**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549**

**Form 10-Q**

**(MarkOne)**

**x****                             ****Quarterly Report pursuant tosection 13 or 15(d) of the securities exchange act of 1934**

**For thequarterly period ended  September 30,2006**

**CommissionFile Number: 1-7935**

**InternationalRectifier Corporation**(Exact name of registrant as specified in its charter)

| **Delaware**                              | ** ** | **95-1528961**                |
|-------------------------------------------|------------|-------------------------------|
| (State or other  jurisdiction of          |       | (IRS employer  identification |
| incorporation or  organization)           |       | number)                       |
|                                      |       |                          |
| **233  Kansas Street**                    |       | **90245**                     |
| **El  Segundo, California**               |       | (Zip Code)                    |
| (Address of  principal executive offices) |       |                          |

 

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

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes  x     No o

Indicate by checkmark whether the registrant is an a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in rule 12b-2 of the exchange act. (check one):

| Large accelerated  filer x |   | Accelerated  filer o |   | Non-accelerated  filer o |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes o  No x

There were 72,159,715shares of the registrant’s common stock, par value $1.00 per share, outstandingon November 7, 2006.

 

 

----

**Table of Contents**
|              | ** ** | ** **                                                                                                         | ** ** | ** ** |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **   | ** ** | ** **                                                                                                         | ** ** | ** ** |
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                          |       |       |
|         |       |                                                                                                               |       |       |
| **ITEM  1.** | ** ** | **Financial Statements**                                                                                           |       |       |
| ** **   | ** ** | ** **                                                                                                         |       |       |
|         |       | Unaudited Consolidated  Statements of Income for the Three Months Ended September 30, 2006 and 2005                |       |       |
|         |       |                                                                                                               |       |       |
|         |       | Unaudited Consolidated  Statements of Comprehensive Income for the Three Months Ended September 30,  2006 and 2005 |       |       |
|         |       |                                                                                                               |       |       |
|         |       | Unaudited Consolidated  Balance Sheets as of September 30, 2006 and June 30, 2006                                  |       |       |
|         |       |                                                                                                               |       |       |
|         |       | Unaudited Consolidated  Statements of Cash Flows for the Three Months Ended September 30, 2006 and  2005           |       |       |
|         |       |                                                                                                               |       |       |
|         |       | Notes to  Unaudited Consolidated Financial Statements                                                              |       |       |
|         |       |                                                                                                               |       |       |
| **ITEM 2.**  | ** ** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                    |       |       |
| ** **   | ** ** | ** **                                                                                                         |       |       |
| **ITEM 3.**  | ** ** | **Quantitative  and Qualitative Disclosures about Market Risk**                                                    |       |       |
| ** **   | ** ** | ** **                                                                                                         |       |       |
| **ITEM 4.**  | ** ** | **Controls and  Procedures**                                                                                       |       |       |
| ** **   | ** ** | ** **                                                                                                         |       |       |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                              |       |       |
|         |       |                                                                                                               |       |       |
| **ITEM 1A.** | ** ** | **Risk Factors**                                                                                                   |       |       |
| ** **   | ** ** | ** **                                                                                                         |       |       |
| **ITEM 6.**  | ** ** | **Exhibits**                                                                                                       |       |       |

2

----

** **

**PART I. FINANCIAL INFORMATION**

**ITEM 1.  Financial Statements.**

**INTERNATIONAL RECTIFIERCORPORATION AND SUBSIDIARIESUNAUDITED CONSOLIDATED STATEMENTS OF INCOME**

**(In thousandsexcept per share amounts)**
| ** **                                                                            | ** ** | **Three Months Ended  September 30** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
|                                                                                  |       |                                                |       |   |   |
| Revenues                                                                              |       | $                                                   | 344,243    |   | $ | 272,573 |   |
| Cost of sales                                                                         |       | 205,826                                             |       | 161,680 |   |
| Gross profit                                                                          |       | 138,417                                             |       | 110,893 |   |
|                                                                                  |       |                                                |       |   |   |
| Selling and  administrative expense                                                   |       | 53,498                                              |       | 45,166 |   |
| Research and  development expense                                                     |       | 32,049                                              |       | 25,212 |   |
| Amortization of  acquisition-related intangibles                                      |       | 926                                                 |       | 1,453 |   |
| Impairment of assets,  restructuring and severance charges                            |       | 5,237                                               |       | 4,293 |   |
| Other expense, net                                                                    |       | 801                                                 |       | 124 |   |
| Interest income, net                                                                  |       | (2,504                                              | )          | (1,552 | ) |
| Income before income  taxes                                                           |       | 48,410                                              |       | 36,197 |   |
|                                                                                  |       |                                                |       |   |   |
| Provision for income  taxes                                                           |       | 14,281                                              |       | 9,954 |   |
| Net income                                                                            |       | $                                                   | 34,129     |   | $ | 26,243 |   |
|                                                                                  |       |                                                |       |   |   |
| Net income per common  share — basic                                             |       | $                                                   | 0.47       |   | $ | 0.37 |   |
|                                                                                  |       |                                                |       |   |   |
| Net income per common  share — diluted                                           |       | $                                                   | 0.47       |   | $ | 0.36 |   |
|                                                                                  |       |                                                |       |   |   |
| Average common shares  outstanding — basic                                       |       | 72,052                                              |       | 70,329 |   |
|                                                                                  |       |                                                |       |   |   |
| Average common shares and potentially dilutive securities outstanding  — diluted |       | 72,630                                              |       | 72,277 |   |

 

The accompanyingnotes are an integral part of these statements.

3

----

 

**INTERNATIONAL RECTIFIERCORPORATION AND SUBSIDIARIESUNAUDITED CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME**

**(In thousands)**

 
| ** **                                                                                                               | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                                                                                                                     |       |                                                 |       |   |   |
| Net income                                                                                                               |       | $                                                    | 34,129     |   | $ | 26,243 |   |
|                                                                                                                     |       |                                                 |       |   |   |
| Other comprehensive  income (loss):                                                                                      |       |                                                 |       |   |   |
| Foreign currency  translation adjustments                                                                                |       | 8,985                                                |       | (5,136 | ) |
|                                                                                                                     |       |                                                 |       |   |   |
| Unrealized gains  (losses) on securities:                                                                                |       |                                                 |       |   |   |
| Unrealized  holding gains on available-for-sale securities, net of tax effect of ($2,305)  and $1,686, respectively      |       | 3,986                                                |       | (2,872 | ) |
| Unrealized  holding gains on foreign currency forward contract, net of tax effect of  ($1,375) and ($154), respectively  |       | 2,553                                                |       | 263 |   |
| Less:  Reclassification adjustments of net gains on available-for-sale securities  and foreign currency forward contract |       | (419                                                 | )          | (23 | ) |
|                                                                                                                     |       |                                                 |       |   |   |
| Other  comprehensive income (loss)                                                                                       |       | 15,105                                               |       | (7,768 | ) |
|                                                                                                                     |       |                                                 |       |   |   |
| Comprehensive income                                                                                                     |       | $                                                    | 49,234     |   | $ | 18,475 |   |

 

The accompanyingnotes are an integral part of these statements.

4

----

**INTERNATIONAL RECTIFIERCORPORATION AND SUBSIDIARIESUNAUDITED CONSOLIDATED BALANCE SHEETS**

**(In thousands)**

** **
| ** **                                                       | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                       | ** ** | **2006**               | ** ** | **2006**(1)       | ** ** |
| **ASSETS**                                                       | ** ** | ** **             | ** ** | ** **        | ** ** |
| Current assets:                                                  |       |                   |       |              |       |
| Cash and cash  equivalents                                       |       | $                      | 446,261    |              | $          | 482,907 |   |
| Short-term  cash investments                                     |       | 117,999                |       | 120,872           |       |
| Trade accounts  receivable, less allowance for doubtful accounts |       | 210,605                |       | 182,774           |       |
| Inventories, net                                                 |       | 218,833                |       | 214,094           |       |
| Short-term  deferred income taxes                                |       | 22,539                 |       | 23,353            |       |
| Prepaid expenses  and other receivables                          |       | 59,408                 |       | 51,456            |       |
|                                                             |       |                   |       |              |       |
| Total current  assets                                            |       | 1,075,645              |       | 1,075,456         |       |
| Long-term cash  investments                                      |       | 512,997                |       | 488,849           |       |
| Property, plant and  equipment, net                              |       | 596,647                |       | 576,380           |       |
| Goodwill                                                         |       | 155,460                |       | 155,148           |       |
| Acquisition-related intangible assets, net                       |       | 31,022                 |       | 31,994            |       |
| Long-term deferred  income taxes                                 |       | 83,193                 |       | 85,754            |       |
| Other assets                                                     |       | 97,840                 |       | 91,442            |       |
| Total assets                                                     |       | $                      | 2,552,804  |              | $          | 2,505,023 |   |
|                                                             |       |                   |       |              |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                   | ** ** | ** **             | ** ** | ** **        | ** ** |
| Current liabilities:                                             |       |                   |       |              |       |
| Bank loans                                                       |       | $                      | 3,591      |              | $          | 6,501 |   |
| Long-term  debt, due within one year                             |       | 539,005                |       | 627               |       |
| Accounts payable                                                 |       | 86,606                 |       | 85,009            |       |
| Accrued  salaries, wages and commissions                         |       | 40,221                 |       | 57,643            |       |
| Other accrued  expenses                                          |       | 124,603                |       | 104,870           |       |
| Total current  liabilities                                       |       | 794,026                |       | 254,650           |       |
| Long-term debt,  less current maturities                         |       | 81,805                 |       | 617,540           |       |
| Other long-term  liabilities                                     |       | 18,322                 |       | 28,501            |       |
| Total  liabilities                                               |       | 894,153                |       | 900,691           |       |
|                                                             |       |                   |       |              |       |
| Stockholders’ equity:                                       |       |                   |       |              |       |
| Common stock                                                     |       | 72,111                 |       | 71,988            |       |
| Capital  contributed in excess of par value of shares            |       | 930,584                |       | 925,603           |       |
| Retained  earnings                                               |       | 576,411                |       | 542,301           |       |
| Accumulated  other comprehensive income                          |       | 79,545                 |       | 64,440            |       |
| Total  stockholders’ equity                                 |       | 1,658,651              |       | 1,604,332         |       |
| Total liabilities and  stockholders’ equity                 |       | $                      | 2,552,804  |              | $          | 2,505,023 |   |

The accompanying notesare an integral part of these statements.

----

(1)             Theconsolidated balance sheet as of June 30, 2006 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.

5

----

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

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**           | ** ** |
| ** **                                                                         | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                                               |       |                             |       |   |   |
| Cash flows from  operating activities:                                             |       |                             |       |   |   |
| Net income                                                                         |       | $                                | 34,129     |   | $ | 26,243 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                             |       |   |   |
| Depreciation and  amortization                                                     |       | 20,580                           |       | 20,043 |   |
| Amortization of  acquisition-related intangible assets                             |       | 926                              |       | 1,453 |   |
| Stock  compensation expense                                                        |       | 2,031                            |       | 491 |   |
| Unrealized gains  on derivatives                                                   |       | (625                             | )          | (1,175 | ) |
| Deferred income  taxes                                                             |       | 3,732                            |       | 4,270 |   |
| Tax benefits  from options exercised                                               |       | 552                              |       | 6,980 |   |
| Excess tax  benefits from options exercised                                        |       | (150                             | )          | (4,083 | ) |
| Change in  operating assets and liabilities, net                                   |       | (49,922                          | )          | (44,477 | ) |
| Net cash provided by  operating activities                                         |       | 11,253                           |       | 9,745 |   |
|                                                                               |       |                             |       |   |   |
| Cash flows from  investing activities:                                             |       |                             |       |   |   |
| Additions to  property, plant and equipment                                        |       | (34,818                          | )          | (37,009 | ) |
| Proceeds from  sale of property, plant and equipment                               |       | 21                               |       | 2 |   |
| Sale or  maturities of cash investments                                            |       | 83,555                           |       | 110,987 |   |
| Purchase of cash  investments                                                      |       | (99,481                          | )          | (105,277 | ) |
| Change in other  investing activities, net                                         |       | (1,268                           | )          | (3,785 | ) |
| Net cash used in  investing activities                                             |       | (51,991                          | )          | (35,082 | ) |
|                                                                               |       |                             |       |   |   |
| Cash flows from  financing activities:                                             |       |                             |       |   |   |
| (Repayments of)  proceeds from short-term debt, net                                |       | (2,824                           | )          | 2,457 |   |
| Repayments of  capital lease obligations, net                                      |       | (129                             | )          | (59 | ) |
| Proceeds from  exercise of stock options and stock purchase plan                   |       | 2,520                            |       | 21,782 |   |
| Excess tax  benefits from options exercised                                        |       | 150                              |       | 4,083 |   |
| Other, net                                                                         |       | 147                              |       | (4,492 | ) |
| Net cash (used in)  provided by financing activities                               |       | (136                             | )          | 23,771 |   |
|                                                                               |       |                             |       |   |   |
| Effect of exchange rate  changes on cash and cash equivalents                      |       | 4,228                            |       | 726 |   |
| Net decrease in cash  and cash equivalents                                         |       | (36,646                          | )          | (840 | ) |
| Cash and cash  equivalents, beginning of period                                    |       | 482,907                          |       | 359,978 |   |
|                                                                               |       |                             |       |   |   |
| Cash and cash  equivalents, end of period                                          |       | $                                | 446,261    |   | $ | 359,138 |   |

 

The accompanyingnotes are an integral part of these statements.

6

----

**INTERNATIONALRECTIFIER CORPORATION AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2006**

1.         Certain Accounting Policies

Basis ofConsolidation

The consolidatedfinancial statements include the accounts of International RectifierCorporation and its subsidiaries (“the Company”), which are located in NorthAmerica, Europe and Asia.  Intercompanytransactions have been eliminated in consolidation.

The consolidatedfinancial statements included herein are unaudited; however, they contain allnormal recurring adjustments which, in the opinion of the Company’s management,are necessary to state fairly the consolidated financial position of theCompany at September 30, 2006, and the consolidated results of operations andthe consolidated cash flows for the three months ended September 30, 2006 and2005.  The results of operations for thethree months ended September 30, 2006 are not necessarily indicative of theresults to be expected for the full year.

The accompanyingunaudited consolidated financial statements should be read in conjunction withthe Annual Report on Form 10-K for the fiscal year ended June 30, 2006.

The Companyoperates on a 52-53 week fiscal year under which the three months endedSeptember 2006 and 2005 consisted of 13 weeks ending October 1, 2006 andOctober 2, 2005, respectively.  For easeof presenting the accompanying consolidated financial statements, the fiscalquarter-end for all periods presented is shown as September 30 or June 30.  Fiscal 2007 will consist of 52 weeks endingJuly 1, 2007.

Certain previous year’s presentation has been restated to conform tocurrent year presentation. As part of the planned Power Control Systemsdivestiture (see Note 15, “Divestiture”), approximately $6 million of productrevenues previously disclosed in the Focus Products group have been restated asNon-Focus Products, reflecting how our Chief Operating Decision Maker reviewsthe segments as of September 30, 2006.

2.         Net Income Per Common Share

Net income percommon share - basic is computed by dividing net income available to commonstockholders (the numerator) by the weighted average number of common sharesoutstanding (the denominator) during the period. The computation of net incomeper common share - diluted is similar to the computation of net income percommon share - basic except that the denominator is increased to include thenumber of additional common shares that would have been outstanding for theexercise of stock options using the treasury stock method 

7

----

and the conversionof the Company’s convertible subordinated notes using the if-convertedmethod.  The Company’s use of thetreasury stock method reduces the gross number of dilutive shares by the numberof shares purchasable from the proceeds of the options assumed to beexercised.  The Company’s use of theif-converted method increases reported net income by the interest expenserelated to the convertible subordinated notes when computing net income percommon share — diluted.

The followingtable provides a reconciliation of the numerator and denominator of the basicand diluted per-share computations for the three months ended September 30,2006 and 2005 (in thousands except per share amounts):

|                                             | ** ** | **Net Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|---------------------------|------------|----------------------------|------------|
|                                        |       |                                  |       |                           |       |                       |       |
| Three months  ended September 30, 2006:     |       |                             |       |                      |       |                       |       |
| Net income per  common share — basic   |       | $                                | 34,129     |                      | 72,052     |                       | $          | 0.47 |   |
| Effect of  dilutive securities:             |       |                             |       |                      |       |                       |       |
| Stock options                               |       | —                           |       | 578                       |       | —                     |       |
| Net income per  common share — diluted |       | $                                | 34,129     |                      | 72,630     |                       | $          | 0.47 |   |
| Three months  ended September 30, 2005:     |       |                             |       |                      |       |                       |       |
| Net income per  common share — basic   |       | $                                | 26,243     |                      | 70,329     |                       | $          | 0.37 |   |
| Effect of  dilutive securities:             |       |                             |       |                      |       |                       |       |
| Stock options                               |       | —                           |       | 1,948                     |       | (0.01                      | )          |
| Net income per common  share — diluted |       | $                                | 26,243     |                      | 72,227     |                       | $          | 0.36 |   |

 

The conversioneffect of the Company’s outstanding convertible subordinated notes into7,439,000 shares of common stock was not included in the computation of dilutedincome per share for the three months ended September 30, 2006 and 2005, sincesuch effect would be anti-dilutive.

3.         Cash and Investments

TheCompany classifies all highly liquid investments purchased with original orremaining maturities of ninety days or less at the date of purchase as cashequivalents.  The cost of theseinvestments approximates fair value.

TheCompany invests excess cash in marketable securities consisting primarily ofcommercial paper, corporate notes, corporate bonds and U.S. governmentsecurities.  At September 30, 2006 andJune 30, 2006, all of the Company’s marketable securities are classified asavailable-for-sale.  In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting forCertain Investments in Debt and Equity Securities”, unrealized gains and losseson these investments are included in accumulated other comprehensive income, aseparate component of stockholders’ equity, net of any related tax effect.  Realized gains and losses and declines invalue considered to be other than temporary are 

8

----

includedin interest income and expense.  AtSeptember 30, 2006 and June 30, 2006, no investment was in a material lossposition for greater than one year.

