**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 
| **(MARK ONE)**                                                                                                                                                                                                                                                                                                                                                                                                                        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                                                                                                                                                                                                                                                            | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006**                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **OR**                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                                                 | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **FOR THE TRANSITION PERIOD FROM                                 TO                                ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **COMMISSION FILE NUMBER: 1-7935**                                                                                                                                                                                                                                                                                                                                                                                                    |

 

**International Rectifier Corporation**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITSCHARTER)

 

| **DELAWARE**                             | ** ** | **95-1528961**               |
|------------------------------------------|------------|------------------------------|
| (STATE OR OTHER JURISDICTION OF          |       | (IRS EMPLOYER IDENTIFICATION |
| INCORPORATION OR ORGANIZATION)           |       | NUMBER)                      |
|                                     |       |                         |
| **233 KANSAS STREET**                    |       |                         |
| **EL SEGUNDO, CALIFORNIA**               |       | **90245**                    |
| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) |       | (ZIP CODE)                   |

 

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:  **(310) 726-8000**

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTSREQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THEREGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCHFILING REQUIREMENTS FOR THE PAST 90 DAYS. YES ý     NO o

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATEDFILER, AN ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF“ACCELERATED FILER AND LARGE ACCELERATED FILER” IN RULE 12B-2 OF THE EXCHANGEACT.

 
| LARGE ACCELERATED FILER ý |   | ACCELERATED FILER o |   | NON-ACCELERATED FILER o |
|--------------------------------|--------|---------------------|--------|-------------------------|

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (ASDEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES o     NO  ý

 

THERE WERE 71,538,317 SHARES OF THE REGISTRANT’S COMMON STOCK, PARVALUE $1.00 PER SHARE, OUTSTANDING ON MAY 8, 2006.

 

 

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**Table of Contents**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                              | ** ** |
|--------------|------------------------------------------------------------------------------------------------------------------------|------------|
| ** **   | ** **                                                                                                             | ** ** |
| **ITEM 1.**  | **Financial Statements**                                                                                               |       |
| ** **   | ** **                                                                                                             |       |
|         | Unaudited  Consolidated Statements of Income for the Three and Nine Months Ended March  31, 2006 and 2005              |       |
|         |                                                                                                                   |       |
|         | Unaudited Consolidated Statements of Comprehensive Income for the  Three and Nine Months Ended March 31, 2006 and 2005 |       |
|         |                                                                                                                   |       |
|         | Unaudited  Consolidated Balance Sheet as of March 31, 2006 and June 30, 2005                                           |       |
|         |                                                                                                                   |       |
|         | Unaudited  Consolidated Statements of Cash Flows for the Nine Months Ended March 31,  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 2.**  | **Unregistered Sales of Equity Securities and  Use of Proceeds**                                                       |       |
|         |                                                                                                                   |       |
| **ITEM 6.**  | **Exhibits**                                                                                                           |       |

 

2

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**PART I.****                 FINANCIALINFORMATION**

 

**ITEM 1.****                  FinancialStatements.**

 

**INTERNATIONAL RECTIFIER CORPORATION ANDSUBSIDIARIES**

**UNAUDITEDCONSOLIDATED STATEMENTS OF INCOME**

**(In thousands except per share amounts)**

 
| ** **                                                                            | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                  |       |                                             |       |                                            |       |   |   |   |   |
| Revenues                                                                              |       | $                                                | 297,076    |                                            | $          | 281,871 |   | $ | 848,460 |   | $ | 892,656 |   |
| Cost of sales                                                                         |       | 178,289                                          |       | 156,604                                         |       | 507,205 |   | 504,571 |   |
| Gross profit                                                                          |       | 118,787                                          |       | 125,267                                         |       | 341,255 |   | 388,085 |   |
|                                                                                  |       |                                             |       |                                            |       |   |   |   |   |
| Selling and administrative expense                                                    |       | 50,848                                           |       | 40,756                                          |       | 142,162 |   | 128,034 |   |
| Research and development expense                                                      |       | 28,558                                           |       | 27,323                                          |       | 81,008 |   | 80,379 |   |
| Amortization of acquisition-related  intangible assets                                |       | 1,295                                            |       | 1,473                                           |       | 4,181 |   | 4,369 |   |
| Impairment of assets, restructuring and  severance charges                            |       | 3,349                                            |       | 8,077                                           |       | 10,702 |   | 21,599 |   |
| Other income (expense), net                                                           |       | 1,746                                            |       | 169                                             |       | 2,911 |   | 825 |   |
| Interest (income) expense, net                                                        |       | (2,393                                           | )          | (638                                            | )          | (4,746 | ) | 1,728 |   |
| Income before income taxes                                                            |       | 35,384                                           |       | 48,107                                          |       | 105,037 |   | 151,151 |   |
|                                                                                  |       |                                             |       |                                            |       |   |   |   |   |
| Provision for income taxes                                                            |       | 9,730                                            |       | 12,434                                          |       | 28,885 |   | 38,384 |   |
| Net income                                                                            |       | $                                                | 25,654     |                                            | $          | 35,673 |   | $ | 76,152 |   | $ | 112,767 |   |
|                                                                                  |       |                                             |       |                                            |       |   |   |   |   |
| Net income per common share – basic                                              |       | $                                                | 0.36       |                                            | $          | 0.53 |   | $ | 1.08 |   | $ | 1.68 |   |
|                                                                                  |       |                                             |       |                                            |       |   |   |   |   |
| Net income per common share – diluted                                            |       | $                                                | 0.36       |                                            | $          | 0.48 |   | $ | 1.07 |   | $ | 1.55 |   |
|                                                                                  |       |                                             |       |                                            |       |   |   |   |   |
| Average common shares outstanding – basic                                        |       | 70,948                                           |       | 67,795                                          |       | 70,694 |   | 67,080 |   |
|                                                                                  |       |                                             |       |                                            |       |   |   |   |   |
| Average common shares and potentially  dilutive securities outstanding – diluted |       | 71,614                                           |       | 77,322                                          |       | 71,483 |   | 76,559 |   |

 

The accompanying notes are an integral partof this statement.

 

3

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**INTERNATIONAL RECTIFIER CORPORATION ANDSUBSIDIARIES**

**UNAUDITEDCONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME**

**(In thousands)**

 
| ** **                                                                                                                                     | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                                           |       |                                             |       |                                            |       |   |   |   |   |
| Net income                                                                                                                                     |       | $                                                | 25,654     |                                            | $          | 35,673 |   | $ | 76,152 |   | $ | 112,767 |   |
|                                                                                                                                           |       |                                             |       |                                            |       |   |   |   |   |
| Other comprehensive income:                                                                                                                    |       |                                             |       |                                            |       |   |   |   |   |
| Foreign currency translation adjustments                                                                                                       |       | 3,489                                            |       | (9,421                                          | )          | (9,393 | ) | 14,124 |   |
|                                                                                                                                           |       |                                             |       |                                            |       |   |   |   |   |
| Unrealized gains (losses) on securities:                                                                                                       |       |                                             |       |                                            |       |   |   |   |   |
| Unrealized holding gains (losses) on  available-for-sale securities, net of tax effect of ($1,429), ($465),  ($6,663) and $6,780, respectively |       | 2,432                                            |       | 794                                             |       | 11,343 |   | (11,544 | ) |
| Unrealized holding gains (losses) on  foreign currency forward contract, net of tax effect of $0, ($1,061), $0 and  $185, respectively         |       | —                                           |       | 1,807                                           |       | — |   | (315 | ) |
| Less: Reclassification adjustments of net  losses on available-for-sale securities and foreign currency forward contract                       |       | —                                           |       | 57                                              |       | (83 | ) | 609 |   |
|                                                                                                                                           |       |                                             |       |                                            |       |   |   |   |   |
| Other comprehensive income, net                                                                                                                |       | 5,921                                            |       | (6,763                                          | )          | 1,867 |   | 2,874 |   |
|                                                                                                                                           |       |                                             |       |                                            |       |   |   |   |   |
| Comprehensive income                                                                                                                           |       | $                                                | 31,575     |                                            | $          | 28,910 |   | $ | 78,019 |   | $ | 115,641 |   |

 

The accompanying notes are an integral partof this statement.

