of the FCP product line, which normally has a lower
      profit margin than IC products;


·
            expenses
      incurred in obtaining, enforcing, and defending intellectual property
      rights;


·
            the
      timing of new product introductions and announcements by us and by our
      competitors;


·
            customer
      acceptance of new products introduced by
us;


·
            delay
      or decline in orders received from
distributors;


·
            growth
      or reduction in the size of the market for interface
  ICs;


·
            the
      availability of manufacturing capacity with our wafer
      suppliers;


·
            changes
      in manufacturing costs;


·
            fluctuations
      in manufacturing yields;


·
            disqualification
      by our customers for quality or performance related
  issues;


·
            the
      ability of customers to pay us; and


·
            increased
      research and development expenses associated with new product
      introductions or process changes.





All of
these factors are difficult to forecast and could seriously harm our operating
results.  Our expense levels are based in part on our expectations
regarding future sales and are largely fixed in the short
term.  Therefore, we may be unable to reduce our expenses fast enough
to compensate for any unexpected shortfall in sales.  Any significant
decline in demand relative to our expectations or any material delay of customer
orders could harm our operating results.  In addition, if our
operating results in future quarters fall below public market analysts' and
investors' expectations, the market price of our common stock would likely
decrease.





The
demand for our products depends on the growth of our end users'
markets.





Our
continued success depends in large part on the continued growth of markets for
the products into which our semiconductor and frequency control products are
incorporated.  These markets include the following:





·
            computers
      and computer related peripherals;


·
            data
      communications and telecommunications
equipment;


·
            electronic
      commerce and the Internet; and


·
            consumer
      electronics equipment.





Any
decline in the demand for products in these markets could seriously harm our
business, financial condition and operating results.  These markets
have also historically experienced significant fluctuations in
demand.  We may also be seriously harmed by slower growth in the other
markets in which we sell our products.





Our
earnings are subject to substantial quarterly and annual fluctuations and to
adverse economic conditions and market downturns





Our
revenues and earnings have fluctuated significantly in the past and may
fluctuate significantly in the future. General economic or other conditions
could cause a downturn in the market for our products or technology. The
2008-2009 financial disruption affecting the banking system, investment banks,
insurance companies and financial markets resulted in a tightening in the credit
markets, a low level of liquidity in many financial markets and extreme
volatility in fixed income, credit and equity markets. In addition to the
potential impact of such disruptions on our marketable securities portfolio,
there could be a number of follow-on effects on our business that could also
adversely affect our operating results. Disruptions may result in the insolvency
of key suppliers resulting in product delays; the inability of our customers to
obtain credit to finance purchases of our products and/or customer insolvencies
that cause our customers to change delivery schedules, cancel or reduce orders;
a slowdown in global economies which could result in lower end-user demand for
our products; and increased impairments of our investments. Net investment
income could vary from expectations depending on the gains or losses realized on
the sale or exchange of securities, gains or losses from equity method
investments, and impairment charges related to marketable securities. Our cash
and marketable securities investments represent significant assets that may be
subject to fluctuating or even negative returns depending upon interest rate
movements and financial market conditions in fixed income securities. Volatility
in the financial markets and overall economic uncertainty increases the risk of
substantial quarterly and annual fluctuations in our earnings.





33


If
we do not develop products that our customers and end-users design into their
products, or if their products do not sell successfully, our business and
operating results would be harmed.





We have
relied in the past and continue to rely upon our relationships with our
customers and end-users for insights into product development strategies for
emerging system requirements.  We generally incorporate new products
into a customer's or end-user's product or system at the design
stage.  However, these design efforts, which can often require
significant expenditures by us, may precede product sales, if any, by a year or
more.  Moreover, the value to us of any design win will depend in
large part on the ultimate success of the customer or end-user's product and on
the extent to which the system's design accommodates components manufactured by
our competitors.  If we fail to achieve design wins or if the design
wins fail to result in significant future revenues, our operating results would
be harmed.  If we have problems developing or maintaining our
relationships with our customers and end-users, our ability to develop
well-accepted new products may be impaired.





The
markets for our products are characterized by rapidly changing technology, and
our financial results could be harmed if we do not successfully develop and
implement new manufacturing technologies or develop, introduce and sell new
products.