Cash,cash equivalents and cash investments as of September 30, 2006 and June 30,2006 are summarized as follows (in thousands):

|                                                    | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                         | ** ** | **2006**               | ** ** | **2006**          | ** ** |
| Cash and cash  equivalents                         |       | $                      | 446,261    |              | $          | 482,907 |   |
| Short-term cash  investments                       |       | 117,999                |       | 120,872           |       |
| Long-term cash  investments                        |       | 512,997                |       | 488,849           |       |
| Total cash, cash  equivalents and cash investments |       | $                      | 1,077,257  |              | $          | 1,092,628 |   |

 

Available-for-salesecurities as of September 30, 2006 are summarized as follows (in thousands):

*Short-TermCash Investments:*

|                                         | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Market  Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------|------------|
| Corporate debt                          |       | $                   | 62,930     |                        | $          | —                      |       | $                 | (267       | ) | $ | 62,663 |   |
| U.S. government  and agency obligations |       | 55,669              |       | —                      |       | (333                        | )          | 55,336            |       |
| Other debt                              |       | —              |       | —                      |       | —                      |       | —            |       |
| Total short-term  cash investments      |       | $                   | 118,599    |                        | $          | —                      |       | $                 | (600       | ) | $ | 117,999 |   |

 

*Long-TermCash Investments:*

|                                         | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Market  Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------|------------|
| Corporate debt                          |       | $                   | 191,358    |                        | $          | —                      |       | $                 | (259       | ) | $ | 191,099 |   |
| U.S. government  and agency obligations |       | 158,631             |       | —                      |       | (855                        | )          | 157,776           |       |
| Other debt                              |       | 164,388             |       | —                      |       | (266                        | )          | 164,122           |       |
| Total long-term  cash investments       |       | $                   | 514,377    |                        | $          | —                      |       | $                 | (1,380     | ) | $ | 512,997 |   |

 

Available-for-salesecurities as of June 30, 2006 are summarized as follows (in thousands):

*Short-TermCash Investments:*

|                                              | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Market  Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------|------------|
| Corporate debt                               |       | $                   | 66,233     |                        | $          | —                      |       | $                 | (551       | ) | $ | 65,682 |   |
| U.S. government  and agency obligations      |       | 50,914              |       | —                      |       | (492                        | )          | 50,422            |       |
| Corporate  auction rate preferred securities |       | 4,508               |       | —                      |       | —                      |       | 4,508             |       |
| Other debt                                   |       | 260                 |       | —                      |       | —                      |       | 260               |       |
| Total short-term  cash investments           |       | $                   | 121,915    |                        | $          | —                      |       | $                 | (1,043     | ) | $ | 120,872 |   |

 

9

----

*Long-Term Cash Investments:*

|                                         | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Market  Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------|------------|
| Corporate debt                          |       | $                   | 165,598    |                        | $          | 40                          |       | $                 | (1,973     | ) | $ | 163,665 |   |
| U.S. government  and agency obligations |       | 184,882             |       | —                      |       | (3,125                      | )          | 181,757           |       |
| Other debt                              |       | 144,457             |       | 37                          |       | (1,067                      | )          | 143,427           |       |
| Total long-term  cash investments       |       | $                   | 494,937    |                        | $          | 77                          |       | $                 | (6,165     | ) | $ | 488,849 |   |

 

The Company holdsas strategic investments the common stock of two Japanese companies traded onthe Tokyo Stock Exchange.  The Companyaccounts for these available-for-sale investments under SFAS No. 115.  Dividend income from the two companies was$0.4 million and $0.3 million during the three months ended September 30, 2006and 2005, respectively.  The marketvalues of the equity investments included in other long-term assets atSeptember 30, 2006 and June 30, 2006 were $54.1 million and $52.9 million,respectively, compared to their purchase cost of $18.8 million.  Mark-to-market gains (losses), net of tax,for the three months ended September 30, 2006 and 2005, were $0.7 million and($2.9) million, respectively, and were included in other comprehensive income,a separate component of equity.

The amortized costand estimated fair value of cash investments at September 30, 2006, bycontractual maturity, are as follows (in thousands):

|                         | ** ** | **Amortized  Cost** | ** ** | **Estimated Fair  Value** | ** ** |
|-------------------------|------------|---------------------|------------|--------------------------------|------------|
| Due in 1 year or  less  |       | $                   | 120,399    |                           | $          | 119,798 |   |
| Due in 1-2 years        |       | 175,619             |       | 174,726                        |       |
| Due in 2-5 years        |       | 176,504             |       | 176,366                        |       |
| Due after 5  years      |       | 160,454             |       | 160,106                        |       |
| Total cash  investments |       | $                   | 632,976    |                           | $          | 630,996 |   |

 

In accordance withthe Company’s investment policy which limits the length of time that cash maybe invested, the expected disposal dates may be less than the contractualmaturity dates as indicated in the table above.

Gross realizedgains were $0.1 million and gross realized losses were $0.3 million for thethree months ended September 30, 2006. Gross realized gains were $0.01 million and gross realized losses were$0.3 million for the three months ended September 30, 2005.  The cost of marketable securities sold isdetermined by the weighted average cost method.

10

----

4.         Derivative Financial Instruments

*ForeignCurrency Risk*

The Company conductsbusiness on a global basis in several foreign currencies, and at various times,is exposed to fluctuations with the British Pound Sterling, the Euro and theJapanese Yen.  The Company’s risk to theEuropean currencies is partially offset by the natural hedge of manufacturingand selling goods in both U.S. dollars and the European currencies.  Considering its specific foreign currencyexposures, the Company has the greatest exposure to the Japanese Yen, since ithas significant Yen-based revenues without the Yen-based manufacturingcosts.  The Company has established aforeign-currency hedging program using foreign exchange forward contracts,including the Forward Contract described below, to hedge certain foreigncurrency transaction exposures.  Toprotect against reductions in value and volatility of future cash flows causedby changes in currency exchange rates, it has established revenue, expense andbalance sheet hedging programs.  Currencyforward contracts and local Yen and Euro borrowings are used in these hedgingprograms.  The Company’s hedging programsreduce, but do not always eliminate, the impact of currency exchange ratemovements.

In May 2006, theCompany entered into a five-year foreign exchange forward contract (“theForward Contract”) with BNP Paribas for the purpose of reducing the effect ofexchange rate fluctuations on forecasted intercompany purchases by its Japansubsidiary.  The Company has designatedthe May 2006 Forward Contract as a cash flow hedge.  Under the terms of the May 2006 ForwardContract, the Company is required to exchange 507.5 million Yen for $5.0million on a quarterly basis starting in June 2006 and expiring in the March2011.  At September 30, 2006, 18quarterly payments of 507.5 million Yen remained to be swapped at a forwardexchange rate of 101.5 Yen per U.S. dollar. The market value of the May 2006 Forward Contract was $4.5 million atSeptember 30, 2006, included in other assets. The mark-to-market gains, net of tax, of $2.6 million for the threemonths ended September 30, 2006, have been included in other comprehensiveincome.  Based on effectiveness testscomparing forecasted transactions through the May 2006 Forward Contractexpiration date to its cash flow requirements, the Company does not expect toincur a material charge to income during the next twelve months as a result ofthe May 2006 Forward Contract.

The Company hadapproximately $123.8 million and $103.1 million in notional amounts of forwardcontracts not designated as accounting hedges under SFAS No. 133 at September30, 2006 and June 30, 2006, respectively. Net realized and unrealizedforeign-currency losses recognized in earnings were lessthan $1 million for the three months ended September 30, 2006 and 2005.

*InterestRate Risk*

In December 2001, theCompany entered into an interest rate swap transaction (the “December 2001Transaction”) with the investment bank, JP Morgan Chase Bank (the “Bank”), tomodify the Company’s effective interest payable with respect to $412.5 millionof its $550 million outstanding convertible debt (the “Debt”) (see Note 8, “BankLoans and Long-Term Debt”).   In April2004, the Company entered into an interest rate swap transaction (the “April2004 Transaction”) with the Bank 

11

----

to modify the effectiveinterest payable with respect to the remaining $137.5 million of the Debt.  The Company will receive from the Bank fixedpayments equal to 4.25 percent of the notional amount, payable on January 15and July 15.  In exchange, the Companywill pay to the Bank floating rate payments based upon the London InterBankOffered Rate (“LIBOR”) multiplied by the notional amount.  At the inception of the Transaction, interestrates were lower than that of the Debt and the Company believed that interestrates would remain lower for an extended period of time.  The variable interest rate paid since theinception of the swaps has averaged 3.03 percent, compared to a coupon of 4.25percent on the Debt.  During the threemonths ended September 30, 2006, the LIBOR was 5.51 percent, and includingcertain spreads and mark-to-market adjustments associated with the interestswaps, this arrangement increased interest expense by $1.6 million. During thethree months ended September 30, 2005, the LIBOR was 3.60 percent, andincluding certain spreads and mark-to-market adjustments associated with theinterest swaps, this arrangement reduced interest expense by $0.9 million.

Accounted for as fair valuehedges under SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities”, the mark-to-market adjustments of the December 2001 and April 2004Transactions were offset by the mark-to-market adjustments on the Debt,resulting in no material impact to earnings. The market value of the December 2001 Transaction was a liability of$4.7 million and $7.0 million at September 30, 2006 and June 30, 2006,respectively.  The market value of theApril 2004 Transaction was a liability of $3.0 million and a $4.6 million atSeptember 30, 2006 and June 30, 2006, respectively.

BothTransactions terminate on July 15, 2007 (“Termination Date”), subject tocertain early termination provisions.  Onor after July 18, 2003 and prior to July 14, 2007, if the ten-day averageclosing price of the Company’s common stock equals or exceeds $77.63, bothtransactions will terminate.  Dependingon the timing of the early termination event, the Bank would be obligated topay the Company an amount equal to the redemption premium called for under theterms of the Debt.

In support of the Company’s obligationunder the two Transactions, the Company is required to obtain irrevocablestandby letters of credit in favor of the Bank, totaling $7.5 million plus acollateral requirement for the two Transactions, as determined periodically.  At September 30, 2006, $16.8 million inletters of credit were outstanding related to the Transactions.

TheDecember 2001 and the April 2004 Transactions qualify as fair value hedgesunder SFAS No. 133.  To testeffectiveness of the hedge, regression analysis is performed quarterlycomparing the change in fair value of the two Transactions and the Debt.  The fair values of the Transactions and theDebt are calculated quarterly as the present value of the contractual cashflows to the expected maturity date, where the expected maturity date is basedon probability-weighted analysis of interest rates relating to the five-yearLIBOR curve and the Company’s stock prices. For the three months ended September 30, 2006 and 2005, the hedges werehighly effective and therefore, the ineffective portion did not have a materialimpact on earnings.

In April 2002, theCompany entered into an interest rate contract (the “Contract”) with theinvestment bank, Lehman Brothers (“Lehman”), to reduce the variable interestrate risk of the Transaction.  Thenotional amount of the Contract is $412.0 million, representing approximately75 percent of the Debt.  Under the termsof the Contract, the Company has the option to receive a payout from Lehmancovering 

12

----

its exposure to LIBORfluctuations between 5.5 percent and 7.5 percent for any four designatedquarters.  The market value of theContract at September 30, 2006 and June 30, 2006, was $0.1 million and $0.6million, respectively, and was included in other long-term assets.  Mark-to-market (losses) gains of ($0.5)million and $0.1 million for the three months ended September 30, 2006 and2005, respectively, were charged to interest expense.

5.         Inventories

Inventories arestated at the lower of cost (principally first-in, first-out) or market.  Inventories are reviewed for excess andobsolescence based upon demand forecast within a specific time horizon andreserves are established accordingly.  Inaccordance with SFAS No.151, “Inventory Cost” the Company allocates fixed production overheads toinventory based on the normal capacity of the production facilities andabnormal amounts of idle facility expense are recognized as current periodcharges. Inventories atSeptember 30, 2006 and June 30, 2006 were comprised of the following (inthousands):

|                   | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|-------------------|------------|------------------------|------------|-------------------|------------|
| ** **        | ** ** | **2006**               | ** ** | **2006**          | ** ** |
| Raw materials     |       | $                      | 37,542     |              | $          | 37,268 |   |
| Work-in-process   |       | 94,401                 |       | 93,534            |       |
| Finished goods    |       | 86,890                 |       | 83,292            |       |
|              |       |                   |       |              |       |
| Total inventories |       | $                      | 218,833    |              | $          | 214,094 |   |

 

6.         Goodwill and Acquisition-RelatedIntangible Assets

TheCompany accounts for goodwill and acquisition-related intangible assets inaccordance with SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwilland Other Intangible Assets”.  The Companyclassifies the difference between the purchase price and the fair value of netassets acquired at the date of acquisition as goodwill.  The Company classifies intangible assetsapart from goodwill if the assets have contractual or other legal rights or ifthe assets can be separated and sold, transferred, licensed, rented orexchanged.  Depending on the nature ofthe assets acquired, the amortization period may range from four to twelveyears for those acquisition-related intangible assets subject to amortization.

The Company evaluates the carrying value of goodwill andacquisition-related intangible assets, including the related amortizationperiod, in the fourth quarter of each fiscal year.  In evaluating goodwill and intangible assetsnot subject to amortization, the Company completes the two-step goodwillimpairment test as required by SFAS No. 142. The Company identified its reporting units and determined the carryingvalue of each reporting unit by assigning the assets and liabilities, includingthe existing goodwill and intangible assets, to those reporting units, in orderto assess goodwill for impairment.  Areporting unit is the lowest level of the Company for which there is discreteinformation and whose results are regularly reviewed by the Company.

13

----

 

In the first of a two-step impairment test, the Company determined thefair value of these reporting units using a discounted cash flow valuationmodel.  The Company compared thediscounted cash flows for the reporting unit to its carrying value.  If the fair value of a reporting unit exceedsits carrying value, goodwill of the reporting unit is considered not impairedand no further testing is required.  Ifthe fair value does not exceed the carrying value, the second step of thegoodwill impairment test shall be performed to measure the amount of impairmentloss, if any.  The second step comparedthe implied fair value of the reporting unit with the carrying amount of thatgoodwill.  Based on its annual impairmenttest in the fourth quarter of fiscal year ended June 30, 2006, the Companydetermined that goodwill was not impaired.

At September 30, 2006 and June 30,2006 acquisition-related intangible assets included the following (inthousands):

 
| ** **                                  | ** ** | ** **                         | ** ** | **September 30, 2006** | ** ** | **June 30, 2006**   | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **Amortization  Periods  (Years)** | ** ** | **Gross  Carrying  Amount**      | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Acquisition-related  intangible assets:     |       |                               |       |                             |       |                          |       |   |   |   |   |
| Complete  technology                        |       | 4 -  12                            |       | $                                | 38,281     |                          | $          | (15,295 | ) | $ | 38,324 |   | $ | (14,881 | ) |
| Distribution  rights and customer lists     |       | 5 -  12                            |       | 15,454                           |       | (9,111                        | )          | 15,446 |   | (8,744 | ) |
| Intellectual  property and other            |       | 5 -  12                            |       | 7,963                            |       | (6,270                        | )          | 7,963 |   | (6,114 | ) |
| Total acquisition-related intangible assets |       |                               |       | $                                | 61,698     |                          | $          | (30,676 | ) | $ | 61,733 |   | $ | (29,739 | ) |

 

As of September 30, 2006, estimated amortizationexpense for the next five years is as follows (in thousands): remainder offiscal 2007: $2,939; fiscal 2008: $3,503; fiscal 2009: $3,503; fiscal 2010:$3,503, fiscal 2011: $2,715 and fiscal 2012: $1,708.

The carrying amount of goodwill by businesssegment as of September 30, 2006, is as follows (in thousands):

 
| Energy-Saving Products                |   | $      | 48,423  |   |
|---------------------------------------|--------|--------|---------|--------|
| Computing and  Communications         |   | 43,089 |    |
| Intellectual Property                 |   | 20,114 |    |
| Aerospace and Defense                 |   | 18,997 |    |
| Commodity Products                    |   | 15,275 |    |
| Non-Aligned Products                  |   | 9,562  |    |
| Goodwill balance,  September 30, 2006 |   | $      | 155,460 |   |

 

As of September 30, 2006 and June 30, 2006,$43.3 million of goodwill is deductible for income tax purposes, respectively.

14

----

Thechanges in the carrying amount of goodwill for the period ended September 30,2006 are as follows (in thousands):

 
| ** **                  | ** ** | **Goodwill** | ** ** |
|-----------------------------|------------|--------------|------------|
| Balance, June 30, 2006      |       | $            | 155,148    |   |
| Foreign exchange impact     |       | 312          |       |
| Balance, September 30, 2006 |       | $            | 155,460    |   |

 

7.         Other accrued expenses

Otheraccrued expenses at September 30, 2006 and June 30, 2006 were comprised of thefollowing (in thousands):
| ** **                      | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** |
|---------------------------------|------------|------------------------------|------------|-------------------------|------------|
| Accrued taxes                   |       | $                            | 65,230     |                    | $          | 54,497 |   |
| Short-term  severance liability |       | 8,438                        |       | 7,055                   |       |
| Interest rate  swap liability   |       | 7,692                        |       | —                  |       |
| Accrued Interest                |       | 7,455                        |       | 14,579                  |       |
| Other accrued  expenses         |       | 35,788                       |       | 28,739                  |       |
| Total accrued  expenses         |       | $                            | 124,603    |                    | $          | 104,870 |   |

 

8.         Bank Loans and Long-Term Debt 

Asummary of the Company’s long-term debt and other loans at September 30, 2006and June 30, 2006 is as follows (in thousands):
| ** **                                                                                                                                                                                                         | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | **2006**               | ** ** | **2006**          | ** ** |
| Convertible  subordinated notes at 4.25 percent due in 2007 ($550,000 principal amount,  plus accumulated fair value adjustment of ($11,675) and ($14,443) at September 30, 2006 and  June 30, 2006, respectively) |       | $                      | 538,325    |              | $          | 535,557 |   |
| Other loans and  capitalized lease obligations                                                                                                                                                                     |       | 82,380                 |       | 82,610            |       |
| Debt, including  current portion of long-term debt ($539,005 and $627 at September 30,  2006 and June 30, 2006, respectively)                                                                                      |       | 620,809                |       | 618,167           |       |
| Foreign  revolving bank loans at rates from 1.12% to 3.88%                                                                                                                                                         |       | 3,592                  |       | 6,501             |       |
|                                                                                                                                                                                                               |       |                   |       |              |       |
| Total debt                                                                                                                                                                                                         |       | $                      | 624,401    |              | $          | 624,668 |   |

 

In July 2000, the Company sold $550million principal amount of 4.25 percent Convertible Subordinated Notes dueJuly 2007. The interest rate is 4.25 percent per year on the principal amount,payable in cash in arrears semi-annually on January 15 and July 15.  The notes are subordinated to all of theCompany’s existing and future debt. The notes are convertible into shares of theCompany’s common stock at any time on or before July 15, 2007, at a conversionprice of $73.935 per share, subject to certain adjustments.  The Company may redeem any of the notes, inwhole or in part, subject to certain call premiums on or after July 18, 2004,as specified in the notes and related indenture agreement.  In December

15

----

2001 and April 2006, the Company enteredinto two transactions with JP Morgan Chase Bank for $412.5 million and $137.5million in notional amounts, respectively, which had the effect to the Companyof converting the interest rate to variable and requiring that the convertiblenotes be marked to market (see Note 4, “Derivative Financial Instruments”).