 

4

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**INTERNATIONAL RECTIFIER CORPORATION ANDSUBSIDIARIES**

**UNAUDITEDCONSOLIDATED BALANCE SHEET**

**(In thousands)**

 
| ** **                                            | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                            | ** ** | **2006**           | ** ** | **2005****(1)**   | ** ** |
| **ASSETS**                                            |       |               |       |              |       |
| Current assets:                                       |       |               |       |              |       |
| Cash and cash equivalents                             |       | $                  | 258,546    |              | $          | 359,978 |   |
| Short-term cash investments                           |       | 269,253            |       | 278,157           |       |
| Trade accounts receivable, net                        |       | 172,761            |       | 158,510           |       |
| Inventories                                           |       | 208,742            |       | 177,560           |       |
| Deferred income taxes                                 |       | 29,803             |       | 34,784            |       |
| Prepaid expenses and other receivables                |       | 68,134             |       | 53,387            |       |
| Total current assets                                  |       | 1,007,239          |       | 1,062,376         |       |
| Long-term cash investments                            |       | 380,475            |       | 302,585           |       |
| Property, plant and equipment, net                    |       | 549,609            |       | 488,204           |       |
| Goodwill                                              |       | 153,006            |       | 152,457           |       |
| Acquisition-related intangible assets, net            |       | 31,775             |       | 35,354            |       |
| Long-term deferred income taxes                       |       | 73,580             |       | 76,158            |       |
| Other assets                                          |       | 125,037            |       | 106,410           |       |
| Total assets                                          |       | $                  | 2,320,721  |              | $          | 2,223,544 |   |
|                                                  |       |               |       |              |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**        |       |               |       |              |       |
| Current liabilities:                                  |       |               |       |              |       |
| Bank loans                                            |       | $                  | 5,762      |              | $          | 18,168 |   |
| Long-term debt, due within one year                   |       | 481                |       | 163               |       |
| Accounts payable                                      |       | 74,380             |       | 81,893            |       |
| Accrued salaries, wages and commissions               |       | 36,306             |       | 33,344            |       |
| Other accrued expenses                                |       | 83,243             |       | 91,328            |       |
| Total current liabilities                             |       | 200,172            |       | 224,896           |       |
| Long-term debt, less current maturities               |       | 537,709            |       | 547,259           |       |
| Other long-term liabilities                           |       | 33,081             |       | 26,186            |       |
| Long-term deferred income taxes                       |       | 8,069              |       | —            |       |
|                                                  |       |               |       |              |       |
| Stockholders’ equity:                            |       |               |       |              |       |
| Common stock                                          |       | 71,022             |       | 69,826            |       |
| Capital contributed in excess of par value  of shares |       | 891,325            |       | 854,045           |       |
| Retained earnings                                     |       | 511,289            |       | 435,145           |       |
| Accumulated other comprehensive income                |       | 68,054             |       | 66,187            |       |
| Total stockholders’ equity                       |       | 1,541,690          |       | 1,425,203         |       |
| Total liabilities and stockholders’ equity       |       | $                  | 2,320,721  |              | $          | 2,223,544 |   |

 

The accompanying notes are an integral part of these statements.

 

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(1) The consolidated balance sheet as of June 30,2005 has been derived from the audited financial statements at that date butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.

 

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**INTERNATIONAL RECTIFIER CORPORATION ANDSUBSIDIARIES**

**UNAUDITEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**              | ** ** |
| ** **                                                                         | ** ** | **2006**                        | ** ** | **2005** | ** ** |
|                                                                               |       |                            |       |   |   |
| Cash flows from operating activities:                                              |       |                            |       |   |   |
| Net income                                                                         |       | $                               | 76,152     |   | $ | 112,767 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                      |       | 61,024                          |       | 51,852 |   |
| Amortization of acquisition-related  intangible assets                             |       | 4,181                           |       | 4,369 |   |
| Stock compensation expense                                                         |       | 2,314                           |       | 657 |   |
| Unrealized gains on swap transactions                                              |       | (3,088                          | )          | (1,176 | ) |
| Deferred income taxes                                                              |       | 9,411                           |       | (15,106 | ) |
| Tax benefits from options exercised                                                |       | 8,431                           |       | 11,405 |   |
| Excess tax benefits from options exercised                                         |       | (4,556                          | )          | — |   |
| Change in operating assets and liabilities,  net                                   |       | (80,880                         | )          | (21,852 | ) |
| Net cash provided by operating activities                                          |       | 72,989                          |       | 142,916 |   |
|                                                                               |       |                            |       |   |   |
| Cash flows from investing activities:                                              |       |                            |       |   |   |
| Additions to property, plant and equipment                                         |       | (122,496                        | )          | (98,745 | ) |
| Proceeds from sale of property, plant and  equipment                               |       | 435                             |       | 265 |   |
| Acquisition of business                                                            |       | —                          |       | (39,633 | ) |
| Acquisition of technologies                                                        |       | (2,500                          | )          | (11,500 | ) |
| Sale or maturities of cash investments                                             |       | 578,768                         |       | 332,131 |   |
| Purchase of cash investments                                                       |       | (654,250                        | )          | (375,889 | ) |
| Change in other investing activities, net                                          |       | 4,178                           |       | (12,907 | ) |
| Net cash used in investing activities                                              |       | (195,865                        | )          | (206,278 | ) |
|                                                                               |       |                            |       |   |   |
| Cash flows from financing activities:                                              |       |                            |       |   |   |
| (Repayments of) proceeds from short-term  debt, net                                |       | (12,139                         | )          | 49 |   |
| Proceeds from (repayments of) capital lease  obligations, net                      |       | 1,007                           |       | (172 | ) |
| Proceeds from exercise of stock options and  stock purchase plan                   |       | 27,731                          |       | 35,185 |   |
| Excess tax benefits from options exercised                                         |       | 4,556                           |       | — |   |
| Other, net                                                                         |       | (4,938                          | )          | (1,193 | ) |
| Net cash provided by financing activities                                          |       | 16,217                          |       | 33,869 |   |
| Effect of exchange rate changes on cash and  cash equivalents                      |       | 5,227                           |       | 2,508 |   |
| Net decrease in cash and cash equivalents                                          |       | (101,432                        | )          | (26,985 | ) |
| Cash and cash equivalents, beginning of  period                                    |       | 359,978                         |       | 339,024 |   |
|                                                                               |       |                            |       |   |   |
| Cash and cash equivalents, end of period                                           |       | $                               | 258,546    |   | $ | 312,039 |   |

 

The accompanying notes are an integral partof this statement.

 

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**INTERNATIONAL RECTIFIER CORPORATION ANDSUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

**March 31, 2006**

 

1.         Certain Accounting Policies

 

Basis of Consolidation

 

The consolidated financial statements include the accounts ofInternational Rectifier Corporation and its subsidiaries (“the Company”), whichare located in North America, Europe and Asia. Intercompany transactions havebeen eliminated in consolidation.

 

The consolidated financial statements included herein are unaudited;however, they contain all normal recurring adjustments which, in the opinion ofthe Company’s management, are necessary to state fairly the consolidatedfinancial position of the Company at March 31, 2006, and the consolidatedresults of operations and the consolidated cash flows for the three and ninemonths ended March 31, 2006 and 2005. The results of operations for the threeand nine months ended March 31, 2006 are not necessarily indicative of theresults to be expected for the full year.