The
markets for our products are characterized by rapidly changing technology,
frequent new product introductions and declining selling prices over product
life cycles.  We currently offer a comprehensive portfolio of silicon
and quartz based products.  Our future success depends upon the timely
completion and introduction of new products, across all our product lines, at
competitive price and performance levels.  The success of new products
depends on a variety of factors, including the following:





·
            product
      performance and functionality;


·
            customer
      acceptance;


·
            competitive
      cost structure and pricing;


·
            successful
      and timely completion of product
development;


·
            sufficient
      wafer fabrication capacity; and


·
            achievement
      of acceptable manufacturing yields by our wafer
  suppliers.





We may
also experience delays, difficulty in procuring adequate fabrication capacity
for the development and manufacture of new products, or other difficulties in
achieving volume production of these products.  Even relatively minor
errors may significantly affect the development and manufacture of new
products.  If we fail to complete and introduce new products in a
timely manner at competitive price and performance levels, our business would be
significantly harmed.





Intense
competition in the semiconductor industry may reduce the demand for our products
or the prices of our products, which could reduce our revenues and gross
profits.





The
semiconductor industry is intensely competitive. Our competitors include Analog
Devices, Cypress Semiconductor Corporation, Fairchild Semiconductor, Hitachi,
Integrated Device Technology, Inc., Intel Corp., Maxim Integrated Products,
Inc., Motorola, On Semiconductor Corp., Tundra Semiconductor Corp., PLX
Technology, STMicroelectronics, Texas Instruments, Inc., and Toshiba. Most of
those competitors have substantially greater financial, technical, marketing,
distribution and other resources, broader product lines and longer-standing
customer relationships than we do. We also compete with other major or emerging
companies that sell products to certain segments of our markets. Competitors
with greater financial resources or broader product lines may have a greater
ability to sustain price reductions in our primary markets in order to gain or
maintain market share.





We
believe that our future success will depend on our ability to continue to
improve and develop our products and processes.  Unlike us, many of
our competitors maintain internal manufacturing capacity for the fabrication and
assembly of semiconductor products.  This ability may provide them
with more reliable manufacturing capability, shorter development and
manufacturing cycles and time-to-market advantages.  In addition,
competitors with their own wafer fabrication facilities that are capable of
producing products with the same design geometries as ours may be able to
manufacture and sell competitive products at lower prices.  Any
introduction of products by our competitors that are manufactured with improved
process technology could seriously harm our business. As is typical in the
semiconductor industry, our competitors have developed and marketed products
that function similarly or identically to ours.  If our products do
not achieve performance, price, size or other advantages over products offered
by our competitors, our products may lose market share. Competitive pressures
could also reduce market acceptance of our products, reduce our prices and
increase our expenses.





34


We also
face competition from the makers of ASICs and other system devices. These
devices may include interface logic functions which may eliminate the need or
sharply reduce the demand for our products in particular
applications.





Downturns
in the semiconductor industry, rapidly changing technology, accelerated selling
price erosion and evolving industry standards can harm our operating
results.





The
semiconductor industry has historically been cyclical and periodically subject
to significant economic downturns--characterized by diminished product demand,
accelerated erosion of selling prices and overcapacity--as well as rapidly
changing technology and evolving industry standards. In the future, we may
experience substantial period-to-period fluctuations in our business and
operating results due to general semiconductor industry conditions, overall
economic conditions or other factors.  Our business is also subject to
the risks associated with the effects of legislation and regulations relating to
the import or export of semiconductor products.





Our
potential future acquisitions may not be successful.





Our
potential future acquisitions could result in the following:





·
            large
      one-time write-offs;


·
            the
      difficulty in integrating newly-acquired businesses and operations in an
      efficient and effective manner;


·
            the
      challenges  in achieving strategic objectives, cost savings, and
      other benefits from acquisitions as
anticipated;


·
            the
      risk of diverting the attention of senior management from other business
      concerns;


·
            risks
      of entering geographic and business markets in which we have no or limited
      prior experience and potential loss of key employees of acquired
      organizations;


·
            the
      risk that our markets do not evolve as anticipated and that the
      technologies and capabilities acquired do not prove to be those needed to
      be successful in those markets;


·
            potentially
      dilutive issuances of equity
securities;


·
            the
      incurrence of debt and contingent liabilities or amortization expenses
      related to intangible assets;


·
            difficulties
      in the assimilation of operations, personnel, technologies, products and
      the information systems of the acquired companies;
  and


·
            difficulties
      in expanding information technology systems and other business processes
      to accommodate the acquired
businesses.