TheCompany had been a party to a three-year syndicated multi-currency revolvingcredit facility, led by BNP Paribas, that expires in November 2006 (the“Facility”).  The Facility provides acredit line of $150 million of which up to $150 million may be used for standbyletters of credit.  The Facility bearsinterest at (i) local currency rates plus (ii) a margin between 0.75 percentand 2.0 percent for base rate advances and a margin of between 1.75 percent and3.0 percent for Euro-currency rate advances. Other advances bear interest as set forth in the credit agreement.  The annual commitment fee for the Facility issubject to a leverage ratio as determined by the credit agreement and was 0.375percent of the unused portion of the total facility at each period-end.  The Company pledged as collateral shares ofcertain of its subsidiaries.  TheFacility also contains certain financial and other covenants, with which theCompany was in compliance at September 30, 2006.  At September 30, 2006, the Company had noborrowings and $21.1 million letters of credit outstanding under theFacility.  At June 30, 2006, the Companyhad no borrowings and $25.0 million letters of credit outstanding under theFacility.  Of the letters of creditoutstanding, $16.8 million and $20.7 million were related to the interest rateswap transactions (see Note 4) at September 30, 2006 and June 30, 2006,respectively.

At September 30, 2006,the Company had $169.1 million in total revolving lines of credit, of which$24.7 million had been utilized, consisting of $21.1 million in letters ofcredit and $3.6 million in foreign revolving bank loans, which are included inthe table above.

On November 6, 2006, theCompany entered into a new five-year multi-currency revolving credit facility,with a syndicate of lenders including JP Morgan Chase Bank, Bank of America,N.A., HSBC Bank USA, and Deutsche Bank AG, to replace the BNP Paribas revolvingcredit facility that would otherwise have expired in November 2006 (the“November 2006 Facility”).  The November2006 Facility expires in November 2011, and provides a credit line of $150million with an option to increase the facility limit to $250 million.  Up to $75 million of the November 2006Facility may be used for standby letters of credit and up to $10 million may beused for swing-line loans.  The November2006 Facility bears interest at (i) local currency rates plus (ii) a marginbetween 0 percent and 0.25 percent for base rate advances and a margin between0.875 percent and 1.25 percent for Euro-currency rate advances, based on theCompany’s senior leverage ratio.  Otheradvances bear interest as set forth in the credit agreement.  The annual commitment fee for the November2006 Facility ranges between 0.175 and 0.25 percent of the unused portion ofthe total facility, depending upon the Company’s senior leverage ratio.  The Company is required to pledge ascollateral shares of certain of its subsidiaries and certain of the Company’ssubsidiaries are required to guarantee the credit facility.  The Company has no obligation to pledge thesecurities and the subsidiaries have no obligation to guarantee the facilityuntil December 31, 2006.

9.         Impairment of Assets, Restructuringand Severance

Duringfiscal 2003 second quarter ended December 31, 2002, the Company announcedcertain restructuring initiatives. Under these initiatives, the goal was to 

16

----

repositionthe Company to better fit the market conditions and de-emphasize its commoditybusiness.  The Company’s restructuringplan included consolidating and closing certain manufacturing sites, upgradingequipment and processes in designated facilities and discontinuing productionin a number of others that cannot support more advanced technology platforms orproducts within its Focus Product segments. The Company also planned to lower overhead costs across its supportorganizations.  The Company hassubstantially completed these restructuring activities as of September 30,2006.

Totalcharges associated with the December 2002 restructuring were $277.9 million.These charges consisted of $219.0 million for asset impairment, plant closureand other charges, $6.0 million of raw material and work-in-process inventory,and $52.9 million for severance-related costs.

Asdiscussed in Note 15, “Divestiture”, on November 8, 2006, the Company enteredinto definitive agreements with Vishay Intertechnology Inc. to sell its PowerControl Systems (“PCS”) business, consisting of the Company’s Non-Focus Productsegments (see Note 10, “Segment and Geographic Information”), for approximately$290 million (the “PCS Divestiture”). Associated with the PCS Divestiture, the Company plans to realign itssales, distribution and product development functions to a business basedsolely on its Focus Products.  It alsoplans to configure its manufacturing and support infrastructure to address theinitially lower revenue levels following the PCS Divestiture.  The Company expects thatrestructuring-related charges related to these plans will be approximately $10million to $15 million (including the $4.6 million recorded to date), primarilyseverance-related costs, which will be recorded as incurred through calendaryear-end 2007.

Restructuring-relatedcosts were charged as incurred in accordance with SFAS No. 146, “Accounting forthe Costs Associated with Exit or Disposal Activities”.  Asset impairments were calculated inaccordance with SFAS No. 144.  Theseverance charges had been and will continue to be recognized ratably over thefuture service period, as applicable, in accordance with SFAS No. 146.  The Company measured the total terminationbenefits at the communication date based on the fair value of the liability asof the termination date.  A changeresulting from a revision to either the timing or the amount of estimated cashover the future service period will be measured using the credit-adjustedrisk-free rate that was used to initially measure the liability.  The cumulative effect of the change will berecognized as an adjustment to the liability in the period of the change.

Forthe three months ended September 30, 2006, the Company recorded $5.2 million intotal restructuring-related charges, consisting of: $0.6 million for plantclosure costs and other charges, and $4.6 million for severance-related costsrelated to the PCS Divestiture and reorganization activities.   For the three months ended September 30,2005, the Company recorded $4.3 million in total restructuring-related chargesrelated to the December 2002 restructuring initiatives, consisting of: $3.1million for asset impairment, plant closure costs and other charges, and $1.2million for severance-related costs.

17

----

As of September 30, 2006, including the costsassociated with the PCS Divestiture and associated reorganization, the Companyhad recorded $282.5 million in total charges, consisting of: $219.0 million forasset impairment, plant closure costs and other charges, $6.0 million for rawmaterial and work-in-process inventory charges, and $57.6 million forseverance-related costs.   Components ofthe $219.0 million asset impairment, plant closure and other charges includedthe following items:

·                  As the Company emphasizes more advancedgeneration planar products, it expects the future revenue stream from its lessadvanced facilities in Temecula, California to decrease significantly.  These facilities had a net book value of$138.3 million and were written down by $77.7 million.  Certain equipment at this facility is beingsold as part of the PCS Divestiture.  Itis expected that these facilities will continue in use to support certaintransitional service level agreements as part of the PCS Divestiture untilapproximately March 2008, and the remaining basis is being depreciated overunits of production during this period.

·                  As the Company emphasizes more advancedgeneration trench products, it expects the future revenue stream from its lessadvanced facility in El Segundo, California to decrease significantly. Thisfacility had a net book value of $59.5 million and was written down by $57.2million.  This facility had significantlyreduced production as of fiscal year ended June 30, 2003 and is used primarilyfor research and development activities.

·                  As the Company emphasizes more advancedgeneration Schottky products, it expects the future revenue stream from itsless advanced facility in Borgaro, Italy to decrease significantly. Thisfacility had a net book value of $20.5 million and was written down by $13.9million.  This facility is being sold aspart of the PCS Divestiture.

·                  The Company restructured itsmanufacturing activities in Europe. Based on a review of its Swansea, Wales facility, a general-purposemodule facility, the Company determined that this facility would be bettersuited to focus only on automotive applications.  The general-purpose module assets at thisfacility, with a net book value of $13.6 million, were written down by $8.2million.  In addition, the Company hascompleted the move of its manufacturing activities from its automotive facilityin Krefeld, Germany to its Swansea, Wales and Tijuana, Mexico facilities as ofJune 30, 2005. The Company has also moved the production from its Venaria,Italy facility to its Borgaro, Italy and Mumbai, India facilities, which wascompleted as of December 31, 2003.  TheCompany stopped manufacturing products at its Oxted, England facility as ofSeptember 30, 2003.  The Swansea, Wales;Krefeld, Germany; Borgaro, Italy and Mumbai, India facilities are being sold aspart of the PCS Divestiture.

·                  The Company has eliminated themanufacturing of its non-space military products in its Santa Clara, Californiafacility as of July 31, 2004. Currently, subcontractors handle the Company’snon-space qualified products previously manufactured in this facility. TheCompany has also transitioned the assembly and test of non-space power componentsfrom its Leominster, Massachusetts facility to its Tijuana, Mexico facility asof December 31, 2005.  Associated with 

18

----

these reductions in manufacturing activities,certain assets with a net book value of $4.0 million were written down by $2.1million.

·                  $59.9 million in other miscellaneousitems were charged, including $50.7 million in relocation costs and otherimpaired asset charges and $9.2 million in contract termination and settlementcosts.

As a result of the restructuring initiatives,certain raw material and work-in-process inventories were impaired, includingproducts that could not be completed in other facilities, materials that werenot compatible with the processes used in the alternative facilities, andmaterials such as gases and chemicals that could not readily be transferred.Based on these factors the Company wrote down these inventories with a carryingvalue of $98.2 million, by $6.0 million to their net realizable value. For thethree months September 30, 2006 and 2005, the Company disposed of $0.1 millionand $0, respectively, of these inventories, which did not have a materialimpact on gross margin for the period then ended.  As of September 30, 2006, no inventoryremained to be disposed.

Asof September 30, 2006, the Company has recorded $57.5 million inseverance-related charges:  $44.4 millionin severance termination costs related to the December 2002 restructuring andthe elimination of approximately 1,300 administrative, operating andmanufacturing positions, $8.5 million in pension termination costs at itsmanufacturing facility in Oxted, England, and $4.6 million forseverance-related costs related to the PCS Divestiture and reorganizationactivities.

Thefollowing summarizes the Company’s severance accrual related to the June 2001restructuring, the December 2002 restructuring, the TechnoFusion acquisition, and the PCS Divestiture for the threemonths ended September 30, 2006 (in thousands):

 
| ** **                                                                                          | ** ** | **June  2001  Restructuring** | ** ** | **December  2002  Restructuring** | ** ** | **TechnoFusion  Acquisition** | ** ** | **PCS  Divestiture** | ** ** | **Total  Severance  Liability** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|----------------------|------------|---------------------------------|------------|
| Accrued  severance, June 30, 2006                                                                   |       | $                             | 235        |                              | $          | 6,538                         |       | $                    | 282        |                            | $          | — |   | $ | 7,055 |   |
| Costs incurred  or charged to “impairment of assets, restructuring and severance charges” |       | —                        |       | —                            |       | —                        |       | 4,656                |       | 4,656                           |       |
| Costs paid                                                                                          |       | (24                           | )          | (3,250                            | )          | (1                            | )          | —               |       | (3,275                          | )          |
| Foreign exchange  impact                                                                            |       | —                        |       | —                            |       | 2                             |       | —               |       | 2                               |       |
| Accrued severance,  September 30, 2006                                                              |       | $                             | 211        |                              | $          | 3,288                         |       | $                    | 283        |                            | $          | 4,656 |   | $ | 8,438 |   |

 

The June 2001 severance liabilityis primarily related to certain legal accruals associated with the terminationof 29 administrative and operating personnel, which will be paid or released asthe outcome is determined.  The December2002 severance liability is primarily related to severance-related costs ofapproximately 130 operating personnel, who have been notified and targeted tobe terminated as 

19

----

a result of the finaltransition of the manufacturing to the Newport, Wales facility, expected to becompleted and paid by calendar year-end 2007. The TechnoFusion severance liability is related to restructuring of theCompany’s Krefeld, Germany facility associated with the acquisition ofTechnoFusion GmbH, which is contemplated to be paid or released pending thesale of the PCS business.  The PCSDivestiture severance liability relates to approximately 100 operating andfinance personnel who have been notified to be impacted by the PCSDivestiture.  The associated liability isexpected to be paid by calendar year-end 2007.

10.       Segment and Geographic Information

As part of the planned PowerControl Systems Divestiture (see Note 15, “PCS Divestiture”), approximately $6 million of productrevenues for the three months ended September 30, 2006, previously accountedfor in the Focus Products group, has been restated in the Non-Focus Products groupreflecting how the Chief Operating Decision Maker reviews the segments in lightof the pending divestiture of the Company’s Non-Focus Products business. Previous year’s presentation has been restated to conform to current yearpresentation (in thousands except percentages):

 
| ** **                                          | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Business Segment**                           | ** ** | **Revenues**                 | ** ** | **Gross  Profit**            | ** ** | **Revenues** | ** ** | **Gross  Profit** | ** ** |
| Computing and  Communications (“C&C”) |       | $                            | 133,492    |                         | 40.3       | % | $ | 86,967 |   | 41.4 | % |
| Energy-Saving  Products (“ESP”)           |       | 75,420                       |       | 49.5                         |       | 69,262 |   | 53.8 |   |
| Aerospace and  Defense (“A&D”)        |       | 38,428                       |       | 50.1                         |       | 29,401 |   | 43.8 |   |
| Intellectual  Property (“IP”)             |       | 11,010                       |       | 100.0                        |       | 10,440 |   | 100.0 |   |
| Subtotal Focus Products                             |       | 258,350                      |       | 47.0                         |       | 196,070 |   | 49.2 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
| Commodity  Products (“CP”)                |       | 57,501                       |       | 20.8                         |       | 47,949 |   | 21.2 |   |
| Non-Aligned  Products (“NAP”)             |       | 28,392                       |       | 17.8                         |       | 28,554 |   | 14.6 |   |
| Subtotal Non-Focus Products                         |       | 85,893                       |       | 19.8                         |       | 76,503 |   | 18.7 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
| Consolidated  total                                 |       | $                            | 344,243    |                         | 40.2       | % | $ | 272,573 |   | 40.7 | % |

 

Productrevenues from unaffiliated customers are based on the location in which thesale originated. One distributor accounted for approximately 11 percent of theCompany’s consolidated revenues for the three months ended September 30, 2006.  No single original equipment manufacturer(“OEM”), customer, distributor or subcontract manufacturer accounted for morethan ten percent of the Company’s consolidated revenues for the three monthsended September 30, 2005.  Onedistributor accounted for approximately 23 percent and 12 percent of theCompany’s accounts receivable at September 30, 2006 and June 30, 2006,respectively.

The majority of the Company’s products in theFocus Product segments, including those in the C&C, ESP and A&Dsegments, are sold directly to OEM customers. Two distributors, individually accounting for greater than ten percentof the C&C 

20

----

segment revenue, accounted for approximately 38percent of C&C revenue for the three months ended September 30, 2006.  One distributor accounted for approximately11 percent of A&D segment revenue for the three months ended September 30,2006.

Two OEM customers, individually accounting forgreater than ten percent of NAP segment revenue, accounted for approximately 33percent of NAP revenue for the three months ended September 30, 2006.  Two distributors, individually accounting forgreater than ten percent of the CP segment revenue, accounted for approximately21 percent of CP revenue for the three months ended September 30, 2006.  No single OEM customer, distributor orsubcontract manufacturer accounted for more than ten percent of theEnergy-Saving Products segment revenues for the quarter.

Geographic information for the Company on anaggregate basis, for the three months ended September 30, 2006 and 2005,and June 30, 2006 is presented below (in thousands):
| ** **                                          | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Revenues from Unaffiliated Customers |       |                         |       |                         |       |
| The United  States                                  |       | $                            | 88,416     |                         | $          | 74,611 |   |
| Asia                                                |       | 168,734                      |       | 129,628                      |       |
| Europe                                              |       | 76,083                       |       | 57,894                       |       |
| Subtotal                                            |       | 333,233                      |       | 262,133                      |       |
| Royalties  (unallocated)                            |       | 11,010                       |       | 10,440                       |       |
|                                                |       |                         |       |                         |       |
| Total                                               |       | $                            | 344,243    |                         | $          | 272,573 |   |

 
| ** **         | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** |
|--------------------|------------|------------------------------|------------|-------------------------|------------|
| Long-Lived  Assets |       |                         |       |                    |       |
| The United  States |       | $                            | 357,698    |                    | $          | 348,478 |   |
| Asia               |       | 47,653                       |       | 45,061                  |       |
| Europe             |       | 289,136                      |       | 274,284                 |       |
|               |       |                         |       |                    |       |
| Total              |       | $                            | 694,487    |                    | $          | 667,823 |   |

 

The Company includes in long-lived assets, alllong-term assets excluding long-term cash investments, long-term deferredincome taxes, goodwill and acquisition-related intangibles.

21

----

 

11.       Stock-Based Compensation

The Company issues newshares to fulfill the obligations under all of its stock-based compensationawards.  The following table summarizesthe stock option activities for the three months ended September 30, 2006 (inthousands except per share price data): 
| ** **                      | ** ** | **Shares** | ** ** | **Weighted Average  Option Exercise  Price Per Share** | ** ** | **Weighted Average  Grant Date Fair  Value Per Share** | ** ** | **Aggregate Intrinsic Value** | ** ** |
|---------------------------------|------------|------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| Outstanding, June 30,  2006     |       | 12,075     |       | $                                                                          | 40.35      |                                                                            | —     |                                    | $          | 45,981 |   |
| Granted                         |       | 668        |       | $                                                                          | 35.29      |                                                                            | $          | 13.36                                   |       | — |   |
| Exercised                       |       | (111       | )          | $                                                                          | 21.25      |                                                                            | —     |                                    | $          | 1,510 |   |
| Expired                         |       | (128       | )          | $                                                                          | 48.43      |                                                                            | —     |                                    | —     |   |
| Outstanding, September 30, 2006 |       | 12,504     |       | $                                                                          | 40.18      |                                                                            | —     |                                    | $          | 29,910 |   |
|                                 |            |            |            |                                                                            |            |                                                                                 |            |                                         |            |  |  |  |

 

For the three months ended September 30, 2006 and 2005the Company received $2.5 million and $21.8 million, respectively, for stockoptions exercised.  Total tax benefitrealized for the tax deductions from stock options exercised was $0.6 millionand $7.0 million for three months ended September 30, 2006 and 2005,respectively.