 

The accompanying unaudited consolidated financial statements should beread in conjunction with the Annual Report on Form 10-K for the fiscal yearended June 30, 2005.

 

The Company operates on a 52-53 week fiscal year under which the threemonths ended March 2006 and 2005 consisted of 13 weeks ending April 2, 2006 andApril 3, 2005, respectively. For ease of presenting the accompanyingconsolidated financial statements, fiscal quarter-end and fiscal year-end isshown as March 31 and June 30, respectively, for all periods presented. Fiscal2006 will consist of 52 weeks ending July 2, 2006.

 

Certain reclassifications have been made to previously reported amountsto conform to the current year presentation.

 

Statement of Cash Flows

 

During the first quarter of the Company’s fiscal year, it adopted SFASNo. 123(R), “Share Based Payment”.  Thisstandard requires the excess tax benefits from the exercise of stock options tobe shown as cash flows from financing activities.  In the financial statements included in the Company’sForm 10-Q filings or the quarters ending September 30, 2005 and December 31,2005, the Company incorrectly classified these amounts as a component of cashflows from operating activities.  For thethree months ended September 30, 2005 and the six months ended December 31,2005, the excess tax benefits from options exercised was $4.1 million and $4.3million, respectively.  The Company hasfiled amended Quarterly Reports on Form 10-Q/A for such quarters in order toreclassify these amounts as part of cash flows from financing activities.  As a consequence of such change, net cashprovided by operating activities was reduced by $4.1 million and $4.3 millionfor the three months ended September 30, 2005 and six months ended December 31,2005, respectively, and net cash provided by financing activities was increasedby those amounts over the respective time periods.   Such changes do not affect the Company’s overallnet change in cash and cash equivalents in those periods.  

 

The change in cash flow presentation of the excess tax benefits fromoptions exercised had no impact to the unaudited consolidated statements ofincome for the three months ended September 30, 2005 or for the three or sixmonths ended December 31, 2005, and had no impact to the unaudited consolidatedbalance sheet amounts reported as of September 30, 2005 or December 31, 2005.

 

The Company has correctly presented these excess tax benefits in theunaudited consolidated statements of cash flows as cash flows from a financingactivity for the nine months ended March 31, 2006.    

 

2.         NetIncome Per Common Share

 

Net income per common share - basic is computed by dividing net incomeavailable to common stockholders (the numerator) by the weighted average numberof common shares outstanding (the denominator) during the period. Thecomputation of net income per common share - diluted is similar to thecomputation of net income per common share - basic except that the denominatoris increased to include the number of additional common shares that would havebeen outstanding for the exercise of stock options using the treasury stockmethod and the conversion of the Company’s convertible subordinated notes usingthe if-converted method. Under the treasury stock method, the amount that the employeemust pay for exercising stock options, the amount of compensation cost forfuture service that the Company has not yet recognized and the amount of taxbenefits that would be recorded in additional paid-in-capital when the awardbecomes deductible are assumed to be used to repurchase shares. Under the

 

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if-converted method, reported net income is increased by the interestexpense related to the convertible subordinated notes.

 

The following table provides a reconciliation of the numerator anddenominator of the basic and diluted per-share computations for the three andnine months ended March 31, 2006 and 2005 (in thousands except per shareamounts):

 
| ** **                                 | ** ** | **Net Income** | ** ** | **Shares**        | ** ** | **Per Share  Amount** | ** ** |
|--------------------------------------------|------------|---------------------|------------|-------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **(Numerator)**     | ** ** | **(Denominator)** | ** ** | ** **                 | ** ** |
|                                       |       |                |       |              |       |                       |       |
| Three months ended March 31, 2006:         |       |                |       |              |       |                       |       |
|                                       |       |                |       |              |       |                       |       |
| Net income per common share – basic   |       | $                   | 25,654     |              | 70,948     |                       | $          | 0.36 |   |
| Effect of dilutive securities:             |       |                |       |              |       |                       |       |
| Stock options and restricted stock units   |       | —              |       | 666               |       | —                     |       |
| Net income per common share – diluted |       | $                   | 25,654     |              | 71,614     |                       | $          | 0.36 |   |
|                                       |       |                |       |              |       |                       |       |
| Three months ended March 31, 2005:         |       |                |       |              |       |                       |       |
|                                       |       |                |       |              |       |                       |       |
| Net income per common share – basic   |       | $                   | 35,673     |              | 67,795     |                       | $          | 0.53 |   |
| Effect of dilutive securities:             |       |                |       |              |       |                       |       |
| Stock options and restricted stock units   |       | —              |       | 2,088             |       | (0.02                      | )          |
| Conversion of subordinated notes           |       | 1,552               |       | 7,439             |       | (0.03                      | )          |
| Net income per common share – diluted |       | $                   | 37,225     |              | 77,322     |                       | $          | 0.48 |   |
|                                       |       |                |       |              |       |                       |       |
| Nine months ended March 31, 2006:          |       |                |       |              |       |                       |       |
|                                       |       |                |       |              |       |                       |       |
| Net income per common share – basic   |       | $                   | 76,152     |              | 70,694     |                       | $          | 1.08 |   |
| Effect of dilutive securities:             |       |                |       |              |       |                       |       |
| Stock options and restricted stock units   |       | —              |       | 789               |       | —                     |       |
| Net income per common share – diluted |       | $                   | 76,152     |              | 71,483     |                       | $          | 1.07 |   |
|                                       |       |                |       |              |       |                       |       |
| Nine months ended March 31, 2005:          |       |                |       |              |       |                       |       |
|                                       |       |                |       |              |       |                       |       |
| Net income per common share – basic   |       | $                   | 112,767    |              | 67,080     |                       | $          | 1.68 |   |
| Effect of dilutive securities:             |       |                |       |              |       |                       |       |
| Stock options and restricted stock units   |       | —              |       | 2,040             |       | (0.05                      | )          |
| Conversion of subordinated notes           |       | 6,250               |       | 7,439             |       | (0.08                      | )          |
| Net income per common share – diluted |       | $                   | 119,017    |              | 76,559     |                       | $          | 1.55 |   |

 

The conversion effect of the Company’s outstanding convertiblesubordinated notes into 7,439,000 shares of common stock was not included inthe computation of diluted income per share for the three and nine months endedMarch 31, 2006, since such effect would have been anti-dilutive.

 

3.         Cashand Investments

 

The Company classifiesall highly liquid investments purchased with original or remaining maturitiesof ninety days or less at the date of purchase as cash equivalents. The cost ofthese investments approximates fair value.

 

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The Company investsexcess cash in marketable securities consisting primarily of commercial paper,corporate notes, corporate bonds and U.S. government securities. At March 31,2006 and June 30, 2005, all of the Company’s marketable securities areclassified as available-for-sale. In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments inDebt and Equity Securities”, unrealized gains and losses on these investmentsare included in accumulated other comprehensive income, a separate component ofstockholders’ equity, net of any related tax effect. Realized gains and lossesand declines in value considered to be other than temporary are included ininterest (income) expense, net. At March 31, 2006 and June 30, 2005, noinvestment was in a material loss position for greater than one year.