As part
of our business strategy, we expect to seek acquisition prospects that would
complement our existing product offerings, improve our market coverage or
enhance our technological capabilities.  Although we are evaluating
acquisition and strategic investment opportunities on an ongoing basis, we may
not be able to locate suitable acquisition or investment
opportunities.  In addition, from time to time, we invest in other
companies, without actually acquiring them, and such investments involve many of
the same risks as are involved with acquisitions.







The
trading price of our common stock and our operating results are likely to
fluctuate substantially in the future.





The
trading price of our common stock has been and is likely to continue to be
highly volatile.  Our stock price could fluctuate widely in response
to factors some of which are not within our control, including:





·
            general
      conditions in the semiconductor and electronic systems
      industries;


·
            quarter-to-quarter
      variations in operating results;


·
            announcements
      of technological innovations or new products by us or our competitors;
      and


·
            changes
      in earnings estimates by analysts; and price and volume fluctuations in
      the overall stock market, which have particularly affected the market
      prices of many high technology
companies.





35


Implementation
of new FASB rules and the issuance of new laws or other accounting regulations,
or reinterpretation of existing laws or regulations, could materially impact our
business or stated results.





In
general, from time to time, the government, courts and the financial accounting
boards may issue new laws or accounting regulations, or modify or reinterpret
existing ones. There may be future changes in laws, interpretations or
regulations that would affect our financial results or the way in which we
present them. Additionally, changes in the laws or regulations could have
adverse effects on hiring and many other aspects of our business that would
affect our ability to compete, both nationally and internationally.








We
and our independent registered public accounting firm determined that we had
material weaknesses in our internal control over financial reporting as of the
end of our most recent fiscal year, June 27, 2009.  There can be no
assurance that a material weakness will not arise in the future. As a result,
current and potential stockholders could lose confidence in our financial
reporting, which would harm our business and the trading price of our
stock.





Under SEC
rules, we are required to maintain, and evaluate the effectiveness of, our
internal control over financial reporting and disclosure controls and
procedures.





In our
annual reports on Form 10-K for the years ended June 30, 2007 and July 2, 2005,
we reported material weaknesses in our internal control over financial reporting
which were subsequently remediated.





As
reported in Item 9A of our recently filed 10-K, Pericom had material weaknesses
in internal control over financial reporting as of June 27, 2009, and management
and our independent registered public accounting firm determined that as of June
27, 2009, our internal control over financial reporting was not
effective.  As a result, we also concluded that our disclosure
controls and procedures were not effective as of June 27, 2009, or as of the end
of the first three fiscal quarters of 2009. As set forth in this Form 10-Q, we
determined that our disclosure controls and procedures were not effective as of
March 27, 2010 due to the fact that management had not fully remediated the
material weaknesses described in our Form 10-K.





The
errors described in Item 9A resulted in the restatement of our financial results
for the periods covered by the Forms 10-Q for the first three fiscal quarters of
FY 2009, which restated results are set forth in amended Forms 10-Q/A filed for
each of these periods.  Please refer to Item 9A of the 10-K for a
discussion of the material weaknesses.





Our
current and future results of operations may be adversely affected by
significant costs related to our investigation of and remedial measures relating
to these matters.





Although
we have renewed our efforts to maintain effective internal control in financial
reporting as described in Item 4 of this report on Form 10-Q, there can be no
assurance that we will succeed in remediating the material weaknesses that have
been identified. There also can be no assurance that other material weaknesses
or significant deficiencies will not arise in the future. Should we or our
independent registered public accounting firm determine in future periods that
we have a material weakness in our internal control over financial reporting,
the reliability of our financial reports may be impacted, and investors could
lose confidence in the accuracy and completeness of our financial reports, which
could have an adverse effect on our stock price and we could suffer other
materially adverse consequences if our future internal control over financial
reporting and disclosure controls and procedures are not effective.








Our
finance department has undergone, and continues to undergo, significant
changes.





The
Company has recently undergone significant turnover of personnel in the finance
department, including in significant positions. Since June 27, 2009, the Company
has hired a new chief financial officer, general accounting manager and a cost
accounting manager. The Company is in the process of implementing changes in its
finance department, including but not limited to recruiting to fill other key
management positions, enhancing training in certain areas, and implementing
improved processes and procedures. There can be no assurance that these changes
will sufficiently improve the Company's finance functions, or that the finance
personnel turnover the Company has experienced will not continue.  In
either event, the reliability of our financial reports may be impacted, and
investors may lose confidence in the accuracy or completeness of our financial
reports, which could have an adverse impact on our stock price.