The following table summarizes the Restricted Stock Unit(“RSU”) activities for the three months ended September 30, 2006 (in thousandsexcept per share data):

 
| ** **                      | ** ** | **Restricted  Stock Units** | ** ** | **Weighted  Average  Grant Date  Fair Value  Per Share** | ** ** | **Aggregate**

**Intrinsic  Value** | ** ** |
|---------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding, June 30,  2006     |       | 23                               |       | $                                                                       | 49.09      |                                | $          | 909 |   |
| Vested                          |       | (2                               | )          | $                                                                       | 35.30      |                                | $          | 71 |   |
| Expired                         |       | (6                               | )          | $                                                                       | 33.61      |                                | —     |   |
| Outstanding, September 30, 2006 |       | 15                               |       | $                                                                       | 49.07      |                                | $          | 510 |   |

 

22

----

 

The following table summarizes the stock options and RSUs outstandingat September 30, 2006, and related weighted average price and lifeinformation (in thousands except years and price data):

 
| ** **                                                 | ** ** | **September 30, 2006** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **Outstanding**                  | ** ** | **Exercisable** | ** ** |
| **Range of Exercise  Price per Share** | ** ** | **Number  Outstanding**          | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.00 to $14.13                                            |       | 404                              |       | 2.54 |   | $ | 11.31 |   | 390 |   | 2.49 |   | $ | 11.73 |   |
| $15.62 to $25.35                                           |       | 1,385                            |       | 2.88 |   | $ | 20.65 |   | 1,385 |   | 2.88 |   | $ | 20.65 |   |
| $26.00 to $35.90                                           |       | 2,032                            |       | 4.73 |   | $ | 34.39 |   | 1,309 |   | 4.67 |   | $ | 33.96 |   |
| $36.39 to $45.87                                           |       | 6,449                            |       | 3.71 |   | $ | 42.71 |   | 5,859 |   | 3.63 |   | $ | 42.82 |   |
| $46.19 to $54.69                                           |       | 1,351                            |       | 3.85 |   | $ | 50.37 |   | 936 |   | 3.83 |   | $ | 51.32 |   |
| $55.31 to $63.88                                           |       | 898                              |       | 4.17 |   | $ | 62.28 |   | 898 |   | 4.17 |   | $ | 62.28 |   |
|                                                       |       | 12,519                           |       | 3.79 |   | $ | 40.13 |   | 10,777 |   | 3.68 |   | $ | 40.13 |   |

 

Additional information relating to the stock option plans, includingemployee stock options and RSUs, at September 30, 2006 and June 30, 2006is as follows (in thousands):

 
| ** **                                                 | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| Options  exercisable                                       |       | 10,777                       |       | 10,813                  |       |
| Options  available for grant                               |       | 3,109                        |       | 3,696                   |       |
| Total reserved common  stock shares for stock option plans |       | 15,628                       |       | 15,794                  |       |

 

Forthe three months ended September 30, 2006 and 2005, stock-based compensationexpense associated with the Company’s stock options is as follows (inthousands):

 
| ** **                          | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Selling and  administrative expense |       | $                            | 1,199      |                         | $          | 258 |   |
| Research and  development expense   |       | 528                          |       | 82                           |       |
| Cost of sales                       |       | 200                          |       | 30                           |       |
|                                |       |                         |       |                         |       |
| Total stock  option expense         |       | $                            | 1,927      |                         | $          | 370 |   |

 

Forthe three months ended September 30, 2006 and 2005, stock-based compensationexpense associated with the Company’s RSUs is as follows (in thousands):
| ** **                          | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Research and  development expense   |       | $                            | 52         |                         | $          | 52 |   |
| Selling and  administrative expense |       | 44                           |       | 61                           |       |
| Cost of sales                       |       | 8                            |       | 8                            |       |
|                                |       |                         |       |                         |       |
| Total RSU  expense                  |       | $                            | 104        |                         | $          | 121 |   |

 

23

----

 

Thetotal unrecognized compensation expense for outstanding stock options and RSUswas $20.4 million as of September 30, 2006, and will be recognized, in general,over three years.  The weighted averagenumber of years to recognize the compensation expense is 1.2 years.

The fair value of theoptions associated with the above compensation expense for the three monthsended September 30, 2006 and June 30, 2006, was determined at the date of thegrant using the Black-Scholes option pricing model with the followingweighted average assumptions:

 
| ** **               | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** | ** ** |
|--------------------------|------------|------------------------------|------------|-------------------------|------------|------------|
| Expected life            |       | 3.5 years                    |       | 3.5 years               |       |       |
| Risk free  interest rate |       | 4.7                          | %          | 4.3                     | %          |       |
| Volatility               |       | 44.3                         | %          | 34.3                    | %          |       |
| Dividend yield           |       | 0.0                          | %          | 0.0                     | %          |       |

 

12.       Environmental Matters

Federal, state, foreign and local laws andregulations impose various restrictions and controls on the storage, use anddischarge of certain materials, chemicals and gases used in semiconductormanufacturing processes. The Company does not believe that compliance with suchlaws and regulations as now in effect will have a material adverse effect onthe Company’s results of operations, financial position or cash flows.

However, under some of theselaws and regulations, the Company could be held financially responsible forremedial measures if properties are contaminated or if waste is sent to alandfill or recycling facility that becomes contaminated. Also, the Company maybe subject to common law claims if it releases substances that damage or harmthird parties. The Company cannot make assurances that changes in environmentallaws and regulations will not require additional investments in capitalequipment and the implementation of additional compliance programs in thefuture, which could have a material adverse effect on the Company’s results ofoperations, financial position or cash flows, as could any failure by theCompany to comply with environmental laws and regulations.

TheCompany and Rachelle Laboratories, Inc. (“Rachelle”), a former operatingsubsidiary of the Company that discontinued operations in 1986, were each nameda potentially responsible party (“PRP”) in connection with the investigation bythe United States Environmental Protection Agency (“EPA”) of the disposal ofallegedly hazardous substances at a major superfund site in Monterey Park,California (“OII Site”). Certain PRPs who settled certain claims with the EPAunder consent decrees filed suit in Federal Court in May 1992 against anumber of other PRPs, including the Company, for cost recovery and contributionunder the provisions of the Comprehensive Environmental Response, Compensationand Liability Act (“CERCLA”). IR has settled all outstanding claims that havearisen against it out of the OII Site. No claims against Rachelle have been settled.  The 

24

----

Companyhas taken the position that none of the wastes generated by Rachelle werehazardous.

Counselfor Rachelle received a letter dated August 2001 from the U.S. Department ofJustice, directed to all or substantially all PRPs for the OII Site, offeringto settle claims against such parties for all work performed through andincluding the final remedy for the OII Site. The offer required a payment from Rachelle in the amount ofapproximately $9.3 million in order to take advantage of the settlement.  Rachelle did not accept the offer.

In as much as Rachelle has not accepted thesettlement, the Company cannot predict whether the EPA or others would attemptto assert an action for contribution or reimbursement for monies expended toperform remedial actions at the OII Site. The Company cannot predict the likelihood that the EPA or such otherswould prevail against Rachelle in any such action.  It remains the position of Rachelle that itswastes were not hazardous.  The Company’sinsurer has not accepted liability, although it has made payments for defensecosts for the lawsuit against the Company. The Company has made no accrual for potential loss, if any; however, anadverse outcome could have a material adverse effect on the Company’s resultsof operations and cash flows.

The Company received a letter in June 2001from a law firm representing UDT Sensors, Inc. relating to environmentalcontamination (chlorinated solvents such as trichlorethene) assertedly found inUDT’s properties in Hawthorne, California. The letter alleges that the Company operated a manufacturing business atthat location in the 1970’s and/or 1980’s and that it may have liability inconnection with the claimed contamination. The Company has made no accrual for any potential losses since there hasbeen no assertion of specific facts on which to form the basis fordetermination of liability.

13.       Litigation

In June 2000, the Companyfiled suit in Federal District Court in Los Angeles, California against IXYSCorporation, alleging infringement of its key U.S. patents 4,959,699; 5,008,725and 5,130,767.  The suit sought damagesand other relief customary in such matters. The Federal District Court entered a permanent injunction, effective onJune 5, 2002, barring IXYS from making, using, offering to sell or selling in,or importing into the United States, MOSFETs (including IGBTs) covered by theCompany’s U.S. patents 4,959,699; 5,008,725 and/or 5,130,767.  In August 2002, the Court of Appeals for theFederal Circuit stayed that injunction, pending appeal on the merits.  In that same year, following trial on damagesissues, a Federal District Court jury awarded the Company $9.1 million incompensatory damages.  The FederalDistrict Court subsequently tripled the damages, increasing the award from $9.1million to approximately $27.2 million, and ruled that the Company is entitledto an additional award of reasonable attorney’s fees for a total monetaryjudgment of about $29.5 million.  InMarch 2004, the U.S. Court of Appeals for the Federal Circuit reversed thesummary judgment granted to the Company by the Federal District Court in LosAngeles of infringement by IXYS of its U.S. patents 4,959,699; 5,008,725 and5,130,767. The Federal Circuit reversed in part and vacated in partinfringement findings of the District Court, granted IXYS the right to presentcertain affirmative defenses, and 

25

----

vacated the injunctionagainst IXYS entered by the District Court. The ruling by the Federal Circuithad the effect of vacating the damages judgment obtained against IXYS. TheFederal Circuit affirmed the District Court’s rulings in the Company’s favorregarding the validity and enforceability of the three IR patents. Followingremand a federal court jury in Los Angeles, California, held on September 15,2005, that IXYS elongated octagonal MOSFETs and IGBTs infringed on the4,959,699 patent but did not infringe on the 5,008,725 and 5,130,767 patents.On October 6, 2005, the jury awarded the Company $6.2 million in damages.  Based on the jury’s verdict, on February 14,2006, the District Court entered its final judgment (including permanentinjunctions prohibiting IXYS from further infringing sales for the remaininglife of the 4,959,699 patent) and found that the Company is entitled to $6.2million in compensatory damages for infringement through September 30, 2005,plus an additional 6.5 percent of infringing sales after September 30,2005.  On July 14, 2006, the FederalCircuit entered an order vacating that judgment and remanded the IR v. IXYSaction so that the District Court could consider whether to reissue a permanentinjunction in light of the Supreme Court’s decision in eBay Inc. v.MercExchange, L.L.C., _ U.S. _, 126 S.Ct. 1837, 164 L.Ed.2d 641 (2006).  The Company then requested that the DistrictCourt re-enter the final judgment (and permanent injunction).  On September 14, 2006, the District Courtgranted the Company’s motion and re-entered the final judgment.  IXYS failed to timely file notice of appealof the final judgement and has filed a motion with the District Court seekingadditional time in which to file notice of appeal.  The Company is opposing the IXYS motion.  The Company believes that it is reasonablyassured that the value of the judgment is at least $2.5 million.

14.       Income Taxes

TheCompany’s effective tax provision for the three months ended September 30, 2006and 2005 was 29.5 percent and 27.5 percent, respectively, rather than the U.S.federal statutory tax provision of 35 percent as a result of lower statutorytax rates in certain foreign jurisdictions, the benefit of foreign tax creditsand state research and development credits, partially offset by state taxes andcertain foreign losses without foreign tax benefit.

15.       Divestiture

On November 8, 2006, the Company entered into definitive agreementswith Vishay Intertechnology, Inc. (“Vishay”), a manufacturer of discretesemiconductors and passive electronic components, to sell its Power ControlSystems (“PCS”) business for approximately $290 million (the “PCS Divestiture”).  The PCS business consists of the Company’sNon-Focus Product segments (see Note 10, “Segment and Geographic Information”),which include operations at the Company’s Mumbai, India; Borgaro, Italy; Xian,China; Krefeld, Germany; Swansea, Wales; and Halifax, Canada sites.  The PCS Divestiture will also include certainwafer manufacturing, product assembly and research and development equipmentcurrently located at the Company’s Temecula, California; Tijuana, Mexico; andEl Segundo, California locations.  ThePCS Divestiture is expected to close in February 2007, subject to 

26

----

various closing conditions including obtaining all necessarygovernmental approvals or clearances.

Aspart of the PCS Divestiture, the Company will be involved in the transition ofcertain of the divested business and assets with Vishay, including providingcertain manufacturing, sales, marketing and administrative support services fora period of up to three years.

27

----

 

**ITEM 2.**                    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussionof our financial condition and results of operations should be read togetherwith the consolidated financial statements and notes to consolidated financialstatements included elsewhere in this Form 10-Q.  Except for historic information containedherein, the matters addressed in this Item 2 constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  Forward-looking statements maybe identified by the use of terms such as “anticipate,” “believe,” “expect,” “intend,”“project,” “will,” and similar expressions. Such forward-looking statements are subject to a variety of risks anduncertainties, including those discussed under the heading “Statement ofCaution Under the Private Securities Litigation Reform Act of 1995” andelsewhere in this Quarterly Report on Form 10-Q, that could cause actualresults to differ materially from those anticipated by the Company.  We undertake no obligation to update theseforward-looking statements to reflect events or circumstances after the date ofthis report or to reflect actual outcomes.

**Overview of Results of Operations for the Three Months EndedSeptember 30, 2006**

We report our results in sixsegments that generally reflect our products’ end-markets: Computing andCommunications (“C&C”), Energy-Saving Products (“ESP”), Aerospace andDefense (“A&D”), Intellectual Property (“IP”), Commodity Products (“CP”)and Non-Aligned Products (“NAP”).  Wefurther summarize our segments in two groups, our Focus Products and Non-FocusProducts, to reflect our strategic goals and the allocation of our criticalresources.  We include our C&C, ESP,A&D and IP segments in our Focus Product group, and our CP and NAP segmentsin our Non-Focus Product group.

For the three months endedSeptember 30, 2006, consolidated revenues were $344.2 million compared to$272.6 million in the prior year three months ended September 30, 2005.  Revenues for the three months ended September 30, 2006increased by 26.3 percent compared to the prior year, reflecting growth inComputing and Communications, Energy-Saving Products, Aerospace and Defense andCommodity Products segments, which increased 53.5 percent, 8.9 percent, 30.7percent, and 19.9 percent, respectively, from the prior year three months endedSeptember 30, 2005.

Revenues for our FocusProducts were $258.3 million and $196.1 million for the three months endedSeptember 30, 2006 and 2005, respectively. Focus Product revenues accounted for75.0 percent of consolidated revenues for the three months ended September 30,2006, compared to 71.9 percent of consolidated revenues for the three monthsended September 30, 2005.  Revenues forour Non-Focus Products were $85.9 million and $76.5 million for the threemonths ended September 30, 2006 and 2005, respectively.  Non-Focus Product revenues for the fiscalquarter ended September 30, 2006, included approximately $6 million of productrevenues previously accounted for in the Focus Products group and restated in theNon-Focus Products group, to align with how we review the segments, in light ofthe pending divestiture of our Non-Focus Products business.  Prior period has been restated to conform tocurrent year presentation.

28

----

 

Revenues as a percentage of total product revenues based on saleslocation were approximately 27 percent, 51 percent and 22 percent for theUnited States, Asia and Europe, respectively, for the three months endedSeptember 30, 2006.  Revenues as apercentage of total product revenues based on sales location were approximately28 percent, 50 percent and 22 percent for the United States, Asia and Europe, respectively,for the three months ended September 30, 2005.

We operated at over 90 percent of our worldwidein-house wafer fabrication and assembly manufacturing capacities, withoutconsidering subcontract or foundry capacity. We have added capacity during calendar year 2006 and are planning to addincremental productioncapacity of $100 million to $150 million in annual revenue potential by June2007. As part of our expansion plans, we announced in October 2006 a foundryagreement with Tower Semiconductor for capacity capable of addressing many ofour Focus Products.

Gross profit margin was 40.2 percent for the three months endedSeptember 30, 2006, and 40.7 percent for the prior year three months endedSeptember 30, 2005.  The gross profitmargin declined primarily due to product mix. Gross margin decline also reflected increased costs associated with theramp-up of major new product families at our Newport, Wales facility. Grossprofit margin for our Focus Products was 47.0 percent for the three months endedSeptember 30, 2006, and 49.2 percent for the prior year three months endedSeptember 30, 2005.  Gross profit marginfor our Non-Focus Products was 19.8 percent and 18.7 percent for the threemonths ended September 30, 2006 and 2005, respectively.

Forthe three months ended September 30, 2006, selling and administrative expensewas $53.5 million (15.5 percent of revenues) compared to $45.2 million (16.7percent of revenues) for the prior year three months ended September 30, 2005,reflecting variable costs paid on a higher revenue base such as salescommissions, and profit sharing, stock option and other employee benefitexpenses.

Forthe three months ended September 30, 2006, research and development expense was$32.0 million (9.3 percent of revenues) compared to $25.2 million (9.2 percentof revenues) for the prior year three months ended September 30, 2005,reflecting our continued commitment to developing our power management ICs andnew architectures for the next-generation applications, including new gamestations, digital televisions, high-performance servers, hybrid vehicles andenergy-efficient appliances.

During fiscal 2003 second quarter ended December 31,2002, we announced certain restructuring initiatives. We have substantiallycompleted the December 2002 restructuring activities as of September 30,2006.  For the three months endedSeptember 30, 2006, we recorded $5.2 million in total restructuring-relatedcharges, consisting of: $0.6 million for plant closure costs and other chargesrelated to the completion of the December 2002 restructuring plans, and $4.6million for severance-related costs related to the divestiture of our Non-FocusProducts business and related reorganization activities (see “Divestiture” below).

Duringthe three months ended September 30, 2006, operating activities generated cashflow of $11.3 million.  Our cash, cashequivalents and cash investments totaled $1,077.3 million at September 30,2006.  As of September 30, 2006, we had$144.3 million in unused credit facilitiesfor operating needs.  Our Credit Facilitywith BNP 

29

----

Paribaswas scheduled to expire in November 2006. On November 6, 2006, we replaced this facility with a new five-yearmulti-currency revolving credit facility with a syndicate of lenders includingJP Morgan Chase Bank, Bank of America, N.A., HSBC Bank USA, and Deutsche BankAG, for $150 million, with an option to increase the facility limit to $250million.

Our$550 million convertible subordinated notes are due in July 2007.  We anticipate that these subordinated noteswill be refinanced through public or private offerings of debt or equity, or bepaid down with our existing cash and cash investments.

Divestiture

On November 8, 2006, we entered into definitiveagreements with Vishay Intertechnology, Inc. (“Vishay”), a manufacturer ofdiscrete semiconductors and passive electronic components, to sell our PowerControl Systems (“PCS”) business for approximately $290 million (the “PCSDivestiture”).  The PCS business consistsof our Non-Focus Product segments, which include operations at our Mumbai,India; Borgaro, Italy; Xian, China; Krefeld, Germany; Swansea, Wales; andHalifax, Canada sites.  The PCSDivestiture will also include certain wafer manufacturing, product assembly andresearch and development equipment currently located at our Temecula,California; Tijuana, Mexico; and El Segundo, California locations.  The PCS Divestiture is expected to close in February 2007,subject to various closing conditions including obtaining all necessarygovernmental approvals or clearances.