 

Cash, cash equivalentsand cash investments as of March 31, 2006 and June 30, 2005 are summarized asfollows (in thousands):

 
| ** **                                         | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                         | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Cash and cash equivalents                          |       | $                  | 258,546    |              | $          | 359,978 |   |
| Short-term cash investments                        |       | 269,253            |       | 278,157           |       |
| Long-term cash investments                         |       | 380,475            |       | 302,585           |       |
| Total cash, cash equivalents and cash  investments |       | $                  | 908,274    |              | $          | 940,720 |   |

 

Available-for-salesecurities as of March 31, 2006 are summarized as follows (in thousands):

 

*Short-Term Cash Investments:*

 
| ** **                             | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Net  Unrealized  Loss** | ** ** | **Market  Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------------------|------------|-------------------|------------|
| Corporate debt                         |       | $                   | 84,411     |                        | $          | —                      |       | $                         | (440       | )                 | $          | (440 | ) | $ | 83,971 |   |
| U.S. government and agency obligations |       | 134,356             |       | 3                           |       | (924                        | )          | (921                      | )          | 133,435           |       |
| Other debt                             |       | 51,958              |       | 8                           |       | (119                        | )          | (111                      | )          | 51,847            |       |
| Total short-term cash investments      |       | $                   | 270,725    |                        | $          | 11                          |       | $                         | (1,483     | )                 | $          | (1,472 | ) | $ | 269,253 |   |

 

*Long-Term Cash Investments:*

 
| ** **                             | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Net  Unrealized  Loss** | ** ** | **Market  Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------------------|------------|-------------------|------------|
| Corporate debt                         |       | $                   | 132,584    |                        | $          | 7                           |       | $                         | (1,565     | )                 | $          | (1,558 | ) | $ | 131,026 |   |
| U.S. government and agency obligations |       | 154,911             |       | 21                          |       | (2,003                      | )          | (1,982                    | )          | 152,929           |       |
| Other debt                             |       | 97,184              |       | 30                          |       | (694                        | )          | (664                      | )          | 96,520            |       |
| Total long-term cash investments       |       | $                   | 384,679    |                        | $          | 58                          |       | $                         | (4,262     | )                 | $          | (4,204 | ) | $ | 380,475 |   |

 

9

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Available-for-salesecurities as of June 30, 2005 are summarized as follows (in thousands):

 

*Short-Term Cash Investments:*

 
| ** **                             | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Net  Unrealized  Loss** | ** ** | **Market  Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------------------|------------|-------------------|------------|
| Corporate debt                         |       | $                   | 179,372    |                        | $          | 6                           |       | $                         | (1,477     | )                 | $          | (1,471 | ) | $ | 177,901 |   |
| U.S. government and agency obligations |       | 99,728              |       | —                      |       | (576                        | )          | (576                      | )          | 99,152            |       |
| Other debt                             |       | 1,105               |       | —                      |       | (1                          | )          | (1                        | )          | 1,104             |       |
| Total long-term cash investments       |       | $                   | 280,205    |                        | $          | 6                           |       | $                         | (2,054     | )                 | $          | (2,048 | ) | $ | 278,157 |   |

 

*Long-Term Cash Investments:*

 
| ** **                             | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Net  Unrealized  (Loss) Gain** | ** ** | **Market  Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------------------------------|------------|-------------------|------------|
| Corporate debt                         |       | $                   | 124,727    |                        | $          | 249                         |       | $                                     | (355       | )                 | $          | (106 | ) | $ | 124,621 |   |
| U.S. government and agency obligations |       | 116,082             |       | 239                         |       | (134                        | )          | 105                                   |       | 116,187           |       |
| Other debt                             |       | 61,765              |       | 131                         |       | (119                        | )          | 12                                    |       | 61,777            |       |
| Total long-term cash investments       |       | $                   | 302,574    |                        | $          | 619                         |       | $                                     | (608       | )                 | $          | 11 |   | $ | 302,585 |   |

 

The Company holds as strategic investments the common stock of twopublicly-traded Japanese companies, one of which is Nihon Inter ElectronicsCorporation (“Nihon”), a related party as further disclosed in Note 16. TheCompany accounts for these available-for-sale investments under SFAS No. 115. Thesestocks are traded on the Tokyo Stock Exchange. The market values of the equityinvestments at March 31, 2006 and June 30, 2005 were $88.9 million and $71.2million, respectively, compared to their purchased cost of $24.2 million. Mark-to-marketgains (losses), net of tax, of $2.8 million and $1.1 million for the threemonths ended March 31, 2006 and 2005, respectively, and $11.1 million and($11.1) million for the nine months ended March 31, 2006 and 2005,respectively, were included in accumulated other comprehensive income, aseparate component of equity.

 

The amortized cost and estimated fair value of cash investments atMarch 31, 2006, by contractual maturity, are as follows (in thousands):

 
| ** **             | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
|------------------------|------------|---------------------|------------|--------------------------------|------------|
| Due in 1 year or less  |       | $                   | 142,502    |                           | $          | 141,617 |   |
| Due in 1-2 years       |       | 178,426             |       | 176,532                        |       |
| Due in 2-5 years       |       | 198,633             |       | 196,654                        |       |
| Due after 5 years      |       | 135,843             |       | 134,925                        |       |
| Total cash investments |       | $                   | 655,404    |                           | $          | 649,728 |   |

 

10

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Cash investments with contractual maturity greater than one year forwhich the Company intends to convert to cash within one year, are classified asshort-term investments.

 

Gross realized gains were $0.1 million and $0.1 million for the threeand nine months ended March 31, 2006, respectively, and gross realized losseswere ($0.7) million and ($1.1) million for the three and nine months endedMarch 31, 2006, respectively. Gross realized gains were $0.01 million and $0.03million for the three and nine months ended March 31, 2005, respectively, andgross realized losses were ($0.2) million and ($0.3) million for the three andnine months ended March 31, 2005, respectively. The cost of marketablesecurities sold is determined by the weighted average cost method.

 

4.         DerivativeFinancial Instruments

 

*ForeignCurrency Risk*

 

The Company conductsbusiness on a global basis in several foreign currencies, and is primarilyexposed to fluctuations with the British Pound Sterling, the Euro and theJapanese Yen. Considering its foreign currency risks, the Company has thegreatest exposure to the Japanese Yen, since it has significant Yen-basedrevenues without the Yen-based manufacturing costs. The risk of the Company’srevenues in the European currencies is partially offset by the cost ofmanufacturing goods in the European currencies.

 

The Company hasestablished a foreign-currency hedging program using foreign exchange forwardcontracts, including the Forward Contract described below, to hedge certainforeign currency transaction exposures. To protect against reductions in valueand volatility of future cash flows caused by changes in currency exchangerates, it has established revenue, expense and balance sheet hedging programs. Currencyforward contracts and local Yen and Euro borrowings are used in these hedgingprograms. The Company’s hedging programs reduce, but do not always eliminate,the impact of currency exchange rate movements.

 

InMarch 2001, the Company entered into a five-year foreign exchange forwardcontract (the “Forward Contract”) for the purpose of reducing the effect ofexchange rate fluctuations on forecasted intercompany purchases by the Company’ssubsidiary in Japan. The Company designated the Forward Contract as a cash flowhedge under which mark-to-market adjustments were recorded in accumulated othercomprehensive income, a separate component of stockholders’ equity, until theforecasted transactions were recorded in earnings. Under the terms of theForward Contract, the Company was required to exchange 1.2 billion yen for$11.0 million on a quarterly basis starting in June 2001 and expiring in thecurrent March 2006 quarter. The marketvalue of the Forward Contract was $0.1 million at June 30, 2005. Mark-to-marketgains (losses), included in other comprehensive income, net of tax, were $0 and$1.8 million for the three months ended March 31, 2006 and 2005, respectively,and $0 and ($0.3) million for the nine months ended March 31, 2006 and 2005,respectively. Following the expiration of the Forward Contract on May 8, 2006,the Company entered into another five-year foreign exchange forward contractwith BNP Paribas (the “May 2006 Forward Contract”) for the purpose of reducingthe effect of exchange rate fluctuations on forecasted intercompany purchasesby its Japan subsidiary. 

 

11

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The Company hasdesignated the May 2006 Forward Contract as a cash flow hedge. Under the termsof the May 2006 Forward Contract, the Company is required to exchange 507.5million Yen for $5.0 million on a quarterly basis starting in June 2006 andexpiring in the March 2011 quarter. The Company believes that its operationswill generate sufficient Yen to meet its contractual commitments.