36


Customer
demands for the Company’s products are volatile and difficult to
predict.





The
Company’s customers continuously adjust their inventories in response to changes
in end market demand for their products and the availability of semiconductor
components. This results in frequent changes in demand for the Company’s
products. The volatility of customer demand limits the Company’s ability to
predict future levels of sales and profitability. The supply of semiconductors
can quickly and unexpectedly match or exceed demand because end customer demand
can change very quickly. Also, semiconductor suppliers can rapidly increase
production output. This can lead to a sudden oversupply situation and a
subsequent reduction in order rates and revenues as customers adjust their
inventories to true demand rates. A rapid and sudden decline in customer demand
for the Company’s products can result in excess quantities of certain of the
Company’s products relative to demand. In this event, the Company’s operating
results might be adversely affected as a result of charges to reduce the
carrying value of the Company’s inventory to the estimated demand level or
market price.





Changes
to environmental laws and regulations applicable to manufacturers of electrical
and electronic equipment are causing us to redesign our products, and may
increase our costs and expose us to liability.





The
implementation of new environmental regulatory legal requirements, such as lead
free initiatives, may affect our product designs and manufacturing processes.
The impact of such regulations on our product designs and manufacturing
processes could affect the timing of compliant product introductions as well as
their commercial success. Redesigning our products to comply with new
regulations may result in increased research and development and manufacturing
and quality control costs.  In addition, the products we manufacture
that comply with new regulatory standards may not perform as well as our current
products. Moreover, if we are unable to successfully and timely redesign
existing products and introduce new products that meet new standards set by
environmental regulation and our customers, sales of our products could decline,
which could materially adversely affect our business, financial condition and
results of operations.





Our
contracts with our wafer suppliers do not obligate them to a minimum supply or
set prices.  Any inability or unwillingness of our wafer suppliers
generally, and Global Foundries, Inc. and MagnaChip Semiconductor, Inc. in
particular, to meet our manufacturing requirements would delay our production
and product shipments and harm our business.





In recent
years, we purchased approximately 80 to 90% of our wafers from MagnaChip and
Global Foundries, with the balance coming from three to nine other suppliers.
Our reliance on independent wafer suppliers to fabricate our wafers at their
production facilities subjects us to possible risks such as:





·
            lack
      of adequate capacity;


·
            lack
      of available manufactured products;


·
            lack
      of control over delivery schedules;
and


·
            unanticipated
      changes in wafer prices.





Any
inability or unwillingness of our wafer suppliers generally, and Global
Foundries and MagnaChip in particular, to provide adequate quantities of
finished wafers to meet our needs in a timely manner would delay our production
and product shipments and seriously harm our business. In March 2004, Global
Foundries shut down one of their production facilities that was used to
manufacture our products. We transitioned the production of these products to
different facilities. The transfer of production of our products to other
facilities subjects us to the above listed risks as well as potential yield or
other production problems, which could arise as a result of any
change.





37


At
present, we purchase wafers from our suppliers through the issuance of purchase
orders based on our rolling nine-month forecasts.  The purchase orders
are subject to acceptance by each wafer supplier.  We do not have
long-term supply contracts that obligate our suppliers to a minimum supply or
set prices.  We also depend upon our wafer suppliers to participate in
process improvement efforts, such as the transition to finer
geometries.  If our suppliers are unable or unwilling to do so, our
development and introduction of new products could be
delayed.  Furthermore, sudden shortages of raw materials or production
capacity constraints can lead wafer suppliers to allocate available capacity to
customers other than us or for the suppliers' internal uses, interrupting our
ability to meet our product delivery obligations.  Any significant
interruption in our wafer supply would seriously harm our operating results and
our customer relations.  Our reliance on independent wafer suppliers
may also lengthen the development cycle for our products, providing
time-to-market advantages to our competitors that have in-house fabrication
capacity.





In the
event that our suppliers are unable or unwilling to manufacture our key products
in required volumes, we will have to identify and qualify additional wafer
foundries.  The qualification process can take up to nine months or
longer.  Furthermore, we are unable to predict whether additional
wafer foundries will become available to us or will be in a position to satisfy
any of our requirements on a timely basis.