When the PCS Divestiture is completed, it is our goal that within thenext couple of years, the remaining revenues from our Focus Products would growfaster and the remaining business would be more profitable.  We do not believe that the completion of thePCS Divestiture will substantially alter the customer base that we serve or thecompetition that we face currently. However, to achieve our goals, for a few quarters following a successfulcompletion of the PCS Divestiture, we plan to more fully develop our FocusProducts by realigning our sales, distribution and product developmentfunctions to a business based solely on our Focus Products.  We also plan to configure our manufacturingand support infrastructure to address the initially lower revenue levelsfollowing the PCS Divestiture.  We expectthat restructuring-related charges with regards to these plans will be approximately$10 million to $15 million (including the $4.6 million recorded to date),consisting of primarily severance-related costs, which will be recorded asincurred in accordance with SFAS No. 146 through approximately calendar year-end2007.

As part of the PCS Divestiture, we will be involved in the transitionof certain of the divested business and assets with Vishay, including providingcertain manufacturing, sales, marketing and administrative support services forup to three years.

30

----

 

**Resultsof Operations for the Three Months Ended September 30, 2006 Compared with theThree Months Ended September 30, 2005**

The following table sets forth certain items as a percentage ofrevenues (in millions except percentages):
| ** **                                                 | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Revenues                                                   |       | $                                                    | 344.2      |   | 100.0 | % | $ | 272.6 |   | 100.0 | % |
| Cost of sales                                              |       | 205.8                                                |       | 59.8 |   | 161.7 |   | 59.3 |   |
| Gross profit                                               |       | 138.4                                                |       | 40.2 |   | 110.9 |   | 40.7 |   |
| Selling and  administrative expense                        |       | 53.5                                                 |       | 15.5 |   | 45.2 |   | 16.7 |   |
| Research and  development expense                          |       | 32.0                                                 |       | 9.3 |   | 25.2 |   | 9.2 |   |
| Amortization of  acquisition-related intangible assets     |       | 1.0                                                  |       | 0.3 |   | 1.5 |   | 0.5 |   |
| Impairment of  assets, restructuring and severance charges |       | 5.2                                                  |       | 1.5 |   | 4.3 |   | 1.6 |   |
| Other expense,  net                                        |       | 0.8                                                  |       | 0.2 |   | 0.1 |   | 0.0 |   |
| Interest income,  net                                      |       | (2.5                                                 | )          | (0.7 | ) | (1.6 | ) | (0.6 | ) |
| Income before  income taxes                                |       | 48.4                                                 |       | 14.1 |   | 36.2 |   | 13.3 |   |
| Provision for  income taxes                                |       | 14.3                                                 |       | 4.2 |   | 10.0 |   | 3.7 |   |
| Net income                                                 |       | $                                                    | 34.1       |   | 9.9 | % | $ | 26.2 |   | 9.6 | % |

 

Revenuesand Gross Margin

For the three months endedSeptember 30, 2006, consolidated revenues were $344.2 million compared to$272.6 million in the prior year three months ended September 30, 2005.  Revenues for the three months ended September 30, 2006increased by 26.3 percent compared to the prior year, reflecting growth inComputing and Communications, Energy-Saving Products, Aerospace and Defense andCommodity Products segments, which increased 53.5 percent, 8.9 percent, 30.7percent, and 19.9 percent, respectively, from the prior year three months endedSeptember 30, 2005.

Revenues for our FocusProducts were $258.3 million and $196.1 million for the three months endedSeptember 30, 2006 and 2005, respectively. Focus Product revenues accounted for75.0 percent of consolidated revenues for the three months ended September 30,2006, compared to 71.9 percent of consolidated revenues for the three monthsended September 30, 2005.  Revenues forour Non-Focus Products were $85.9 million and $76.5 million for the threemonths ended September 30, 2006 and 2005, respectively.  Non-Focus Product revenues for the fiscalquarter ended September 30, 2006, included approximately $6 million of certaincomplementary products previously accounted for in the Focus Products group andrestated in Non-Focus Products, to align with how we review the segments inlight of the pending divestiture of our Non-Focus Products business.  Prior period has been restated to conform tocurrent year presentation.

Revenues as a percentage of total product revenues based on saleslocation were approximately 27 percent, 51 percent and 22 percent for theUnited States, Asia and Europe, respectively, for the three months endedSeptember 30, 2006.  Revenues as apercentage of total product revenues based on sales location were approximately

31

----

28 percent, 50 percent and 22 percent for the United States, Asia andEurope, respectively, for the three months ended September 30, 2005.

Gross profit margin was 40.2 percent for the three months endedSeptember 30, 2006, and 40.7 percent for the prior year three months endedSeptember 30, 2005.  The gross profitmargin declined primarily due to product mix. Gross margin decline also reflected increased costs associated with theramp-up of major new product families at our Newport, Wales facility. Grossprofit margin for our Focus Products was 47.0 percent for the three monthsended September 30, 2006, and 49.2 percent for the prior year three monthsended September 30, 2005.  Gross profitmargin for our Non-Focus Products was 19.8 percent and 18.7 percent for the threemonths ended September 30, 2006 and 2005, respectively.

Segment results for the three months ended September 30, 2006 and 2005are as follows (in thousands except percentages):
| ** **                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| **Business Segment**     | ** ** | **Revenues**                     | ** ** | **Percentage  of Total** | ** ** | **Gross  Margin** | ** ** | **Revenues** | ** ** | **Percentage  of Total** | ** ** | **Gross  Margin** | ** ** |
| Computing and  Communications |       | $                                | 133,492    |   | 38.8 | % | 40.3 | % | $ | 86,967 |   | 31.9 | % | 41.4 | % |
| Energy-Saving  Products       |       | 75,420                           |       | 21.9 |   | 49.5 |   | 69,262 |   | 25.4 |   | 53.8 |   |
| Aerospace and  Defense        |       | 38,428                           |       | 11.1 |   | 50.1 |   | 29,401 |   | 10.8 |   | 43.8 |   |
| Intellectual  Property        |       | 11,010                           |       | 3.2 |   | 100.0 |   | 10,440 |   | 3.8 |   | 100.0 |   |
| Subtotal Focus Products       |       | 258,350                          |       | 75.0 |   | 47.0 |   | 196,070 |   | 71.9 |   | 49.2 |   |
|                          |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Commodity  Products           |       | 57,501                           |       | 16.7 |   | 20.8 |   | 47,949 |   | 17.6 |   | 21.2 |   |
| Non-Aligned  Products         |       | 28,392                           |       | 8.3 |   | 17.8 |   | 28,554 |   | 10.5 |   | 14.6 |   |
| Subtotal Non-Focus Products   |       | 85,893                           |       | 25.0 |   | 19.8 |   | 76,503 |   | 28.1 |   | 18.7 |   |
|                          |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated  total           |       | $                                | 344,243    |   | 100.0 | % | 40.2 | % | $ | 272,573 |   | 100.0 | % | 40.7 | % |

 

*Computing and Communications (“C&C”)*

TheComputing and Communication segment is comprised of our power management ICs,including iPowirTM multi-chip modules and DirectFETTM solutions, and power components (primarilyMOSFET power components) that address servers and high-end desktops, notebooks,communications networking, and digitally-oriented consumer products like gameconsoles.  Our C&C products are alsoused in digital televisions, liquid crystal displays (“LCDs”), portablehandheld devices and cellular phones.

32

----

 

C&Crevenues increased by $46.5 million, 53.5 percent, compared to the prior yearthree months ended September 30, 2005, reflecting strength in the latest generation gamestations from the top two manufacturers and in the new generation of Intel andAMD-based servers.

Grossmargin for C&C was 40.3 percent for the three months ended September 30,2006, compared to 41.4 percent for the prior year three months ended September30, 2005.  Gross margin declinedprimarily reflecting product mix and costs associated with the ramp-up of newproducts.

*Energy-Saving Products (“ESP”)*

TheEnergy-Saving Product segment is comprised of our power management ICs andpower components, primarily HEXFET and IGBT power components, that providesolutions for variable speed motion control in energy-saving appliances (suchas washing machines, refrigerators and air conditioners), and industrialsystems (such as fans, pumps and compressors), advanced lighting products(including fluorescent lamps, high intensity discharge (“HID”) lamps, coldcathode fluorescent (“CCFL”) tubes and light emitting diodes (“LED”) lighting),advanced automotive solutions (primarily diesel injection, electric-gasolinehybrid and electric power steering systems), and consumer applications (forexample, plasma TVs and digital-audio units).

ESPrevenues for the three months ended September 30, 2006, increased by $6.2million, 8.9 percent, compared to the prior year three months ended September30, 2005, primarily reflecting strength in the notebook market and increasedsales of our IGBTs and high-voltage ICs.

Grossmargin for ESP was 49.5 percent for the three months ended September 30, 2006,compared to 53.8 percent for the three months ended September 30, 2005.  The gross margin decline reflected primarilyproduct mix and certain end-market application price declines.

*Aerospace and Defense (“A&D”)*

TheAerospace and Defense segment is comprised of advanced power managementsolutions, such as radiation-hardened power management modules,radiation-hardened power components, and other high-reliability power componentsthat address power management requirements in satellites, launch vehicles,aircraft, ships, submarines and other defense and high-reliabilityapplications.

A&Drevenues for the three months ended September 30, 2006, increased by $9.0million, 30.7 percent, from the three months ended September 30, 2005, reflecting a higher demand for ourpower components and advanced power management solutions for commercial anddefense satellites, military and other high reliability applications.

Grossmargin for the A&D segment increased to 50.1 percent for the fiscal quarterended September 30, 2006, from 43.8 percent in the comparable prior yearperiod, primarily reflecting product mix, manufacturing efficiencies and restructuringcost savings.

33

----

 

*Intellectual Property (“IP”)*

The Intellectual Property segment reports ongoing andone-time royalty income from licensing and activities related to theenforcement of our patents and other intellectual property, which may include claimssettlement from the successful defense of our licenses.

IP revenues were $11.0 million and $10.4 million forthe three months ended September 30, 2006 and 2005, respectively.  Included in the IP revenues were one-timeroyalty income from the licensing of our patents of $3.0 million and $2.0million for the three months ended September 30, 2006 and 2005, respectively.Our licensed MOSFET patents expire between 2006 and 2010, with the broadestremaining in effect until 2007 and 2008. We continue to commit to research and development to generate newpatents and other intellectual property and concentrate on incorporating ourtechnologies into our Focus Products.

*Commodity Products (“CP”)*

TheCommodity Product segment is comprised primarily of older-generation power componentsthat have widespread use throughout the power management industry, but aretypically commodity in nature and sold with margins generally below ourstrategic targets.

Forthe three months ended September 30, 2006, CP revenues were $57.5 million, anincrease of 19.9 percent from $47.9 million for the three months endedSeptember 30, 2005, primarily reflecting stronger market conditions.

Grossmargin for CP was 20.8 percent for the fiscal quarter ended September 30, 2006,compared to 21.2 percent in the comparable prior year quarter, reflectingprimarily price pressures.

*Non-Aligned Products (“NAP”)*

The Non-Aligned Product segment includes businesses,product lines or products that we are targeting for realignment, whether bydivestiture or otherwise.   Currently,product lines reported in this segment include certain modules, rectifiers,diodes and thyristors used in the automotive, industrial, welding and motorcontrol applications.

NAP revenues for the three months ended September 30,2006 were $28.4 million, decreasing 0.6 percent from $28.6 million in the threemonths ended September 30, 2005, reflecting primarily declining demand in theautomotive industry.

Grossmargin for our NAP segment was 17.8 percent for the three months ended September30, 2006, compared to 14.6 percent for the three months ended September 30,2005, reflecting yield improvements and cost reduction plans.

Selling and Administrative Expense

Forthe three months ended September 30, 2006, selling and administrative expensewas $53.5 million (15.5 percent of revenues), compared to $45.2 million (16.7percent of revenues) for the three months ended September 30, 2005.  The decrease in the selling andadministrative expense ratio primarily reflected a higher revenue base in thecurrent year.  The absolute selling andadministrative expense increased reflecting 

34

----

variablecosts paid on a higher revenue base such as sales commissions, and profitsharing, stock option and other employee benefit expenses.

Research and Development Expenses

Forthe three months ended September 30, 2006 and 2005, research and developmentexpense was $32.0 million and $25.2 million (9.3 percent and 9.2 percent ofrevenues), respectively, reflecting our continued commitment to developing ourpower management ICs and new architectures for the next-generationapplications, including new game stations, digital televisions,high-performance servers, hybrid vehicles and energy-efficient appliances

Impairment ofAssets, Restructuring and Severance

During fiscal 2003 secondquarter ended December 31, 2002, we announced certain restructuringinitiatives. Under these initiatives, the goal was to reposition us to betterfit the market conditions and de-emphasize our commodity business.  Our restructuring plan included consolidatingand closing certain manufacturing sites, upgrading equipment and processes indesignated facilities and discontinuing production in a number of others thatcannot support more advanced technology platforms or products within its FocusProduct segments.  We also planned tolower overhead costs across our support organizations.  We have substantially completed the December2002 restructuring activities as of September 30, 2006.

Total charges associatedwith the December 2002 restructuring were $277.9 million. These chargesconsisted of $219.0 million for asset impairment, plant closure and othercharges, $6.0 million of raw material and work-in-process inventory, and $52.9million for severance-related costs.

Associated with the PCSDivestiture (see Note 15, “Divestiture”), we plan to realign our sales,distribution and product development functions to a business based solely onour Focus Products. We also plan to configure our manufacturing and supportinfrastructure to address the initially lower revenue levels following the PCSDivestiture.  We expect thatrestructuring-related charges related to these plans will be approximately $10million to $15 million (including the $4.6 million recorded to date), primarilyseverance-related costs, which will be recorded as incurred through calendaryear-end 2007.

Restructuring-related costswere charged as incurred in accordance with SFAS No. 146, “Accounting for theCosts Associated with Exit or Disposal Activities”.  Asset impairments were calculated inaccordance with SFAS No. 144.  Theseverance charges had been and will continue to be recognized ratably over thefuture service period, as applicable, in accordance with SFAS No. 146.  We measured the total termination benefits atthe communication date based on the fair value of the liability as of thetermination date.  A change resultingfrom a revision to either the timing or the amount of estimated cash over thefuture service period will be measured using the credit-adjusted risk-free ratethat was used to initially measure the liability.  The cumulative effect of the change will berecognized as an adjustment to the liability in the period of the change.

35

----

 

For the three months endedSeptember 30, 2006, we recorded $5.2 million in total restructuring-relatedcharges, consisting of: $0.6 million for plant closure costs and other charges,and $4.6 million for severance-related costs related to the PCS Divestiture andreorganization activities.   For thethree months ended September 30, 2005, we recorded $4.3 million in totalrestructuring-related charges related to the December 2002 restructuringinitiatives, consisting of: $3.1 million for asset impairment, plant closurecosts and other charges, and $1.2 million for severance-related costs.

As of September30, 2006, including the costs associated with the PCS Divestiture andassociated reorganization, we had recorded $282.5 million in total charges,consisting of: $219.0 million for asset impairment, plant closure costs andother charges, $6.0 million for raw material and work-in-process inventorycharges, and $57.6 million for severance-related costs.   Components of the $219.0 million assetimpairment, plant closure and other charges included the following items:

·                  As we emphasize more advanced generationplanar products, we expect the future revenue stream from our less advancedfacilities in Temecula, California to decrease significantly.  These facilities had a net book value of$138.3 million and were written down by $77.7 million.  Certain equipment at this facility is beingsold as part of the PCS Divestiture.  Itis expected that these facilities will continue in use to support certaintransitional service level agreements as part of the PCS Divestiture untilapproximately March 2008, and the remaining basis is being depreciated overunits of production during this period.

·                  As we emphasize more advanced generation trenchproducts, we expect the future revenue stream from our less advanced facilityin El Segundo, California to decrease significantly. This facility had a netbook value of $59.5 million and was written down by $57.2 million.  This facility had significantly reducedproduction as of fiscal year ended June 30, 2003 and is used primarily forresearch and development activities.

·                  As we emphasize more advanced generationSchottky products, we expect the future revenue stream from our less advancedfacility in Borgaro, Italy to decrease significantly. This facility had a netbook value of $20.5 million and was written down by $13.9 million.  This facility is being sold as part of thePCS Divestiture.

·                  We restructured our manufacturingactivities in Europe.  Based on a reviewof our Swansea, Wales facility, a general-purpose module facility, wedetermined that this facility would be better suited to focus only onautomotive applications.  Thegeneral-purpose module assets at this facility, with a net book value of $13.6million, were written down by $8.2 million. In addition, we have completed the move of our manufacturing activitiesfrom our automotive facility in Krefeld, Germany to our Swansea, Wales andTijuana, Mexico facilities as of June 30, 2005. We have also moved theproduction from our Venaria, Italy facility to our Borgaro, Italy and Mumbai,India facilities, which was completed as of December 31, 2003.  We stopped manufacturing products at ourOxted, England facility as of September 30, 2003.  The Swansea, Wales; Krefeld, Germany;Borgaro, Italy and Mumbai, India facilities are being sold as part of the PCSDivestiture.

36

----

·                  We have eliminated the manufacturing ofour non-space military products in our Santa Clara, California facility as ofJuly 31, 2004. Currently, subcontractors handle our non-space qualifiedproducts previously manufactured in this facility. We have also transitionedthe assembly and test of non-space power components from our Leominster,Massachusetts facility to our Tijuana, Mexico facility as of December 31,2005.  Associated with these reductionsin manufacturing activities, certain assets with a net book value of $4.0million were written down by $2.1 million.

·                  $59.9 million in other miscellaneousitems were charged, including $50.7 million in relocation costs and otherimpaired asset charges and $9.2 million in contract termination and settlementcosts.

As a result of the restructuring initiatives, certainraw material and work-in-process inventories were impaired, including productsthat could not be completed in other facilities, materials that were notcompatible with the processes used in the alternative facilities, and materialssuch as gases and chemicals that could not readily be transferred. Based onthese factors we wrote down these inventories with a carrying value of $98.2million, by $6.0 million to their net realizable value. For the three monthsSeptember 30, 2006 and 2005, we disposed of $0.1 million and $0, respectively,of these inventories, which did not have a material impact on gross margin forthe period then ended.  As of September30, 2006, no inventory remained to be disposed.