 

TheCompany had approximately $67.3 million and $75.9 million in notional amountsof forward contracts not designated as accounting hedges under SFAS No. 133 atMarch 31, 2006 and June 30, 2005, respectively. Net realized and unrealizedforeign-currency net gains recognized in earnings were less than $1million for the three and nine months ended March 31, 2006 and 2005.

 

*InterestRate Risk*

 

In December 2001, the Company entered into an interest rate swaptransaction (the “Transaction”) with an investment bank, JP Morgan Chase Bank(the “Bank”), to modify the Company’s effective interest payable with respectto $412.5 million of its $550 million outstanding convertible debt (the “Debt”)(see Note 9, “Bank Loans and Long-Term Debt”). In April 2004, the Companyentered into an interest rate swap transaction (the “April 2004 Transaction”)with the Bank to modify the effective interest payable with respect to theremaining $137.5 million of the Debt. The Company will receive from the Bankfixed payments equal to 4.25 percent of the notional amount, payable on January15 and July 15. In exchange, the Company will pay to the Bank floating ratepayments based upon the London InterBank Offered Rate (“LIBOR”) multiplied bythe notional amount. At the inception of the Transaction, interest rates werelower than that of the Debt and the Company believed that interest rates wouldremain lower for an extended period of time. The variable interest rate paidsince the inception of the swaps has averaged 2.76 percent, compared to acoupon of 4.25 percent on the Debt. This arrangement (decreased) increasedinterest expense by ($0.2) million and $2.6 million, for the three months endedMarch 31, 2006 and 2005, respectively, and $0.3 million and $7.3 million forthe nine months ended March 31, 2006 and 2005, respectively.

 

Accounted for as fair value hedges under SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities”, the mark-to-market adjustmentsof the Transaction and April 2004 Transaction were offset by the mark-to-marketadjustments on the Debt, resulting in no material impact to earnings. Themarket value of the Transaction was a liability of $6.8 million and $0.3million at March 31, 2006 and June 30, 2005, respectively. The market value ofthe April 2004 Transaction was a liability of $4.2 million and $3.4 million atMarch 31, 2006 and June 30, 2005, respectively.

 

Both Transactionsterminate on July 15, 2007 (“Termination Date”), subject to certain earlytermination provisions. On or after July 18, 2004 and prior to July 14, 2007,if the ten-day average closing price of the Company’s common stock equals orexceeds $77.63, both transactions will terminate.

 

In support of theCompany’s obligation under the two transactions, the Company is required toobtain irrevocable standby letters of credit in favor of the Bank, totaling$7.5 million plus a collateral requirement for the Transaction and the April2004 

 

12

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Transaction, asdetermined periodically. At March 31, 2006, $17.7 million in letters of creditwere outstanding related to both transactions.

 

The Transaction and theApril 2004 Transaction qualify as fair value hedges under 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. Thefair values of the Transaction, the April 2004 Transaction and the Debt arecalculated quarterly as the present value of the contractual cash flows to theexpected maturity date, where the expected maturity date is based onprobability-weighted analysis of interest rates relating to the five-year LIBORcurve and the Company’s stock prices. For the three and nine months ended March31, 2006 and 2005, the hedges were highly effective and therefore, theineffective portion did not have a material impact on earnings.

 

In April 2002, theCompany entered into an interest rate contract (the “Contract”) with aninvestment bank, Lehman Brothers (“Lehman”), to reduce the variable interestrate 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, the Company has the option to receive a payout from Lehmancovering its exposure to LIBOR fluctuations between 5.5 percent and 7.5 percentfor any four designated quarters. The market value of the Contract at March 31,2006 and June 30, 2005, was $0.3 million and $0.1 million, respectively, andwas included in other long-term assets. Mark-to-market gains (losses) of $0.1million and $0.2 million, for the three months ended March 31, 2006 and 2005,respectively, and $0.2 million and ($0.4) million, for the nine months endedMarch 31, 2006 and 2005, respectively, were charged to interest expense.

 

5.         Inventories

 

Inventories are stated at the lower of cost (principally first-in,first-out) or market. Inventories are reviewed for excess and obsolescencebased upon demand forecast within a specific time horizon and reserves areestablished accordingly. Inventories at March 31, 2006 and June 30, 2005 werecomprised of the following (in thousands):

 
| ** **        | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-------------------|------------|--------------------|------------|-------------------|------------|
| ** **        | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Raw materials     |       | $                  | 35,635     |              | $          | 33,328 |   |
| Work-in-process   |       | 95,822             |       | 82,802            |       |
| Finished goods    |       | 77,285             |       | 61,430            |       |
| Total inventories |       | $                  | 208,742    |              | $          | 177,560 |   |

 

6.         Goodwilland Acquisition-Related Intangible Assets

 

The Company accountsfor goodwill and acquisition-related intangible assets in accordance with SFASNo. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other IntangibleAssets”. The Company classifies the difference between the purchase price andthe fair value of net assets acquired at the date of acquisition as goodwill. TheCompany classifies intangible assets apart from goodwill if the assets havecontractual or other legal rights or if the assets can be separated and sold,transferred, licensed, rented or exchanged. Depending on the 

 

13

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nature of the assetsacquired, the amortization period may range from four to twelve years for thoseacquisition-related intangible assets subject to amortization.

 

The Company evaluates the carrying value of goodwilland acquisition-related intangible assets, including the related amortizationperiod, in the fourth quarter of each fiscal year. In evaluating goodwill andintangible assets not subject to amortization, the Company completes thetwo-step goodwill impairment test as required by SFAS No. 142. The Companyidentified its reporting units and determined the carrying value of eachreporting unit by assigning the assets and liabilities, including the existinggoodwill and intangible assets, to those reporting units, in order to assessgoodwill for impairment. A reporting unit is the lowest level of the Companyfor which there is discrete information and whose results are regularlyreviewed by the Company.

 

In the first of a two-step impairment test, theCompany determined the fair value of these reporting units using a discountedcash flow valuation model. The Company compared the discounted cash flows forthe reporting unit to its carrying value. If the fair value of a reporting unitexceeds its carrying value, goodwill of the reporting unit is considered notimpaired and no further testing is required. If the fair value does not exceedthe carrying value, the second step of the goodwill impairment test shall beperformed to measure the amount of impairment loss, if any. The second stepcompared the implied fair value of the reporting unit with the carrying amountof that goodwill. Based on its annual impairment test in the fourth quarter offiscal year ended June 30, 2005, the Company determined that goodwill was notimpaired.

 

At March 31, 2006 and June30, 2005 acquisition-related intangible assets included the following (in thousands):

 
| ** **                                  | ** ** | ** **                         | ** ** | **March 31, 2006** | ** ** | **June 30, 2005**   | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **Amortization  Periods  (Years)** | ** ** | **Gross  Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Acquisition-related intangible assets:      |       |                               |       |                         |       |                          |       |   |   |   |   |
| Complete technology                         |       | 4 – 12                        |       | $                            | 36,862     |                          | $          | (14,156 | ) | $ | 36,665 |   | $ | (11,859 | ) |
| Distribution rights and customer lists      |       | 5 – 12                        |       | 15,449                       |       | (8,386                        | )          | 15,667 |   | (7,243 | ) |
| Intellectual property and other             |       | 5 – 12                        |       | 7,963                        |       | (5,957                        | )          | 7,313 |   | (5,189 | ) |
| Total acquisition-related intangible assets |       |                               |       | $                            | 60,274     |                          | $          | (28,499 | ) | $ | 59,645 |   | $ | (24,291 | ) |

 

14

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As of March 31, 2006, estimated amortizationexpense for the next five years is as follows (in thousands): remainder offiscal 2006: $771; fiscal 2007: $2,925; fiscal 2008: $2,553; fiscal 2009:$2,515, fiscal 2010: $2,515 and fiscal 2011: $1,736.