We
depend on single or limited source assembly subcontractors with whom we do not
have written contracts.  Any inability or unwillingness of our
assembly subcontractors to meet our assembly requirements would delay our
product shipments and harm our business.





We
primarily rely on foreign subcontractors for the assembly and packaging of our
products and, to a lesser extent, for the testing of finished
products.  Some of these subcontractors are our single source supplier
for some of our new packages.  In addition, changes in our or a
subcontractor's business could cause us to become materially dependent on a
single subcontractor.  We have from time to time experienced
difficulties in the timeliness and quality of product deliveries from our
subcontractors and may experience similar or more severe difficulties in the
future.  We generally purchase these single or limited source
components or services pursuant to purchase orders and have no guaranteed
arrangements with these subcontractors.  These subcontractors could
cease to meet our requirements for components or services, or there could be a
significant disruption in supplies from them, or degradation in the quality of
components or services supplied by them.  Any circumstance that would
require us to qualify alternative supply sources could delay shipments, result
in the loss of customers and limit or reduce our revenues.





Conflicts
of interest may arise with respect to transactions with certain of our
non-wholly owned subsidiaries.





We
currently hold an approximately 43% ownership interest in Pericom Technology,
Inc., a company with its principal offices in Shanghai, People’s Republic of
China.  The remaining interest in PTI is held by various entities and
individuals, including our Chairman, Alex Hui, another director and officer of
Pericom, John Hui, and other members of management.





The
Company has made investments, over the years, into PTI and has entered into
various agreements with PTI.  It is possible that the Company may make
further investments into (either by purchasing currently outstanding shares or
newly issued shares of PTI), or enter additional agreements with, PTI or other
entities in which directors and/or management of the Company hold ownership
interests.  Such transactions will involve conflicts of
interest.  Although the Company will take various measures to mitigate
such conflicts of interest, including having such transactions reviewed by
independent and disinterested members of the Board of Directors of the Company,
there can be no assurance that such measures will completely mitigate such
conflicts of interests or that these transactions will be as favorable to the
Company as transactions that the Company negotiates with unrelated
parties.





We
may have difficulty accurately predicting revenues for future
periods.





Our
expense levels are based in part on anticipated future revenue levels, which can
be difficult to predict.  Our business is characterized by short-term
orders and shipment schedules.  We do not have long-term purchase
agreements with any of our customers, and customers can typically cancel or
reschedule their orders without significant penalty.  We typically
plan production and inventory levels based on forecasts of customer demand
generated with input from customers and sales
representatives.  Customer demand is highly unpredictable and can
fluctuate substantially.  If customer demand falls significantly below
anticipated levels, our gross profit would be reduced.





38


We
compete with others to attract and retain key personnel, and any loss of or
inability to attract key personnel would harm us.





To a
greater degree than non-technology companies, our future success will depend on
the continued contributions of our executive officers and other key management
and technical personnel.  None of these individuals has an employment
agreement with us and each one would be difficult to replace.  We do
not maintain any key person life insurance policies on any of these
individuals.  The loss of the services of one or more of our executive
officers or key personnel or the inability to continue to attract qualified
personnel could delay product development cycles or otherwise harm our business,
financial condition and results of operations.





Our
future success also will depend on our ability to attract and retain qualified
technical, marketing and management personnel, particularly highly skilled
design, process and test engineers, for whom competition can be
intense.  During strong business cycles, we expect to experience
difficulty in filling our needs for qualified engineers and other
personnel.





Our
limited ability to protect our intellectual property and proprietary rights
could harm our competitive position.





Our
success depends in part on our ability to obtain patents and licenses and
preserve other intellectual property rights covering our products and
development and testing tools.  In the United States, we currently
hold 108 patents covering certain aspects of our product designs and have 12
additional patent applications pending.  Copyrights, mask work
protection, trade secrets and confidential technological know-how are also key
to our business.  Additional patents may not be issued to us or our
patents or other intellectual property may not provide meaningful
protection.  We may be subject to, or initiate, interference
proceedings in the U.S. Patent and Trademark Office.  These
proceedings can consume significant financial and management
resources.  We may become involved in litigation relating to alleged
infringement by us of others' patents or other intellectual property
rights.  This type of litigation is frequently expensive to both the
winning party and the losing party and takes up significant amounts of
management's time and attention.  In addition, if we lose such a
lawsuit, a court could require us to pay substantial damages and/or royalties or
prohibit us from using essential technologies.  For these and other
reasons, this type of litigation could seriously harm our
business.  Also, although we may seek to obtain a license under a
third party's intellectual property rights in order to bring an end to certain
claims or actions asserted against us, we may not be able to obtain such a
license on reasonable terms or at all.