As of September 30, 2006, we have recorded $57.5million in severance-related charges: $44.4 million in severance terminationcosts related to the December 2002 restructuring and the elimination ofapproximately 1,300 administrative, operating and manufacturing positions, $8.5million in pension termination costs at our manufacturing facility in Oxted,England, and $4.6 million for severance-related costs related to the PCSDivestiture and reorganization activities.

Our restructuring activities were expected to resultin severance charges of approximately $63 million through calendar year-end2007.  Below is a table of approximateseverance charges by major activity and location:
| **Location**                                                                                                                                                       | ** ** | **Activity**                                                  | ** ** | **Amount** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|------------|
| El Segundo, California                                                                                                                                             |       | Close manufacturing facilities                                |       | $          | 10 million |
| Santa Clara, California and Leominster,  Massachusetts                                                                                                             |       | Eliminate certain manufacturing activities                    |       | 4 million  |
| Oxted, England                                                                                                                                                     |       | Close manufacturing facility                                  |       | 13 million |
| Veneria, Italy                                                                                                                                                     |       | Move manufacturing to India and discontinue certain  products |       | 11 million |
| Mumbai, India; Borgaro, Italy; Xian, China; Krefeld,  Germany; Swansea, Wales; Halifax, Canada; Temecula, California; Tijuana,  Mexico; and El Segundo, California |       | Power Control Systems Divestiture                             |       | 10 million |
| Company-wide                                                                                                                                                       |       | Realign business processes                                    |       | 15 million |
| Total                                                                                                                                                              |       |                                                          |       | $          | 63 million |

 

37

----

For the three months ended September 30, 2006, werecorded $5.2 million in total restructuring-related charges, consisting of:$0.6 million for plant closure costs and other charges, and $4.6 million forseverance-related costs related to the PCS Divestiture and relatedreorganization activities.  For the threemonths ended September 30, 2005, we recorded $4.3 million in totalrestructuring-related charges related to the December 2002 restructuringinitiatives, consisting of: $3.1 million for asset impairment, plant closurecosts and other charges, and $1.2 million for severance-related costs.

The following summarizes our severance accrual relatedto the June 2001 restructuring, the December 2002 restructuring, theTechnoFusion acquisition and the PCS Divestiture for the three months endedSeptember 30, 2006 (in thousands):
| ** **                                                                                          | ** ** | **June  2001  Restructuring** | ** ** | **December  2002  Restructuring** | ** ** | **TechnoFusion  Acquisition** | ** ** | **PCS  Divestiture** | ** ** | **Total  Severance  Liability** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|----------------------|------------|---------------------------------|------------|
| Accrued severance, June  30, 2006                                                                   |       | $                             | 235        |                              | $          | 6,538                         |       | $                    | 282        |                            | $          | — | ** ** | $ | 7,055 |   |
| Costs incurred or  charged to “impairment of assets, restructuring and severance charges” |       | —                        |       | —                            |       | —                        |       | 4,656                | ** ** | 4,656                           |       |
| Costs paid                                                                                          |       | (24                           | )          | (3,250                            | )          | (1                            | )          | —               | ** ** | (3,275                          | )          |
| Foreign exchange impact                                                                             |       | —                        |       | —                            |       | 2                             |       | —               | ** ** | 2                               |       |
| Accrued severance, September 30, 2006                                                               |       | $                             | 211        |                              | $          | 3,288                         |       | $                    | 283        |                            | $          | 4,656 | ** ** | $ | 8,438 |   |

 

The June 2001 severance liability is primarily relatedto certain legal accruals associated with the termination of 29 administrativeand operating personnel, which will be paid or released as the outcome isdetermined.  The December 2002 severanceliability is primarily related to severance-related costs of approximately 130operating personnel, who have been notified and targeted to be terminated as aresult of the final transition of the manufacturing to the Newport, Walesfacility, expected to be completed and paid by calendar year-end 2007.  The TechnoFusion severance liability isrelated to restructuring of our Krefeld, Germany facility associated with theacquisition of TechnoFusion GmbH, which is contemplated to be paid or releasedpending the sale of the PCS business. The PCS Divestiture severance liability relates to approximately 100operating and finance personnel who have been notified to be impacted by thePCS Divestiture.  The associatedliability is expected to be paid by calendar year-end 2007.

38

----

Other Income and Expenses

Other expense was $0.8 million and $0.1 million forthe three months ended September 30, 2006 and 2005, respectively, reflecting anincrease in claim settlement costs.

Interest Income and Expenses

Interest income was $12.6 million and $7.1 million forthe three months ended September 30, 2006 and 2005, respectively, reflectinghigher prevailing interest rates on higher average cash and cash investmentbalance in the current year.

Interest expense was $10.1 million and $5.5 millionfor the three months ended September 30, 2006 and 2005, respectively, primarilyreflecting higher effective interest rate payable on our $550 millionconvertible subordinated notes outstanding.

Income Taxes

Our effective tax provision for the three months endedSeptember 30, 2006 and 2005 was 29.5 percent and 27.5 percent, respectively,rather than the U.S. federal statutory tax provision of 35 percent, as a resultof lower statutory tax rates in certain foreign jurisdictions, the benefit offoreign tax credits and state research and development credits, partiallyoffset by state taxes and certain foreign losses without foreign tax benefits.

**Liquidity andCapital Resources**

At September 30, 2006, we had cash and cash equivalentbalances of $446.3 million and cash investments in marketable debt securitiesof $631.0 million. We also had $144.3 million in unused credit facilities.  Our investment portfolio consisted ofavailable-for-sale fixed-income, principally investment-grade securities as ofSeptember 30, 2006.

For the three months ended September 30, 2006, cashprovided by operating activities was $11.3 million compared to $9.7 million inthe comparable prior year three months ended September 30, 2005. Depreciation and amortizationadjusted cash flows from operations by $21.5 million.  Changes in operating assets and liabilitiesdecreased cash by $49.2 million during the three months ended September 30,2006.  The increase in working capitalprimarily reflected an increase in accounts receivable as a result oflengthening payment terms based on business practices in certain foreignregions, and lower accrued salaries and wages due primarily to timing of bonusand profit sharing payments.

For the three months ended September 30, 2006, cashused in investing activities was $54.2 million. We purchased $99.5 million while proceeds from sales or maturities ofcash investments were $83.6 million. We invested $34.8 million in capitalexpenditures, of which approximatelyone-third was spent at the Newport, Wales facility.  Purchase order commitments for capitalexpenditures were $21.5 million as of September 30, 2006.  We intend to fund capital expenditures andworking capital requirements through cash and cash equivalents on hand,anticipated cash flows from operations and available credit facilities.

39

----

Financing activities for the three months endedSeptember 30, 2006 generated $2.1 million. Proceeds from the exercise ofemployee stock options and stock participation plan contributed $2.5 million.

As of September 30, 2006, we had revolving, equipmentand foreign credit facilities of $169.1 million, against which $24.7 millionhad been used.  As discussed in Note 4 ofthe unaudited consolidated financial statements, we have been required toobtain irrevocable standby letters of credit in favor of JP Morgan Chase Bank,for $7.5 million plus the collateral requirement for the interest rate swaptransactions, as determined periodically. At September 30, 2006, $16.8 million in letters of credit wereoutstanding related to the transactions. The collateral requirement of the transactions may be adversely affectedby an increase in the five-year LIBOR curve, a decrease in our stock price, orboth.  We cannot predict what thecollateral requirement of the transactions and the letter of credit requirementwill be over time.  To illustrate thepotential impact, had a 10 percent increase in the five-year LIBOR curve and a10 percent decrease in our stock price occurred at the close of the fiscalquarter ended September 30, 2006, our letter of credit commitment would haveincreased by $2.2 million to $19.0 million. The letters of credit collateral requirement for future periods havebeen waived by JP Morgan Chase Bank following the execution of the November 6,2006 revolving credit facility described below.

On November 6, 2006, we entered into a new five-yearmulti-currency revolving credit facility with a syndicate of lenders includingJP Morgan Chase Bank, Bank of America, N.A., HSBC Bank USA, and Deutsche BankAG, to replace the BNP Paribas revolving credit facility that would otherwisehave expired in November 2006.  The newfacility expires in November 2011 and provides a credit line of $150 million,with an option to increase the facility limit to $250 million.

Our $550 million convertiblesubordinated notes are due in July 2007. We anticipate that this subordinated debt will be refinanced throughpublic or private offerings of debt or equity, or be paid down with ourexisting cash and cash investments.  Wedo not have any off balance sheet arrangements as of September 30, 2006.

We believe that our current cash and cash investmentbalances, cash flows from operations and borrowing capacity, including unusedamounts under our credit facility, will be sufficient to meet our operations inthe next twelve months. Although we believe that our current financialresources will be sufficient for normal operating activities, we may alsoconsider the use of funds from other external sources, including, but notlimited to, public or private offerings of debt or equity.

40

----

**Recent Accounting Pronouncements**

In July 2006, the FASB issued InterpretationNo. 48, “*A*ccounting forUncertainty in Income Taxes — an Interpretation of FASB Statement No. 109”(“FIN No. 48”). FIN No. 48 clarifies the accounting for income taxes byprescribing the minimum recognition threshold an uncertain tax position isrequired to meet before being recognized in the financial statements.  This Interpretation requires that the impactof a tax position be recognized if it is more likely than not of beingsustained in an audit, based on the technical merits of the position.  FIN No. 48 also provides guidance onde-recognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. In addition, FIN No. 48 excludes income taxes from the scope of SFAS No.5, “Accounting for Contingencies”.  FINNo. 48 is effective beginning with our fiscal first quarter ended September 30,2007 of fiscal year 2008. We are currently evaluating the impact of FINNo. 48.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements” (“SFAS No. 157”). This Statement defines fair value, establishes a framework for measuringfair value and expands disclosures regarding fair value measurements.  SFAS No. 157 will be effective for us beginningin the first quarter of fiscal year 2009 ending September 30, 2008.  We are currently evaluating the impact ofSFAS No. 157.

In September 2006, the FASB issued SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106 and 132R” (“SFAS No. 158”).  SFAS No. 158 requires an employer torecognize the overfunded or underfunded status of a defined benefitpostretirement plan as an asset or liability in its statement of financialposition, and to recognize changes in that funded status in the year in whichthe changes occur through other comprehensive income.  SFAS No. 158 also requires an employer tomeasure the funded status of a plan at the date of its year-end statement offinancial position.  SFAS 158 will beeffective for us beginning in the first quarter of fiscal year 2008 endingSeptember 30, 2007.  We do not believethat the adoption of SFAS No. 158 will have a material impact on ourconsolidated financial statements.

In September 2006, the SEC issued Staff AccountingBulletin No. 108, Section N to Topic 1, “Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements*”* (“SAB No. 108”). SAB No. 108 requires the evaluation of prior-year misstatements usingboth the balance sheet approach and the income statement approach. In theinitial year of adoption, should either approach result in quantifying an errorthat is material in light of quantitative and qualitative factors, SAB No. 108guidance allows for a one-time cumulative-effect adjustment to beginningretained earnings. In years subsequent to adoption, previously undetectedmisstatements deemed material shall result in the restatement of previously issuedfinancial statements in accordance with SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20,Accounting Changes, andStatement No. 3, ReportingAccounting Changes in Interim Financial Statements”. SAB No. 108 is effectivefor us beginning in the fiscal quarter ending December 31, 2006. We do notbelieve adoption of SAB No. 108 will have an impact on our condensedconsolidated statement of operations and financial condition.

41

----

**CriticalAccounting Estimates**

The consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States which require us to make estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the consolidatedfinancial statements and revenues and expenses during the periods reported.Actual results could differ from those estimates. Information with respect toour critical accounting policies which we believe could have the mostsignificant effect on our reported results and require subjective or complexjudgments is contained in Item 7, Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, of our Annual Report onForm 10-K for the fiscal year ended June 30, 2006.  We believe that at September 30, 2006, therehas been no material change to this information.

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

This Quarterly Report on Form 10-Q includes somestatements and other information that are not historical facts but are“forward-looking statements” as that term is defined in the Private SecuritiesLitigation Reform Act of 1995.  Thematerials presented can be identified by the use of forward-looking terminologysuch as “anticipate,” “believe,” “estimate,” “expect,” “may,” “should,” “view,”or “will” or the negative or other variations thereof.  We caution that such statements are subjectto a number of uncertainties, and actual results may differ materially. Factorsthat could affect our actual results include those set forth below under PartII, Item 1A, “Risk Factors” and other uncertainties disclosed in our reportsfiled from time to time with the Securities and Exchange Commission.  Unless required by law, we undertake noobligation to publicly update or revise any forward looking statements, toreflect new information, future events or otherwise.

42

----

**ITEM 3. Quantitativeand Qualitative Disclosures about Market Risk**

We are exposed to various risks, includingfluctuations in interest and foreign currency rates. In the normal course ofbusiness, we also face risks that are either non-financial or non-quantifiable.Such risks principally include country risk, credit risk and legal risk and arenot discussed or quantified in the following analyses, as well as risks setforth under the heading “Factors that May Affect Future Results” in thisQuarterly Report on From 10-Q and in our Annual Report on Form 10-K for thefiscal year ended June 30, 2006.

*Interest Rate Risk*

Our financial assets and liabilities subject tointerest rate risk are cash investments, convertible debt, credit facilitiesand interest rate swaps.  Our primaryobjective is to preserve principal while maximizing yield without significantlyincreasing risk.  At September 30, 2006,we evaluated the effect that near-term changes in interest rates would have hadon these transactions.  A change of asmuch as ten percent in the London InterBank Offered Rate (“LIBOR”) would havehad a favorable impact of approximately $0.5 million on net interestincome/expense for the current quarter since the interest income on our cashand cash investments would have outweighed additional interest expense on ouroutstanding debt.  For our interest rate contract with Lehman Brothers, anincrease of ten percent in interest rates would have had a favorable impact of$1.0 million, and a decrease of ten percent in interest rates would have had anadverse impact of ($0.1) million, on net interest income/expense.  These changes would not have had a materialimpact on our results of operations, financial position or cash flows.

In December 2001, we entered into an interest rateswap transaction (the “Transaction”) with JP Morgan Chase Bank (the “Bank”), tomodify our effective interest payable with respect to $412.5 million of our$550 million outstanding convertible debt (the “Debt”) (see Notes 4,“Derivative Financial Instruments,” and 8, “Bank Loans and Long-TermDebt”).  At the inception of theTransaction, interest rates were lower than that of the Debt and we believedthat interest rates would remain lower for an extended period of time.  In April 2004, we entered into an interestrate swap transaction (the “April 2004 Transaction”) with the Bank to modifythe effective interest payable with respect to the remaining $137.5 million ofthe Debt.  The variable interest rate wehave paid since the inception of the swap has averaged 3.03 percent, comparedto a coupon of 4.25 percent on the Debt. During the three months ended September 30, 2006, the LIBOR was 5.51percent, and including certain spreads and mark-to-market adjustmentsassociated with the interest swaps, this arrangement increased interest expenseby $1.6 million.  For the three monthsended September 30, 2005, the LIBOR was 3.60 percent, and including certainspreads and mark-to-market adjustments associated with the interest swaps, thisarrangement decreased interest expense by $0.9 million.

Accounted for as fair value hedges under SFAS No. 133,the mark-to-market adjustments of the two Transactions were offset by themark-to-market adjustments on the Debt, resulting in no material impact toearnings.  To measure the effectivenessof the hedge relationship, we used a regression analysis.  To evaluate the relationship of the fairvalue of the two transactions and the changes in fair value of the Debtattributable to changes in the benchmark rate, we discounted the estimated cashflows by the LIBOR swap rate that corresponds to the Debt’s expected maturitydate.  In addition, our ability to callthe Debt was considered in assessing the effectiveness of the hedgingrelationship.  For those years that wereprojected to include at least a portion of redemption of the convertibledebentures, we employed a valuation model known as a 

43

----

Monte Carlo simulation.  This simulation allowed us to projectprobability-weighted contractual cash flows discounted at the LIBOR swap ratethat corresponded to the Debt’s expected maturity date.  The market value of the December 2001Transaction was a $4.7 million and a $7.0 million liability at September 30,2006 and June 30, 2006, respectively. The market value of the April 2004 Transaction was a $3.0 million and a$4.6 million liability at September 30, 2006 and June 30, 2006, respectively.

In April 2002, we entered into an interest rate contract(the “Contract”) with the investment bank, Lehman Brothers (“Lehman”), toreduce the variable interest rate risk of the Transaction.  The notional amount of the Contract is $412.0million, representing approximately 75 percent of the Debt. Under the terms ofthe Contract, we have the option to receive a payout from Lehman covering ourexposure to LIBOR fluctuations between 5.5 percent and 7.5 percent for any fourdesignated quarters.  The market value ofthe Contract at September 30, 2006 and June 30, 2006 was $0.1 million and $0.6million, respectively, and was included in other long-term assets.  Mark-to-market (losses) gains of ($0.5)million and $0.1 million for the three months ended September 30, 2006 and2005, respectively, were charged to interest expense.

*Foreign CurrencyRisk*

We conduct business on a global basis in severalforeign currencies, and at various times, we have currency exposure related tothe British Pound Sterling, the Euro and the Japanese Yen.  Our risk to the European currencies ispartially offset by the natural hedge of manufacturing and selling goods inboth U.S. dollars and the European currencies. Considering our specific foreign currency exposures, we have thegreatest exposure to the Japanese Yen, since we have significant Yen-basedrevenues without Yen-based manufacturing costs. We have established a foreign-currency hedging program using foreignexchange forward contracts, including the Forward Contract described below, tohedge certain foreign currency transaction exposures.  To protect against reductions in value andvolatility of future cash flows caused by changes in currency exchange rates,we have established revenue, expense and balance sheet hedging programs.  Currency forward contracts and local Yen andEuro borrowings are used in these hedging programs.  Our hedging programs reduce, but do notalways eliminate, the impact of currency exchange rate movements. We consideredan adverse near-term change in exchange rates of ten percent for the BritishPound Sterling, the Euro and the Japanese Yen. Such an adverse change, after taking into account our derivativefinancial instruments and offsetting positions, would have resulted in anannualized adverse impact on income before taxes of less than $1 million forthe three months ended September 30, 2006 and 2005.