 

The carrying amount of goodwill by business segment as ofMarch 31, 2006, is as follows (in thousands):

 
| ** **                   | ** ** | **March 31, 2006** | ** ** |
|------------------------------|------------|------------------------------|------------|
| Energy-Saving Products       |       | $                            | 70,310     |   |
| Aerospace and Defense        |       | 45,765                       |       |
| Computing and Communications |       | 28,803                       |       |
| Non-Aligned Products         |       | 4,867                        |       |
| Intellectual Property        |       | 3,261                        |       |
|                         |       |                         |       |
| Total goodwill               |       | $                            | 153,006    |   |

 

As of March 31, 2006 and June 30, 2005, $43.3 million ofgoodwill is deductible for income tax purposes.

 

Thechanges in the carrying amount of goodwill for the period ended March 31, 2006and June 30, 2005 are as follows (in thousands):

 
| ** **                | ** ** | **Goodwill** | ** ** |
|---------------------------|------------|--------------|------------|
| Balance, June 30, 2004    |       | $            | 139,919    |   |
| New acquisitions          |       | 12,958       |       |
| Foreign exchange impact   |       | (420         | )          |
| Balance, June 30, 2005    |       | $            | 152,457    |   |
| Purchase price adjustment |       | 406          |       |
| Foreign exchange impact   |       | 143          |       |
|                      |       |         |       |
| Balance, March 31, 2006   |       | $            | 153,006    |   |

 

During the fiscal year ended June 30, 2005,the Company acquired the specialty silicon epitaxial services business fromAdvanced Technology Materials, Inc. for $39.6 million, of which $12.5 millionwas allocated to goodwill. The goodwill was assigned to the Computing andCommunications, Energy-Saving Products and Intellectual Property segments basedon revenue. During the nine months ended March 31, 2006, the Company concludedthe physical inventory of ATMI’s fixed assets and determined that the purchasedcost of the assets should be reduced by $1.1 million. The Company reallocatedATMI’s purchase price and increased goodwill by $1.1 million accordingly. Alsoduring the nine months ended March 31, 2006, as described in Note 10, “Impairmentof Assets, Restructuring and Severance”, the Company determined thatapproximately $0.7 million of severance liability associated with theTechnoFusion acquisition was excess. The Company reduced TechnoFusion purchasedgoodwill by $0.7 million accordingly.

 

15

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7.         Otherlong-term assets

 

Other long-term assetsat March 31, 2006 and June 30, 2005 were comprised of the following (inthousands):

 
| ** **                            | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Available-for-sale equity investments |       | $                  | 88,858     |              | $          | 71,224 |   |
| Other long-term assets                |       | 36,179             |       | 35,186            |       |
|                                  |       |               |       |              |       |
| Total other long-term assets          |       | $                  | 125,037    |              | $          | 106,410 |   |

 

8.         Otheraccrued expenses

 

Other accrued expensesat March 31, 2006 and June 30, 2005 were comprised of the following (inthousands):

 
| ** **             | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|------------------------|------------|--------------------|------------|-------------------|------------|
| ** **             | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Accrued taxes          |       | $                  | 37,013     |              | $          | 46,704 |   |
| Other accrued expenses |       | 46,230             |       | 44,624            |       |
|                   |       |               |       |              |       |
| Total accrued expenses |       | $                  | 83,243     |              | $          | 91,328 |   |

 

9.         BankLoans and Long-Term Debt 

 

A summary of the Company’slong-term debt and other loans at March 31, 2006 and June 30, 2005 is asfollows (in thousands):

 
| ** **                                                                                                                                                                                             | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                             | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Convertible subordinated notes at 4.25% due  in 2007 ($550,000 principal amount, plus accumulated fair value adjustment of  ($13,554) and  ($3,360) at March 31, 2006 and June 30, 2005, respectively) |       | $                  | 536,446    |              | $          | 546,640 |   |
| Other loans and capitalized lease  obligations                                                                                                                                                         |       | 2,338              |       | 782               |       |
| Debt, including current portion of  long-term debt ($481 and $163 at March 31, 2006 and June 30, 2005,  respectively)                                                                                  |       | 538,784            |       | 547,422           |       |
| Foreign revolving bank loans at rates from  1.38% to 3.88%                                                                                                                                             |       | 5,168              |       | 18,168            |       |
|                                                                                                                                                                                                   |       |               |       |              |       |
| Total debt                                                                                                                                                                                             |       | $                  | 543,952    |              | $          | 565,590 |   |

 

In July 2000, theCompany sold $550 million principal amount of 4.25 percent ConvertibleSubordinated Notes due 2007. The interest rate is 4.25 percent per year on theprincipal amount, payable in cash in arrears semi-annually on January 15 andJuly 15. The notes are subordinated to all of the Company’s existing and futuredebt. The notes are convertible into shares of the Company’s common stock atany time on or before July 15, 2007, at a conversion price of $73.935 pershare, subject to certain adjustments. The Company may redeem any of the notes,in whole or in part, subject to certain call premiums on or after July 18,2004, as specified in the notes and related indenture agreement. In December2001 and 

 

16

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April 2004, the Companyentered into two transactions with JP Morgan Chase Bank for $412.5 million and$137.5 million in notional amounts, respectively, which had the effect to theCompany of converting the interest rate to variable and requiring that theconvertible notes be marked to market (see Note 4, “Derivative FinancialInstruments”).

 

In November 2003, the Company entered into athree-year syndicated multi-currency revolving credit facility, led by BNPParibas, expiring 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 bears interest at (i) local currency rates plus(ii) a margin between 0.75 percent and 2.0 percent for base rate advances and amargin of between 1.75 percent and 3.0 percent for euro-currency rate advances.Other advances bear interest as set forth in the credit agreement. The annualcommitment fee for the Facility is subject to a leverage ratio as determined bythe credit agreement and was 0.375 percent of the unused portion of the totalfacility at each period-end. The Company pledged as collateral shares ofcertain of its subsidiaries. The Facility also contains certain financial andother covenants, with which the Company was in compliance at March 31, 2006. AtMarch 31, 2006, the Company had $5.2 million borrowings and $22.1 millionletters of credit outstanding under the Facility. At June 30, 2005, the Companyhad $17.1 million borrowings and $16.4 million letters of credit outstandingunder the Facility. Of the letters of credit outstanding, $17.7 million and$12.0 million were related to the interest rate swap transactions (see Note 4)at March 31, 2006 and June 30, 2005, respectively.

 

At March 31, 2006, the Company had $166.5million in total revolving lines of credit, of which $27.2 million had beenutilized, consisting of $22.1 million in letters of credit and $5.2 million inforeign revolving bank loans, which are included in the table above.

 

10.       Impairmentof Assets, Restructuring and Severance

 

During fiscal 2003 second quarter ended December 31, 2002, the Companyannounced its restructuring initiatives. Under these initiatives, the goal was toreposition the Company to better fit the market conditions and de-emphasize itscommodity business. The Company’s restructuring plan included consolidating andclosing 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. The Company also planned to lower overhead costs across itssupport organizations. The Company has substantially completed theserestructuring activities as of December 31, 2005. The Company expects tocomplete the remaining activities, primarily the closing of a fabrication lineat El Segundo, California by calendar year end 2006.

 

Total charges associated with the December 2002 initiatives areexpected to be approximately $285 million. These charges will consist ofapproximately $223 million for asset impairment, plant closure and othercharges, $6 million of raw material and work-in-process inventory, and $56million for severance-related costs.