Because
it is important to our success that we are able to prevent competitors from
copying our innovations, we intend to continue to seek patent, trade secret and
mask work protection for our technologies.  The process of seeking
patent protection can be long and expensive, and we cannot be certain that any
currently pending or future applications will actually result in issued patents,
or that, even if patents are issued, they will be of sufficient scope or
strength to provide meaningful protection or any commercial advantage to
us.  Furthermore, others may develop technologies that are similar or
superior to our technology or design around the patents we own.





We also
rely on trade secret protection for our technology, in part through
confidentiality agreements with our employees, consultants and third
parties.  However, these parties may breach these
agreements.  In addition, the laws of some territories in which we
develop, manufacture or sell our products may not protect our intellectual
property rights to the same extent as do the laws of the United
States.





Our
independent foundries use a process technology that may include technology we
helped develop with them, that may generally be used by those foundries to
produce their own products or to manufacture products for other companies,
including our competitors. In addition, we may not have the right to implement
key process technologies used to manufacture some of our products with foundries
other than our present foundries.





We
may not provide adequate allowances for exchanges, returns and
concessions.





We
recognize revenue from the sale of products when shipped, less an allowance
based on future authorized and historical patterns of returns, price protection,
exchanges and other concessions.  We believe our methodology and
approach are appropriate.  However, if the actual amounts we incur
exceed the allowances, it could decrease our revenue and corresponding gross
profit.





39


We
are subject to risks related to taxes.





A number
of factors, including unanticipated changes in the mix of earnings in countries
with differing statutory tax rates or by unexpected changes in existing tax laws
or our interpretation of them, could unfavorably affect our future effective tax
rate.  In the event our management determines it is no longer more
likely than not that we will realize a portion of our deferred tax assets we
will be required to increase our valuation allowance which will result in an
increase in our effective tax rate.  Furthermore, our tax returns are
subject to examination in all the jurisdictions in which we operate which
subjects us to potential increases in our tax liabilities.  All of
these factors could have an adverse effect on our financial condition and
results of operations.





The
complexity of our products makes us susceptible to manufacturing problems, which
could increase our costs and delay our product shipments.





The
manufacture and assembly of our products is highly complex and sensitive to a
wide variety of factors, including:





·
            the
      level of contaminants in the manufacturing
  environment;


·
            impurities
      in the materials used; and


·
            the
      performance of manufacturing personnel and production
      equipment.





In a
typical semiconductor manufacturing process, silicon wafers produced by a
foundry are cut into individual die. These die are assembled into individual
packages and tested for performance. Our wafer fabrication suppliers have from
time to time experienced lower than anticipated yields of suitable die. In the
event of such decreased yields, we would incur additional costs to sort wafers,
an increase in average cost per usable die and an increase in the time to market
or availability of our products.  These conditions could reduce our
net revenues and gross margin and harm our customer relations.





We do not
manufacture any of our IC products.  Therefore, we are referred to in
the semiconductor industry as a "fabless" producer.  Consequently, we
depend upon third party manufacturers to produce semiconductors that meet our
specifications.  We currently have third party manufacturers that can
produce semiconductors that meet our needs. However, as the industry continues
to progress to smaller manufacturing and design geometries, the complexities of
producing semiconductors will increase.  Decreasing geometries may
introduce new problems and delays that may affect product development and
deliveries.  Due to the nature of the industry and our status as a
"fabless" IC semiconductor company, we could encounter fabrication-related
problems that may affect the availability of our products, delay our shipments
or increase our costs. We are directly involved in the manufacture of our FCP
products. As technologies continue to evolve there may be manufacturing related
problems that affect our FCP products. In addition, we have completed
construction of a new FCP facility located in the Jinan Development Zone in
Shandong Province, China, which adds the uncertainties involved with staffing
and starting up a new facility in a country where we have no previous operating
experience.





A
large portion of our revenues is derived from sales to a few customers, who may
cease purchasing from us at any time.