In May 2006, following the expiration of our March2001 forward contract in March 2006, we entered into a five-year foreignexchange forward contract with BNP Paribas (the “May 2006 Forward Contract”)for the purpose of reducing the effect of exchange rate fluctuations onforecasted intercompany purchases by our Japan subsidiary.  We have designated the May 2006 ForwardContract as a cash flow hedge.  Under theterms of the May 2006 Forward Contract, we are required to exchange 507.5million Yen for $5.0 million on a quarterly basis starting in June 2006 andexpiring in March 2011.  At September 30,2006, 18 quarterly payments of 507.5 million Yen remained to be swapped at aforward exchange rate of 101.5 Yen per U.S. dollar.  The market value of the May 2006 ForwardContract was $4.5 million and 1.2 million, included in other assets, atSeptember 30, 2006 and June 30, 2006, respectively.  The mark-to-market 

44

----

gains, net of tax, of $2.6 million for the threemonths ended September 30, 2006, have been included in other comprehensiveincome.  Based on effectiveness testscomparing forecasted transactions through the May 2006 Forward Contractexpiration date to its cash flow requirements, we do not expect to incur amaterial charge to income during the next twelve months as a result of the May2006 Forward Contract.

We had approximately $123.8 million and $103.1 millionin notional amounts of forward contracts not designated as accounting hedgesunder SFAS No. 133 at September 30, 2006 and June 30, 2006, respectively.  Netrealized and unrealized foreign-currency net losses recognized in earnings wereless than $1 million for the three months ended September 30, 2006 and2005.

45

----

**ITEM 4.                 CONTROLS ANDPROCEDURES**

(a)   Evaluation of disclosure controls andprocedures

The term “disclosurecontrols and procedures” refers to the controls and other procedures of acompany that are designed to ensure that information required to be disclosedby the company in the reports that it files under the Securities Exchange Actof 1934 (“Exchange Act”) is recorded, processed, summarized and reported,within required time periods.  Ourmanagement, with the participation of our Chief Executive Officer, AlexanderLidow, and Chief Financial Officer, Michael P. McGee, carried out an evaluationof the effectiveness of our disclosure controls and procedures pursuant toExchange Act Rule 13a-15(b).  Based onthat evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that, as of the end of the period covered by this report, suchcontrols and procedures are effective at the reasonable assurance level inmaking known to them material information related to us (including ourconsolidated subsidiaries) required to be included in this report.

Disclosure controls andprocedures, no matter how well designed and implemented, can provide onlyreasonable assurance of achieving an entity’s disclosure objectives.  The likelihood of achieving such objectivesis affected by limitations inherent in disclosure controls and procedures.  These include the fact that human judgment indecision-making can be faulty and that breakdowns in internal control can occurbecause of human failures such as simple errors, mistakes or intentionalcircumvention of the established processes.

(b)   Changes in internal controls

There was no change in ourinternal controls during the fiscal first quarter 2007 that has materiallyaffected, or are reasonably likely to materially affect, our internal controlsover financial reporting.

46

----

### **PART II.                OTHERINFORMATION**

**ITEM 1A.               RiskFactors**

***Changes in end-market demand or downturns in the highly cyclicalsemiconductor industry could affect our operating results and the value of ourbusiness.***

We mayexperience significant changes in our profitability as a result of variationsin sales, changes in product mix sought by customers, seasonality, pricecompetition for orders and the costs associated with the introduction of newproducts and start-up of new facilities and additional capacity lines. Themarkets for our products depend on continued demand with the product technologicalplatforms and in the mix we plan for and produce in the information technology,consumer, industrial, aerospace and defense and automotive markets.  Changes in the demand mix, neededtechnologies and these end markets may adversely affect our ability to matchour products, inventory and capacity to meet customer demand and couldadversely affect our operating results and financial condition.

Inaddition, the semiconductor industry is highly cyclical and the value of ourbusiness may decline during the down portion of these cycles.  We have experienced these conditions in ourbusiness in the recent past and we cannot predict when we may experience suchdownturns in the future.  Futuredownturns in the semiconductor industry, or any failure of the industry torecover fully from its recent downturns could seriously impact our revenue andharm our business, financial condition and results of operations. Althoughmarkets for our semiconductors appear stable, we cannot assure you that theywill continue to be stable or that our markets will not experience renewed,possibly more severe and prolonged, downturns in the future.

***Consumer and/or corporate spending for the end-market applicationswhich incorporate our products may be reduced due to increased oil prices orotherwise.***

Our revenue and gross margin guidance is dependent on a certain levelof consumer and/or corporate spending for the specific mix of products weproduce and have the capacity to produce. If our projections of theseexpenditures fail to materialize, or materialize in a mix different from thatfor which we anticipate and build inventory, whether due to reduced consumer orcorporate spending from increased oil prices or otherwise, our revenue andgross margin could be adversely impacted.

***We maintain backlog of customer orders that is subject to cancellation,reduction or delay in delivery schedules, which may result in lower thanexpected revenue and margins.***

With certain exceptions related to products within our Aerospace andDefense and Non-Aligned Product segments, we manufacture primarily pursuant topurchase orders for current delivery or to forecast, rather than pursuant tolong-term supply contracts.  For example,in our Computing and Communications segment, we have announced substantial new designor programs in next generation game stations and are currently manufacturingand shipping on that basis.  Thesemiconductor industry is 

47

----

subject to rapid changes in customer outlooks or unexpected build upsof inventory in the supply channel as a result of shifts in end-market demandgenerally or in the mix of that demand. Accordingly, many of these purchase orders or forecasts may be revisedor canceled without penalty.  As aresult, we must commit resources to the manufacturing of products, and aspecific mix of products, without any advance purchase commitments fromcustomers.  Our inability to sellproducts after we devote significant resources to build them could have amaterial adverse effect on our levels of inventory (or the value of our inventory),our revenue and our operating results generally.  Additionally, cancellation or significantreduction in significant customer programs, like those for next generation gamestation or servers, could materially affect our ability to achieve our revenueand margin targets.

***We build and maintain inventory in order to meet our historic andprojected needs, but cannot guarantee that our inventory will be adequate tomeet our needs or will be usable at a future date.***

At the end of fiscal quarter ended September30, 2006, we reported net inventories of $218.8 million. We build andmaintain inventory in order to meet our historic and projected needs, butcannot guarantee that the inventory we build will be adequate or the right mixof products to meet market demand.  If wedo not project and build the proper mix and amount of inventory, our revenueand gross margin may be adversely affected. Additionally, if we produce or have produced inventory that does notmeet current or future demand, we may determine at some point that certain ofthe inventory may only be sold at a discount or may not be sold at all,resulting in the reduction in the carrying value of our inventory and amaterial adverse effect on our financial condition and operating results.

***The semiconductor business is highly competitive and increasedcompetition could adversely affect the price of our products and otherwisereduce the value of an investment in our company.***

Thesemiconductor industry, including the sectors in which we do business, ishighly competitive. Competition is based on price, product performance,technology platform, product availability, quality, reliability and customerservice. Price pressures often emerge as competitors attempt to gain a greatermarket share by lowering prices or by offering a more desirable technologicalsolution.  Pricing and other competitivepressures can adversely affect our revenue and gross margin, and hence, ourprofitability.  We also compete invarious markets with companies of various sizes, many of which are larger andhave greater financial and other resources than we have, and thus they may bebetter able to withstand adverse economic or market conditions. In addition,companies not currently in direct competition with us may introduce competingproducts in the future.

***Failure to timely complete our expansion plans for our waferfabrication facility could adversely affect our revenue growth and ability toachieve our margin targets.***

We arecurrently at over 90 percent of our worldwide in-house wafer fabrication andassembly manufacturing capacities, without considering subcontract or foundrycapacity.  We are planning to add incremental production capacity of $100million to $150 million in annual revenue potential by June 2007. As part ofour expansion plans, we announced in October 2006 a foundry agreement withTower Semiconductor for capacity capable of 

48

----

addressing many of our FocusProducts.  If we fail to timely execute on our plans inadvance of demand for our products or fail in our ability to obtain additionalcapacity, our revenues could be adversely affected which may prevent us fromachieving our margin targets.  We cannotassure you that we will complete our plans timely, that the ramp-up of theexpanded facilities will occur effectively and without error or delay, or thatsufficient third party sources would be available to satisfy our ability tomeet customer demand.  Even if we fullyexecute and implement our plans, we cannot guarantee that we will havesufficient worldwide wafer fabrication and assembly manufacturing capacities tomeet demand and there may be other unforeseen factors that could adverselyimpact our operating results.

***Delays in initiation of production at new facilities, implementing newproduction techniques or resolving problems associated with technical equipmentmalfunctions could adversely affect our manufacturing efficiencies***.

Our manufacturing efficiency has been and will be an important factorin our future profitability, and we may not be able to maintain or increase ourmanufacturing efficiency.  Ourmanufacturing and testing processes are complex, require advanced and costlyequipment and are continually being modified in our efforts to improve yieldsand product performance. Difficulties in the manufacturing process can loweryields.  Technical or other problemscould lead to production delays, order cancellations and lost revenue.  In addition, any problems in achievingacceptable yields, construction delays, or other problems in upgrading orexpanding existing facilities, building new facilities, problems in bringingother new manufacturing capacity to full production or changing our processtechnologies, could also result in capacity constraints, production delays anda loss of future revenue and customers. Our operating results also could be adversely affected by any increasein fixed costs and operating expenses related to increases in productioncapacity if net sales in the appropriate mix do not increase proportionately,or in the event of a decline in demand for some or all of our products.

***If we are unable to implement our businessstrategy, our revenue and profitability may be adversely affected.***

Ourfuture financial performance and success are largely dependent on our abilityto implement our business strategy successfully of transforming our business toone led by our Focus Products and succeeding on our plans to restructure ourcompany, including our plan for the sale of our entire Non-Focus Productsbusiness. We cannot assure you that we will continue to successfully implementour business strategy or that implementing our strategy will sustain or improveour results of operations.

***The failure to execute on our plans todivest or discontinue product lines that are not consistent with our businessobjectives, including implementation of the PCS Divestiture, and replace thoserevenues with higher-margin product sales could adversely affect our operatingresults.***

We have entered intodefinitive agreements with Vishay Intertechnology, Inc. to sell our PowerControl Systems business consisting of our entire Non-Focus Product business(the “PCS Divestiture”). While we have entered into definitive agreements, theagreements contain a number of conditions to closing, including governmentaland third party approvals.  While aclosing is expected in February 2007, we cannot guaranty that closing will takeplace by then if at all.

If the PCS Divestiture iscompleted, it is our goal that within the next couple of years, the remainingrevenues would grow faster and the remaining business would be moreprofitable.  We do not believe that thecompletion of the PCS Divestiture will substantially alter the customer basethat we serve or the competition that we face currently. However, to achieveour goals, for a few quarters following a successful completion of the PCSDivestiture, we plan to more fully develop our Focus Product segments byrealigning our 

49

----

sales, distribution andproduct development functions. We will also configure our manufacturing andsupport infrastructure to address at least initially lower revenue levels.Despite our plans and efforts, we cannot assure you that we will be successfulin achieving our goals or carrying out plans for realignment.

Additionally as part of the PCSDivestiture, we will be involved in the transition of certain of the divestedbusiness and assets with Vishay, including providing certain manufacturing, sales,marketing and administrative support services and purchasing certain productsfrom Vishay for a period of up to three years.  There may also be unforeseenfactors or other obligations or events arising out of the PCS Divestiture. Theactivities and obligations involved with the PCS Divestiture could involvechanges to various aspects of our business which could have a material adverseeffect on our profitability to an extent we have not anticipated.  Even if we fully execute and implement ourplans, there may be unforeseen factors that could have a material adverseimpact on our operating results.

***The failure to implement and complete ourrestructuring programs and accomplish planned cost reductions could adverselyaffect our business.***

During fiscal 2003 secondquarter ended December 31, 2002, we announced certain restructuringinitiatives. We have substantially completed the December 2002 restructuringactivities as of September 30, 2006.  OnNovember 8, 2006, we entered into definitive agreements with VishayIntertechnology, Inc. to sell our Power Control Systems (“PCS”) business,consisting of the Non-Focus Product segments, for approximately $290 million(the “PCS Divestiture”).  Associated withthe PCS Divestiture, we plan to realign our sales, distribution and productdevelopment functions to a business based solely on our Focus Products.  We also plan to configure our manufacturingand support infrastructure to address the initially lower revenue levelsfollowing the PCS Divestiture.  We expectthat restructuring-related charges related to these plans will be approximately$10 million to $15 million (including the $4.6 million recorded to date) primarilyseverance-related costs, which will be recorded as incurred throughapproximately calendar year-end 2007.  Ifwe do not reconfigure our infrastructure or there are delays in implementingour plans, we could have higher relative costs associated with post-PCSDivestiture revenues, adversely affecting our margins and profitability.  Additionally,there may be unforeseen factors or other obligations or events arising out ofthe PCS Divestiture (including possible indemnity obligations) that couldresult in changes in the amount or timing of charges to be taken or otherwise materiallyadversely impact our margins, profitability and business.

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

Our products are typicallysold at prices that are significantly lower than the cost of the equipment orother goods in which they are incorporated. Although we maintain rigorous quality control systems, we have shippedlarge quantities of semiconductor devices to a wide range of customers aroundthe world, in a variety of high profile and critical applications, and continueto do so.  In the ordinary course of ourbusiness we receive warranty claims for some of these products that aredefective, or that do not perform to published specifications.  Since a defect or failure in our productscould give rise to failures in the end products that incorporate them (andconsequential claims for damages against our customers from their customersdepending on applicable law and contract), we often need to defend againstclaims for damages that are disproportionate to the revenue and profit wereceive from the products involved.  Inaddition, our ability to reduce such liabilities may be limited by the laws orthe customary business practices of the countries where we do business.  Even in cases where we do not believe we havelegal liability for such claims, we may choose to pay for them to retain a 

50

----

customer’s business orgoodwill or to settle claims to avoid protracted litigation.  Our results of operations and business wouldbe adversely affected as a result of a significant alleged quality orperformance issues in our products, if we are required or choose to pay for thedamages that result.  In addition, in ourAerospace and Defense segment, we are sometimes subject to governmentprocurement regulations and other laws that could result in costlyinvestigations and other legal proceedings as a consequence of allegedlydefective products or other actions. Although we currently have productliability and other types of insurance, we have certain deductibles andexclusions to such policies and may not have sufficient insurancecoverage.  We also may not havesufficient resources to satisfy all possible product liability or other typesof product claims.  In addition, anyperception that our products are defective would likely result in reduced salesof our products, loss of customers and harm to our business and reputation.

***While we attempt to monitor the credit worthinessof our customers, we may from time to time be at risk due to the adversefinancial condition of one or more customers.***

We have establishedprocedures for the review and monitoring of the credit worthiness of ourcustomers and/or significant amounts owing from customers. However, from timeto time, we may find that, despite our efforts, one or more of our customersbecome insolvent or face bankruptcy proceedings (Delphi is currently one suchcustomer). Such events could have an adverse effect on our operating results ifour receivables applicable to that customer become uncollectible in whole or inpart, or if our customers’ financial situation result in reductions in whole orin part of our ability to continue to sell our products or services to suchcustomers at the same levels or at all.

***If some original equipmentmanufacturers (“OEMs”) do not design our products into their equipment orconvert design or program wins to actual sales, a portion of our revenue may beadversely affected.***

A “design win” or program award from a customer does not guarantee thatthe design or program win will become future sales to that customer. Forexample, in our Computing and Communications segment, we have announced newdesign or program wins in next generation game stations, and our other segmentshave had other design or program wins. We also are unable to guarantee that we will be able to convert designor program wins into sales for the life of any particular program, or at all,or that the revenue from such wins would be significant.  We also cannot guarantee that we will achievethe same level of design or program wins as we have in the past, or atall.  Without design or program wins fromOEMs, we would only be able to sell our products to these OEMs as a secondsource, if at all. Once an OEM designs another supplier’s semiconductor intoone of its product platforms, it is more difficult for us to achieve futuredesign or program wins with that OEM’s product platform because changingsuppliers involves significant cost, time, effort and risk. Achieving a designor program win with a customer does not ensure that we will receive significantrevenue from that customer and we may be unable to convert design or programwins into actual sales.

51

----

***Corporate investment and expenditures inthe Information Technology sector and in Information Technology purchases maynot materialize as we have planned.***

Our revenue and gross margin guidance is dependent on a certain levelof corporate investment and expenditures in the Information Technology sectorand in Information Technology purchases. If our projections of theseexpenditures fail to materialize, whether due to increased oil prices, changein market conditions, or otherwise, our revenue and gross margin could beadversely impacted.

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

Ourfailure to develop new technologies or react to changes in existingtechnologies could materially delay our development of new products, whichcould result in decreased revenue and a loss of market share to ourcompetitors. Rapidly changing technologies and industry standards, along withfrequent new product introductions, characterize the semiconductor industry. Asa result, we must devote significant resources to research and development. Ourfinancial performance depends on our ability to design, develop, manufacture,assemble, test, market and support new products and enhancements on a timelyand cost-effective basis. We cannot assure you that we will successfullyidentify new product opportunities and develop and bring new products to marketin a timely and cost-effective manner, or that products or technologiesdeveloped by others will not render our products or technologies obsolete ornoncompetitive. A fundamental shift in technologies in our product marketscould have a material adverse effect on our competitive position within theindustry. In addition, to remain competitive, we must continue to reduce die sizesand improve manufacturing yields. We cannot assure you that we can accomplishthese goals.

***Our failure to obtain or maintain the rightto use certain technologies may negatively affect our financial results.***

Ourfuture success and competitive position may depend in part upon our ability toobtain or maintain certain proprietary technologies used in our principalproducts, which is achieved in part by defending and maintaining the validityof our patents and defending claims by our competitors of intellectual propertyinfringement. We license certain patents owned by others. We have also beennotified that certain of our products may infringe the patents of thirdparties. Although licenses are generally offered in such situations, we cannoteliminate the risk of litigation alleging patent infringement.  We are currently a defendant in intellectualproperty claims and we could become subject to other lawsuits in which it isalleged that we have infringed upon the intellectual property rights of others.

Ourinvolvement in existing and future intellectual property litigation couldresult in significant expense, adversely affect sales of the challenged productor technologies and divert the efforts of our technical and managementpersonnel, whether or not such litigation is resolved in our favor. If any suchinfringements exist, arise or are claimed in the future, we may be exposed tosubstantial liability for damages and may need to obtain licenses from thepatent owners, discontinue or change our processes or products or expendsignificant resources to develop or acquire non-infringing technologies. Wecannot assure you that we would be successful in such efforts or that suchlicenses would be available under reasonable terms. Our failure to develop oracquire non-infringing technologies or to obtain licenses on acceptable termsor the occurrence of related litigation itself could have a material adverseeffect on our operating results and financial condition.