 

17

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For the three monthsended March 31, 2006, the Company recorded $3.3 million in totalrestructuring-related charges, consisting of: $1.7 million for plant closureand relocation costs and other impaired assets charges, and $1.6 million forseverance costs. For the nine months ended March 31, 2006, the Company recorded$10.7 million in total restructuring-related charges, consisting of: $6.8million for plant closure and relocation costs and other impaired assetscharges, and $3.9 million for severance costs. For the three months ended March31, 2005, the Company recorded $8.1 million in total restructuring-relatedcharges, consisting of: $6.3 million for plant closure and relocation costs andother impaired assets charges, and $1.8 million for severance costs. For thenine months ended March 31, 2005, the Company recorded $21.6 million in totalrestructuring-related charges, consisting of: $16.8 million for plant closureand relocation costs and other impaired assets charges, and $4.8 million forseverance costs.

 

Restructuring-related costs were charged as incurred in accordance withSFAS No. 146, “Accounting for the Costs Associated with Exit or DisposalActivities”. Asset impairments were calculated in accordance with SFAS No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets”. In determiningthe asset groups, the Company grouped assets at the lowest level for whichindependent identifiable cash flows were available. In determining whether anasset was impaired the Company evaluated undiscounted future cash flows andother factors such as changes in strategy and technology. The undiscounted cashflows from the Company’s initial analyses were less than the carrying amountfor certain of the asset groups, indicating impairment losses. Based on this,the Company determined the fair value of these asset groups using the presentvalue technique, by applying a discount rate to the estimated future cash flowsthat was consistent with the rate used when analyzing potential acquisitions.

 

As of March 31, 2006,the Company had recorded $272.1 million in total charges, consisting of: $216.9million for asset impairment, plant closure costs and other charges, $6.0million for raw material and work-in-process inventory charges, and $49.2million for severance-related costs. Components of the $216.9 million assetimpairment, plant closure and other charges included the following items:

 

•      As the Company emphasizes more advanced generation planar products, itexpects the future revenue stream from its less advanced facilities inTemecula, California to decrease significantly. These facilities had a net bookvalue of $138.3 million and were written down by $77.7 million. It is expectedthat these facilities will continue in use until approximately December 2007and the remaining basis is being depreciated over units of production duringthis period. It is assumed that salvage value will equal disposition costs.

 

•      As the Company emphasizes more advanced generation trench products, itexpects the future revenue stream from its less advanced facility in ElSegundo, California to decrease significantly. This facility had a net bookvalue of $59.5 million and was written down by $57.2 million. This facility hadsignificantly reduced production as of fiscal year ended June 30, 2003, and isused primarily for research and development activities.

 

•      As the Company emphasizes more advanced generation Schottky products, itexpects the future revenue stream from its less advanced facility in Borgaro,Italy to decrease significantly. This facility had a net book value of $20.5million and 

 

18

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was written down by $13.5 million. It is expected that thisfacility will continue in use until approximately December 2007 and theremaining basis is being depreciated over units of production during thisperiod. It is assumed that salvage value will equal disposition costs.

 

•      The Company restructured its manufacturing activities in Europe. Based ona review of its Swansea, Wales facility, a general-purpose module facility, theCompany determined in the December 2002 quarter that this facility would bebetter suited to focus only on automotive applications. The general-purposemodule assets at this facility, with a net book value of $13.6 million, werewritten down by $8.2 million. In addition, the Company has completed the moveof its manufacturing activities from its automotive facility in Krefeld,Germany to its Swansea, Wales and Tijuana, Mexico facilities as of September30, 2005. The Company has also moved the production from its Venaria, Italyfacility to its Borgaro, Italy and Mumbai, India facilities, which wascompleted as of December 31, 2003. The Company stopped manufacturing productsat its Oxted, England facility as of September 30, 2003.

 

•      The Company has eliminated the manufacturing of its non-space militaryproducts in its Santa Clara, California facility as of July 31, 2004. Currently,subcontractors handle the Company’s non-space qualified products previouslymanufactured in this facility. The Company has also transitioned the assemblyand test of non-space Power Components from its Leominster, Massachusettsfacility to its Tijuana, Mexico facility as of December 31, 2005. Associatedwith these reductions in manufacturing activities, certain assets with a netbook value of $4.0 million were written down by $2.0 million.

 

•      $58.3 million in other miscellaneous items were charged, including $49.0million in relocation costs and other impaired asset charges and $9.3 millionin contract termination and settlement costs.

 

As a result of the restructuring initiatives, certain raw material andwork-in-process inventories were impaired, including products that could not becompleted in other facilities, materials that were not compatible with theprocesses used in the alternative facilities, and materials such as gases andchemicals that could not readily be transferred. Based on these factors theCompany wrote down these inventories, with a carrying value of $98.2 million,by $6.0 million. The Company haddisposed no inventories, for the three months ended March 31, 2006 and 2005,respectively, and $1.1 million and $0.7 million for the nine months ended March31, 2006 and 2005, respectively, which did not materially impact gross margin. Asof March 31, 2006, $0.1 million of these inventories remained to be disposed.

 

As of March 31, 2006, the Company has recorded $49.2 million inseverance-related charges:  $44.1 millionin severance termination costs related to approximately 1,300 administrative,operating and manufacturing positions, and $5.1 million in pension terminationcosts at its manufacturing facility in Oxted, England. The severance chargesassociated with the elimination of positions, which included the personsnotified to date, had been and will continue to be recognized over the futureservice period, as applicable, in accordance with SFAS No. 146. The Companymeasured the total termination benefits at the communication date based on thefair value of the liability as of the termination date. A change resulting froma revision to either the timing or the amount of 

 

19

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estimated cash over the future service period will be measured usingthe credit-adjusted risk-free rate that was used to initially measure theliability. The cumulative effect of the change will be recognized as anadjustment to the liability in the period of the change.

 

During fiscal 2002, the Company had recorded an estimated $5.1 millionin severance costs associated with the acquisition of TechnoFusion GmbH inKrefeld, Germany. In fiscal 2003, the Company finalized its plan and determinedthat total severance would be approximately $10 million, and accordingly, theCompany adjusted purchased goodwill by $4.8 million. The Company communicatedthe plan and the elimination of approximately 250 positions primarily inmanufacturing to its affected employees at that time. The Company has completedthe restructuring of its Krefeld facility as of December 31, 2005, anddetermined that $0.7 million of the severance reserve was excess. Accordingly,the Company decreased TechnoFusion purchased goodwill by $0.7 million.

 

The following summarizesthe Company’s accrued severance liability related to the June 2001restructuring, the TechnoFusion acquisition and the December 2002 restructuringplan for the nine months ended March 31, 2006, and the fiscal year ended June30, 2005. Severance activity related to the elimination of 29 administrativeand operating personnel as part of the previously reported restructuring in thefiscal quarter ended June 30, 2001, is also disclosed. The remaining June 2001severance relates primarily to certain legal accruals associated with thatrestructuring, which will be paid or released as the outcome is determined (inthousands):

 
| ** **                                                                                          | ** ** | **June  2001  Restructuring** | ** ** | **December  2002  Restructuring** | ** ** | **TechnoFusion  Severance  Liability** | ** ** | **Total  Severance   Liability** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| Accrued severance, June 30, 2004                                                                    |       | $                             | 697        |                              | $          | 7,180                                  |       | $                                     | 6,067      |   | $ | 13,944 |   |
| Costs incurred or charged to “impairment of  assets, restructuring and severance charges” |       | —                        |       | 8,677                             |       | —                                 |       | 8,677                                 |       |
| Costs paid                                                                                          |       | (326                          | )          | (7,810                            | )          | (3,770                                 | )          | (11,906                               | )          |
| Foreign exchange impact                                                                             |       | —                        |       | 77                                |       | (190                                   | )          | (113                                  | )          |
|                                                                                                |       |                          |       |                              |       |                                   |       |                                  |       |
| Accrued severance, June 30, 2005                                                                    |       | $                             | 371        |                              | $          | 8,124                                  |       | $                                     | 2,107      |   | $ | 10,602 |   |
| Costs incurred or charged to “impairment of  assets, restructuring and severance”         |       | —                        |       | 3,895                             |       | —                                 |       | 3,895                                 |       |
| Purchase price adjustment                                                                           |       | —                        |       | —                            |       | (708                                   | )          | (708                                  | )          |
| Costs paid                                                                                          |       | (115                          | )          | (5,446                            | )          | (900                                   | )          | (6,461                                |       |
| Foreign exchange impact                                                                             |       | —                        |       | (6                                | )          | (21                                    | )          | (27                                   | )          |
|                                                                                                |       |                          |       |                              |       |                                   |       |                                  |       |
| Accrued severance, March 31, 2006                                                                   |       | $                             | 256        |                              | $          | 6,567                                  |       | $                                     | 478        |   | $ | 7,301 |   |