A
relatively small number of customers have accounted for a significant portion of
our net revenues in each of the past several fiscal years. In general we expect
this to continue for the foreseeable future.  We had two direct
customers that each accounted for more than 10% of net revenues during the nine
months ended March 27, 2010. As a percentage of net revenues, sales to our top
five direct customers during the nine months ended March 27, 2010 totaled
54%.





We do not
have long-term sales agreements with any of our customers.  Our
customers are not subject to minimum purchase requirements, may reduce or delay
orders periodically due to excess inventory and may discontinue purchasing our
products at any time. Our distributors typically offer competing products in
addition to ours.  For the nine months ended March 27, 2010 and the
fiscal year ended June 27, 2009, sales to our distributors were approximately
61% and 56% of net revenues, respectively as compared to approximately49% of net revenues in
the fiscal year ended June 28, 2008 and 40% for the fiscal year ended June 30,
2007. The increase in the percentage of sales to our distributors as compared
with the prior periods was due to growth in sales to Asian distributor
customers. The loss of one or more significant customers, or the decision by a
significant distributor to carry additional product lines of our competitors
could decrease our revenues.





40


Almost
all of our wafer suppliers and assembly subcontractors are located in Southeast
Asia, as are our FCP manufacturing facilities, which exposes us to the problems
associated with international operations.





Risks
associated with international business operations include the
following:





·
            disruptions
      or delays in shipments;


·
            changes
      in economic conditions in the countries where these subcontractors are
      located;


·
            currency
      fluctuations;


·
            changes
      in political conditions;


·
            potentially
      reduced protection for intellectual
property;


·
            foreign
      governmental regulations;


·
            import
      and export controls; and


·
            changes
      in tax laws, tariffs and freight
rates.





Although
most of our products are sold in U.S. dollars, we incur a significant amount of
certain types of expenses, such as payroll, utilities, capital equipment
purchases and taxes in local currencies. The impact of currency exchange rate
movements could harm our results and financial condition. In addition, changes
in tariff and import regulations and in U.S. and non-U.S. monetary policies
could harm our results and financial condition by increasing our expenses and
reducing our revenue. Varying tax rates in different jurisdictions could harm
our results of operations and financial condition by increasing our overall tax
rate.





In
addition, there is a potential risk of conflict and further instability in the
relationship between Taiwan and the People's Republic of China
(PRC).  Conflict or instability could disrupt the operations of one of
our principal wafer suppliers, several of our assembly subcontractors located in
Taiwan, and our FCP manufacturing operations in Taiwan and the PRC.





Because
we sell products in foreign markets and have operations outside of the United
States, we face foreign business, political and economic risks that could
seriously harm us.





In the
nine months ended March 27, 2010, we derived approximately 87% of our net
revenues from sales in Asia and approximately 4% from sales outside of Asia and
the United States. In fiscal 2009, we derived approximately 88% of our net
revenues from sales in Asia and approximately 4% from sales outside of Asia and
the United States. In fiscal year 2008, we derived approximately 88% of our net
revenues from sales in Asia and approximately 3% from sales outside of Asia and
the United States. In fiscal year 2007, we derived approximately 82% of our net
revenues from sales in Asia and approximately 4% from sales outside of Asia and
the United States. We expect that export sales will continue to represent a
significant portion of net revenues. We intend to continue the expansion of our
sales efforts outside the United States. This expansion will require significant
management attention and financial resources and further subject us to
international operating risks.  These risks include:





·
            tariffs
      and other barriers and
restrictions;


·
            unexpected
      changes in regulatory requirements;


·
            the
      burdens of complying with a variety of foreign laws;
  and


·
            delays
      resulting from difficulty in obtaining export licenses for
      technology.





Various
of our subsidiaries are located in Asia.  We manufacture certain of our
frequency control products in Taiwan.  We are also in the process of
developing a factory in the Jinan Development Zone in the Shandong Province
of the People's Republic of China and a research and development and
manufacturing center in Yangzhou, People's Republic of China.  The
development of  these facilities  depends upon various
tax concessions, tax rebates and other support from the local
governmental bodies in the areas where the facilities are
located.  There can be no assurance that these local governmental
bodies will not change their position regarding such tax and other support and
such a change might adversely affect the successful completion and
profitability of these projects.





41


We are
also subject to general geopolitical risks in connection with our international
operations, such as political and economic instability and changes in diplomatic
and trade relationships.  In addition, because our international sales
are denominated in U.S. dollars, increases in the value of the U.S. dollar could
increase the price in local currencies of our products in foreign markets and
make our products relatively more expensive than competitors' products that are
denominated in local currencies. Regulatory, geopolitical and other factors
could seriously harm our business or require us to modify our current business
practices.