52

----

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

We havetraditionally relied on our patents and proprietary technologies. Patentlitigation settlements and royalty income substantially contribute to ourfinancial results. Enforcement of our intellectual property rights is costly,risky and time-consuming. We cannot assure you that we can successfullycontinue to protect our intellectual property rights, especially in foreignmarkets. Our key MOSFET patents expire between 2006 and 2010, although ourbroadest MOSFET patents expire in 2007 and 2008.

Ourroyalty income is largely dependent on the following factors: the remainingterms of our MOSFET patents; the continuing introduction and acceptance ofproducts that are not covered by our patents; remaining covered under unexpiredMOSFET patents; the defensibility and enforceability of our patents; changes inour licensees’ unit sales, prices or die sizes; the terms, if any, upon whichexpiring license agreements are renegotiated; and our ability to obtain revenuefrom new licensing opportunities. Market conditions and mix of licenseeproducts, as well as sales of non-infringing devices can significantlyadversely affect royalty income.  We alsocannot guarantee that we can obtain new licenses to offset reductions inroyalties from existing licenses. While we try to predict the effects of thesefactors and efforts, often there are variations or factors that cansignificantly affect results different from that predicted.  Accordingly, we cannot guarantee that ourpredictions of our IP segment revenue will be consistent with actualresults.  We also cannot guarantee thatour royalty income will continue at levels consistent with prior periods.  Any decrease in our royalty income could havea material adverse effect on our operating results and financial condition.

***Our international operations expose us tomaterial risks.***

Weexpect revenue from foreign markets to continue to represent a significantportion of total revenue. We maintain or contract with significant operationsin foreign countries.  Among others, thefollowing risks are inherent in doing business internationally: changes in, orimpositions of, legislative or regulatory requirements, including tax laws inthe United States and in the countries in which we manufacture or sell ourproducts; trade restrictions; transportation delays; work stoppages; economicand political instability; and foreign currency fluctuations.

Inaddition, certain of our operations and products are subject to restrictions orlicensing under U.S. export laws.  Ifsuch laws or the implementation of these restrictions change, or if in thecourse of operating under such laws we become subject to claims, we cannotassure you that such factors would not have a material adverse effect on ourfinancial condition and operating results.

Inaddition, it is more difficult in some foreign countries to protect ourproducts or intellectual property rights to the same extent as is possible inthe United States. Therefore, the risk of piracy or misuse of our technologyand products may be greater in these foreign countries. Although we have notexperienced any material adverse effect on our operating results as a result ofthese and other factors, we cannot assure you that 

53

----

suchfactors will not have a material adverse effect on our financial condition andoperating results in the future.

***Delays in initiation of production at newfacilities, implementing new production techniques or resolving problemsassociated with technical equipment malfunctions could adversely affect ourmanufacturing efficiencies.***

Ourmanufacturing efficiency will be an important factor in our futureprofitability, and we cannot assure you that we will be able to maintain orincrease our manufacturing efficiency to the same extent as our competitors.Our manufacturing processes are highly complex, require advanced and costlyequipment and are continuously being modified in an effort to improve yieldsand product performance. Impurities, defects or other difficulties in themanufacturing process can lower yields.

Inaddition, as is common in the semiconductor industry, we have from time to timeexperienced difficulty in beginning production at new facilities or ineffecting transitions to new manufacturing processes. As a consequence, we haveexperienced delays in product deliveries and reduced yields. We may experiencemanufacturing problems in achieving acceptable yields or experience productdelivery delays in the future as a result of, among other things, capacityconstraints, construction delays, upgrading or expanding existing facilities orchanging our process technologies, any of which could result in a loss offuture revenue. Our operating results could also be adversely affected by theincrease in fixed costs and operating expenses related to increases inproduction capacity if revenue does not increase proportionately.

We arecontinuing to ramp up our Newport, Wales facility for new production.  We have experienced some delays and/ortechnical problems in moving our various facilities.  Continued delays and/or technical problems incompleting the remaining transfers could lead to increased costs, reducedyields, delays in product deliveries, order cancellations and/or lost revenue.

***Interruptions, delays or cost increasesaffecting our materials, parts or equipment may impair our competitive positionand our operations.***

Ourmanufacturing operations depend upon obtaining adequate supplies of materials,parts and equipment, including silicon, mold compounds and leadframes, on atimely basis from third parties. Our results of operations could be adverselyaffected if we were unable to obtain adequate supplies of materials, parts andequipment in a timely manner from our third party suppliers or if the costs ofmaterials, parts or equipment increase significantly. From time to time,suppliers may discontinue products, extend lead times, limit supplies orincrease prices due to capacity constraints or other factors. We have a limitednumber of suppliers or sole suppliers for some materials, parts and equipment,and any interruption could materially impair our operations and adverselyaffect our customer relations.

Wemanufacture a substantial portion of our wafer product at our Temecula,California and Newport, Wales facilities. Any disruption of operations at thosefacilities could have a material adverse effect on our business, financialcondition and results of operations.

Also,some of our products are assembled and tested by third party subcontractors. Wedo not have any long-term assembly agreements with these subcontractors. As aresult, 

54

----

we do nothave immediate control over our product delivery schedules or product quality.Due to the amount of time often required to qualify assemblers and testers andthe high cost of qualifying multiple parties for the same products, we couldexperience delays in the shipment of our products if we are forced to findalternative third parties to assemble or test them. Any product delivery delaysin the future could have a material adverse effect on our operating results andfinancial condition. Our operations and ability to satisfy customer obligationscould be adversely affected if our relationships with these subcontractors weredisrupted or terminated.

***We must commit resources to productmanufacturing prior to receipt of purchase commitments and could lose some orall of the associated investment.***

We sellproducts primarily pursuant to purchase orders for current delivery or toforecast, rather than pursuant to long-term supply contracts. Many of thesepurchase orders or forecasts may be revised or canceled without penalty. As aresult, we must commit resources to the manufacturing of products without anyadvance purchase commitments from customers. Our inability to sell productsafter we devote significant resources to them could have a material adverseeffect on our levels of inventory and our business, financial condition andresults of operations.

***We receive a significant portion of ourrevenue from a small number of customers and distributors.***

Historically,a significant portion of our revenue has come from a relatively small number ofcustomers and distributors. The loss or financial failure of any significantcustomer or distributor, any reduction in orders by any of our significantcustomers or distributors, or the cancellation of a significant order, couldmaterially and adversely affect our business.

***We may fail to attract or retain thequalified technical, sales, marketing and managerial personnel required tooperate our business successfully.***

Ourfuture success depends, in part, upon our ability to attract and retain highlyqualified technical, sales, marketing and managerial personnel. Personnel withthe necessary semiconductor expertise are scarce and competition for personnelwith these skills is intense. We cannot assure you that we will be able to retainexisting key technical, sales, marketing and managerial employees or that wewill be successful in attracting, assimilating or retaining other highlyqualified technical, sales, marketing and managerial personnel in the future.If we are unable to retain existing key employees or are unsuccessful inattracting new highly qualified employees, our business, financial conditionand results of operations could be materially and adversely affected.

***We have acquired and may continue toacquire other companies and may be unable to successfully integrate suchcompanies with our operations.***

We haveacquired several companies over the past few years.  We may continue to expand and diversify ouroperations with additional acquisitions. If we are unsuccessful in integratingthese companies with our operations, or if integration is more difficult thananticipated, we may experience disruptions that could have a material adverseeffect on our business, financial condition and results of operations.

55

----

***The price of our common stock has fluctuated widely in the past and mayfluctuate widely in the future.***

Our common stock, which istraded on The New York Stock Exchange, has experienced and may continue toexperience significant price and volume fluctuations that could adverselyaffect the market price of our common stock without regard to our operatingperformance.  In addition, we believethat factors such as quarterly fluctuations in financial results, earnings belowanalysts’ estimates and financial performance and other activities of otherpublicly traded companies in the semiconductor industry could cause the priceof our common stock to fluctuate substantially. In addition, in recent periods, our common stock, the stock market ingeneral and the market for shares of semiconductor industry-related stocks inparticular have experienced extreme price fluctuations which have often beenunrelated to the operating performance of the affected companies.  Any similar fluctuations in the future couldadversely affect the market price of our common stock.

***Our investments in certain securities expose us to market risks.***

We invest excess cash in marketable securitiesconsisting primarily of commercial paper, corporate notes, corporate bonds andgovernmental securities.  We also hold as strategic investments the commonstock of two publicly-traded Asian companies. The value of our investments is subject to market fluctuations, which ifadverse, could have a material adverseeffect on our financial position and if sold at the down turn, could have amaterial adverse effect on our operating results.

***If we fail to maintain an effectivesystem of internal control over financial reporting or discover materialweaknesses in our internal control over financial reporting or financialreporting practices, we may not be able to report our financial resultsaccurately or detect fraud, which could harm our business and the trading priceof our stock.***

Effective internal controls are necessary for us to produce reliablefinancial reports and are important in our effort to prevent financial fraud.We are required to periodically evaluate the effectiveness of the design andoperation of our internal controls. These evaluations may result in theconclusion that enhancements, modifications or changes to our internal controlsare necessary or desirable.  Whilemanagement evaluates the effectiveness of our internal controls on a regularbasis, we cannot provide absolute assurance that these controls will always beeffective or any assurance that the controls, accounting processes, proceduresand underlying assumptions will not be subject to revision. There are alsoinherent limitations on the effectiveness of internal controls and financialreporting practices, including collusion, management override, and failure ofhuman judgment. Because of this, control procedures and financial reportingpractices are designed to reduce rather than eliminate business risks. If wefail to maintain an effective system of internal control over financialreporting or if and for so long as management or our independent registeredpublic accounting firm were to discover material weaknesses in our internalcontrol over financial reporting (or if our system of controls and auditsresult in a change of practices or new information or conclusions about ourfinancial reporting) like the disclosed material weakness, we may be unable toproduce reliable financial reports or prevent fraud and it could harm ourfinancial condition and results of operations and result in loss of investorconfidence and a decline in our stock price.

56

----

***Large potential environmental liabilities, including those relating toa former operating subsidiary, may adversely impact our financial position.***

Federal, state, foreign andlocal laws and regulations impose various restrictions and controls on thedischarge of materials, chemicals and gases used in our semiconductormanufacturing processes, and on the operation of our facilities and equipment.We believe we use reasonable efforts to maintain a system of compliance andcontrols for these laws and regulations. However, we cannot provide absolute assurance thatthese controls will always be effective or that issues with respect to thesematters will not from time to time occur. There are also inherent limitations on the effectiveness of controlsincluding the failure of human judgment.

Under some laws andregulations, we could be held financially responsible for remedial measures ifour properties are contaminated or if we send waste to a landfill or recyclingfacility that becomes contaminated, even if we did not cause the contamination.Under other laws, we may be subject to fines and penalties if facilities orequipment are not operated in technical compliance with permit conditions or ifrequired reports are not timely filed with applicable agencies.  Also, we may be subject to common law claimsif we release substances that damage or harm third parties. Further, we cannotassure you that changes in environmental laws or regulations will not requireadditional investments in capital equipment or the implementation of additionalcompliance programs in the future. Additionally, as we prepare for thecontemplated PCS Divestiture of certain of our facilities, such facilities mayundergo further environmental review and investigation which may lead topreviously unknown environmental liabilities. Any present or prior failure to comply with environmental laws orregulations could subject us to serious liabilities and could have a materialadverse effect on our operating results and financial condition.

***Some of our facilities are located near major earthquake fault lines.***

Our corporate headquarters, oneof our manufacturing facilities, one of our research facility and certain othercritical business operations are located near major earthquake fault lines. Wecould be materially and adversely affected in the event of a major earthquake.Although we maintain earthquake insurance, we can give you no assurance that wehave obtained or will maintain sufficient insurance coverage.

***There can be no assurance that we will have sufficient capitalresources to make necessary investments in manufacturing technology andequipment.***

The semiconductor industry iscapital intensive. Semiconductor manufacturing requires a constant upgrading ofprocess technology to remain competitive, as new and enhanced semiconductorprocesses are developed which permit smaller, more efficient and more powerfulsemiconductor devices. We maintain certain of our own manufacturing, assemblyand test facilities, which have required and will continue to requiresignificant investments in manufacturing technology and equipment. We are alsoattempting to add the appropriate level and mix of capacity to meet ourcustomers’ future demand. There can be no assurance that we will havesufficient capital resources to make necessary investments in manufacturingtechnology and equipment. Although we believe that anticipated cash flows fromoperations, existing cash reserves and other equity or debt financings that wemay obtain will be sufficient to satisfy our future capital expenditure 

57

----

requirements, there can be noassurance that this will be the case or that alternative sources of capitalwill be available to us on favorable terms or at all.

***Our outstanding Convertible Subordinated Notes maturing in July 2007may expose us to risks.***

We have outstanding in principal $550 million ofConvertible Subordinated Notes due in July 2007. While we intend to refinanceor pay down such notes prior to maturity, if we decide to refinance such notes,in whole or in part, we cannot guarantee that the terms, including interestrate and costs, would be comparable to the current interest rates and costs,and if higher, could adversely affect our future results.  Additionally, if we elect in whole or in partto pay down such notes, it would lower the amount of funds we have availablefor operations or investment.

***Unforeseen changes in market conditions, tax laws and other factorscould impact our judgment about the realizability of our deferred tax assets.***

We have made certain judgmentsregarding the realizability of our deferred tax assets.  In accordance with SFAS No. 109, “Accountingfor Income Taxes”, the carrying value of the net deferred tax assets is basedon the belief that it is more likely than not that we will generate sufficientfuture taxable income in certain jurisdictions to realize these deferred taxassets, after considering all available positive and negative evidence.  If our assumptions and estimates change in the future given unforeseenchanges in market conditions, tax laws or other factors, then the valuationallowances established may be increased, resulting in increased income taxexpense.  Conversely, if we areultimately able to use all or a portion of the deferred tax assets for which avaluation allowance has been established, then the related portion of thevaluation allowance will be released to income as a credit to income taxexpense.

***Our Aerospace and Defense segment is subject to governmental regulationthat exposes us to additional risks.***

Our Aerospace and Defensesegment manufactures and sells certain products that are subject to US exportcontrol laws and regulations.  TheAerospace and Defense segment also manufactures and sells products that aresold directly or indirectly to the US government and may subject us to certaingovernment procurement regulations, investigations or review.  While we maintain a system of control of suchproducts and compliance with such laws and regulations, we cannot provide absolute assurance thatthese controls will always be effective. There are also inherent limitations onthe effectiveness of controls including the failure of human judgment. If wefail to maintain an effective system of control or are otherwise foundnon-compliant with applicable laws and regulations, violations could lead togovernmental investigations, fines, penalties and limitations on our ability toexport product, all of which could have a material affect on our results.

***Final outcomes from the various tax authorities’ audits are difficultto predict and an unfavorable finding may negatively impact our financialresults.***

As is common with corporationsof our size, we are from time to time under audit by various taxingauthorities.  It is often difficult topredict the final outcome or the timing of resolution of any particular taxmatter.  We have provided certain taxreserves which have 

58

----

been included in thedetermination of our financial results. However, unpredicted unfavorable settlements may require additional useof cash and negatively impact our financial position or results of operations.

***Terrorist attacks, such as those that took place on September 11, 2001,or threats or occurrences of other terrorist activities whether in the UnitedStates or internationally may affect the markets in which our common stocktrades, the markets in which we operate and our profitability.***

Terrorist attacks, such asthose that took place on September 11, 2001, or threats or occurrences of otherterrorist or related activities, whether in the United States orinternationally, may affect the markets in which our common stock trades, themarkets in which we operate and our profitability.  Future terrorist or related activities couldaffect our domestic and international sales, disrupt our supply chains andimpair our ability to produce and deliver our products.  Such activities could affect our physicalfacilities or those of our suppliers or customers, and make transportation ofour supplies and products more difficult or cost prohibitive.  Due to the broad and uncertain effects thatterrorist attacks have had on financial and economic markets generally, wecannot provide any estimate of how these activities might affect our futureresults.

***Natural disasters, like those related to Hurricanes Katrina and Wilma,or occurrences of other natural disasters whether in the United States orinternationally may affect the markets in which our common stock trades, themarkets in which we operate and our profitability.***

Natural disasters, like thoserelated to Hurricanes Katrina and Wilma, or threats or occurrences ofother  similar events, whether in theUnited States or internationally, may affect the markets in which our common stocktrades, the markets in which we operate and our profitability.  Such events could affect our domestic andinternational sales, disrupt our supply chains, and impair our ability toproduce and deliver our products.  Whilewe do not have facilities located near the affected areas, such activitiescould affect physical facilities, primarily for raw materials and processchemicals and gases of our suppliers or customers, and make transportation ofour supplies and products more difficult or cost prohibitive.  Due to the broad and uncertain effects thatnatural events have had on financial and economic markets generally, we cannotprovide any estimate of how these activities might affect our future results.

59

----

**ITEM 6.                 Exhibits**

| Index: |   |                                                                                                                                                                                                                                                                                                                                                                      |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |   |
| 3.1    |   | Certificate of Incorporation, as amended to date  (incorporated by reference to Exhibit 3.1 to the Company’s Registration  Statement on Form S-8 filed with the Commission on July 19, 2006;  Registration No. 333-117489)                                                                                                                                           |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |   |
| 3.2    |   | Bylaws as Amended (incorporated by reference to  Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed with the  Commission on November 11, 2005)                                                                                                                                                                                                         |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |   |
| 10.1   |   | Credit Agreement, dated November 6, 2006, among the  Company, the Lenders described therein, Bank of America, N.A., as Syndication  Agent and HSBC Bank USA, National Association and Deutsche Bank AG New York  Branch as Co-Documentation Agent (incorporated by reference to Exhibit 99.1  to the Company’s current Report on Form 8-K filed on November 9, 2006) |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |   |
| 11.1   |   | Statement Regarding Computation of Per Share  Earnings (incorporated by reference to Note 2, “Net Income Per Common Share”,  of the Notes to Unaudited Consolidated Financial Statements contained herein)                                                                                                                                                      |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |   |
| 31.1   |   | Certification Pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                      |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |   |
| 31.2   |   | Certification Pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                      |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |   |
| 32.1   |   | Certification Pursuant to 18 U.S.C. 1350, Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                              |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |   |
| 32.2   |   | Certification  Pursuant to 18 U.S.C. 1350, Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                             |   |

60

----

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

**INTERNATIONALRECTIFIER CORPORATION****Registrant**
| November 10, 2006 | /s/ Michael P. McGee                         |   |
|-------------------|----------------------------------------------|--------|
|              | Michael P. McGee                             |
|              | Executive Vice  President,                   |
|              | Chief Financial  Officer                     |
|              | (Duly authorized  officer and                |
|              | principal  financial and accounting officer) |

 

61

----