Our
shareholder rights plan may adversely affect existing shareholders.





On March
6, 2002, we adopted a shareholder rights plan that may have the effect of
deterring, delaying, or preventing a change in control that otherwise might be
in the best interests of our shareholders.  Under the rights plan, we
issued a dividend of one preferred share purchase right for each share of our
common stock held by shareholders of record as of March 21, 2002. Each right
entitles shareholders to purchase one one-hundredth of our Series D Junior
Participating Preferred Stock.





In
general, the share purchase rights become exercisable when a person or group
acquires 15% or more of our common stock or a tender offer for 15% or more of
our common stock is announced or commenced.  After such event, our
other stockholders may purchase additional shares of our common stock at 50% off
of the then-current market price.  The rights will cause substantial
dilution to a person or group that attempts to acquire us on terms not approved
by our Board of Directors.  The rights should not interfere with any
merger or other business combination approved by our Board of Directors since
the rights may be redeemed by us at $0.001 per right at any time before any
person or group acquire 15% or more of our outstanding common
stock.  These rights expire in March 2012.








Our
operations and financial results could be severely harmed by natural
disasters.





Our
headquarters and some of our major suppliers' manufacturing facilities are
located near major earthquake faults. One of the foundries we use is located in
Taiwan, which suffered a severe earthquake during fiscal 2000. We did not
experience significant disruption to our operations as a result of that
earthquake. Taiwan is also exposed to typhoons, which can affect not only
foundries we rely upon but also our SaRonix-eCERA subsidiary. If a major
earthquake, typhoon or other natural disaster were to affect our operations or
those of our suppliers, our product supply could be interrupted, which would
seriously harm our business.





Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds





On April
26, 2007, the Company’s Board of Directors authorized the repurchase of 2.0
million shares of our common stock and on April 29, 2008, the Board authorized
the repurchase of an additional $30 million worth of common stock. The Company
was authorized to repurchase the shares from time to time in the open market or
private transactions, at the discretion of the Company’s management. The
following table summarizes the stock repurchase activity during the nine months
ended March 27, 2010:





Period
              
              Total
      Number of Shares Purchased
              
              
              Average
      Price Paid per Share
              
              
              Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
              
              
              Maximum
      $ Value That May Yet be Purchased Under the Plans or
    ProgramsNovember
      1 -- November 30, 2009
              
              
              100,000
              
              
              $
              10.30
              
              
              
              2,673,107
              
              
              $
              25,426,150December
      1 -- December 31, 2009
              
              
              2,551
              
              
              
              10.50
              
              
              
              2,675,658
              
              
              
              25,399,314January
      1 -- January 31, 2010
              
              
              152,418
              
              
              
              9.68
              
              
              
              2,828,076
              
              
              
              23,924,448February
      1 -- February 28, 2010
              
              
              176,452
              
              
              
              9.27
              
              
              
              3,004,528
              
              
              
              22,288,070March
      1 -- March 31, 2010
              
              
              8,716
              
              
              
              9.52
              
              
              
              3,013,244
              
              
              
              22,205,094Total
              
              
              440,137
              
              
              $
              9.66
              
              
              
              3,013,244
              
              
              $
              22,205,094





Current
cash balances and the proceeds from stock option exercises and purchases in the
stock purchase plan have funded stock repurchases in the past, and the Company
expects to fund future stock repurchases from these same sources.





42


Item
6.  Exhibits.





Exhibit
            Exhibit


Number
            Description





10.1
            Offer
      letter, dated March 8, 2010, by and between the Company and Aaron
      Tachibana.31.1
            Certification
      of Alex C. Hui, Chief Executive Officer, pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            Certification
      of Aaron Tachibana, Chief Financial Officer, pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232.1
            Certification
      of Alex C. Hui, Chief Executive Officer, pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
            Certification
      of Aaron Tachibana, Chief Financial Officer, pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002





43


SIGNATURES





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







Pericom
Semiconductor Corporation


(Registrant)





Date:    
      May 6, 2010
              By:
              /s/ Alex
      C. HuiAlex
      C. HuiChief
      Executive Officer
 By:
              /s/ Aaron
      TachibanaAaron
      TachibanaChief
      Financial Officer




44