 

20

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11.       Segmentand Geographic Information

 

Revenue for the three andnine months ended March 31, 2006 and 2005, by the three broad productcategories, are as follows (in thousands):

 
| ** **                                         | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                               |       |                                             |       |                                            |       |   |   |   |   |
| Power Management ICs and Advanced Circuit  Devices |       | $                                                | 206,884    |                                            | $          | 160,228 |   | $ | 581,367 |   | $ | 495,083 |   |
| Power Components                                   |       | 47,889                                           |       | 81,662                                          |       | 145,549 |   | 270,799 |   |
| Power Systems                                      |       | 32,277                                           |       | 29,468                                          |       | 91,004 |   | 95,705 |   |
| Total product revenue                              |       | 287,050                                          |       | 271,358                                         |       | 817,920 |   | 861,587 |   |
| Intellectual Property                              |       | 10,026                                           |       | 10,513                                          |       | 30,540 |   | 31,069 |   |
| Total consolidated revenue                         |       | $                                                | 297,076    |                                            | $          | 281,871 |   | $ | 848,460 |   | $ | 892,656 |   |

 

Segment results for thethree months ended March 31, 2006 and 2005 are as follows (in thousands exceptpercentages):

 
| ** **                   | ** ** | **March 31****,  2006** | ** ** | **March 31****,********2005** | ** ** |
|------------------------------|------------|------------------------------|------------|------------------------------------|------------|
| **Business Segment**    | ** ** | **Revenue**                  | ** ** | **Gross  Profit**                  | ** ** | **Revenue** | ** ** | **Gross  Profit** | ** ** |
| Computing and Communications |       | $                            | 100,560    |                               | 39.6       | % | $ | 89,323 |   | 45.9 | % |
| Energy-Saving Products       |       | 81,442                       |       | 50.1                               |       | 73,686 |   | 55.5 |   |
| Aerospace and Defense        |       | 36,179                       |       | 48.1                               |       | 32,431 |   | 42.9 |   |
| Intellectual Property        |       | 10,026                       |       | 100.0                              |       | 10,513 |   | 100.0 |   |
| Subtotal Focus Products      |       | 228,207                      |       | 47.4                               |       | 205,953 |   | 51.6 |   |
|                         |       |                         |       |                               |       |   |   |   |   |
| Commodity Products           |       | 42,869                       |       | 18.5                               |       | 50,980 |   | 30.1 |   |
| Non-Aligned Products         |       | 26,000                       |       | 10.7                               |       | 24,938 |   | 14.3 |   |
| Subtotal Non-Focus Products  |       | 68,869                       |       | 15.6                               |       | 75,918 |   | 24.9 |   |
| Consolidated total           |       | $                            | 297,076    |                               | 40.0       | % | $ | 281,871 |   | 44.4 | % |

 

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Segment results for the ninemonths ended March 31, 2006 and 2005 are as follows (in thousands exceptpercentages):

 
| ** **                   | ** ** | **March 31****,  2006** | ** ** | **March 31****,  2005** | ** ** |
|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Business Segment**    | ** ** | **Revenue**                  | ** ** | **Gross  Profit**            | ** ** | **Revenue** | ** ** | **Gross  Profit** | ** ** |
| Computing and Communications |       | $                            | 285,377    |                         | 40.9       | % | $ | 297,156 |   | 44.7 | % |
| Energy-Saving Products       |       | 229,406                      |       | 50.1                         |       | 221,048 |   | 54.8 |   |
| Aerospace and Defense        |       | 99,980                       |       | 47.5                         |       | 96,891 |   | 42.3 |   |
| Intellectual Property        |       | 30,540                       |       | 100.0                        |       | 31,069 |   | 100.0 |   |
| Subtotal Focus Products      |       | 645,303                      |       | 48.0                         |       | 646,164 |   | 50.5 |   |
|                         |       |                         |       |                         |       |   |   |   |   |
| Commodity Products           |       | 124,562                      |       | 18.2                         |       | 162,987 |   | 29.3 |   |
| Non-Aligned Products         |       | 78,595                       |       | 11.4                         |       | 83,505 |   | 17.1 |   |
| Subtotal Non-Focus Products  |       | 203,157                      |       | 15.6                         |       | 246,492 |   | 25.2 |   |
| Consolidated total           |       | $                            | 848,460    |                         | 40.2       | % | $ | 892,656 |   | 43.5 | % |

 

Product revenue fromunaffiliated customers is based on the location in which the sale originated.The Company includes in long-lived assets all long-term assets excludinglong-term cash investments, long-term deferred income taxes, goodwill andacquisition-related intangibles.

 

Geographic information forthe Company on an aggregate basis, for the three months ended March 31, 2006and 2005, is presented below (in thousands):

 
| ** **             | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                   |       |                                             |       |                                            |       |   |   |   |   |
| United States          |       | $                                                | 83,900     |                                            | $          | 94,873 |   | $ | 232,257 |   | $ | 276,749 |   |
| Asia                   |       | 136,586                                          |       | 119,280                                         |       | 402,630 |   | 392,234 |   |
| Europe                 |       | 66,564                                           |       | 57,205                                          |       | 183,033 |   | 192,604 |   |
| Total product revenues |       | 287,050                                          |       | 271,358                                         |       | 817,920 |   | 861,587 |   |
| Unallocated royalties  |       | 10,026                                           |       | 10,513                                          |       | 30,540 |   | 31,069 |   |
| Total revenues         |       | $                                                | 297,076    |                                            | $          | 281,871 |   | $ | 848,460 |   | $ | 892,656 |   |

 
| ** **                             | ** ** | **March 31,  2006** | ** ** | **June 30,  2005** | ** ** |
|----------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Long-Lived Assets                      |       |                     |       |                    |       |
| North America, primarily United States |       | $                        | 382,883    |                    | $          | 347,892 |   |
| Asia                                   |       | 37,609                   |       | 23,598                  |       |
| Europe                                 |       | 254,154                  |       | 223,124                 |       |
| Total                                  |       | $                        | 674,646    |                    | $          | 594,614 |   |

 

No single original equipment manufacturer (“OEM”),customer, distributor or subcontract manufacturer accounted for more than tenpercent of the Company’s consolidated revenue for the three and nine monthsended March 31, 2006 and 2005. No customer accounted for more than ten percentof the Company’s accounts receivable at March 31, 2006 and June 30, 2005.

 

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For its Focus Product segments as a whole,the Company primarily sells direct to OEM customers. However, in the Computingand Communications segment, two distributors, individually accounting forgreater than ten percent of segment revenue, accounted for approximately 25percent and 27 percent of revenue for the three and nine months ended March 31,2006, respectively. In the Aerospace and Defense segment, one OEM accounted forapproximately 14 percent and seven percent of revenue for the three and ninemonths ended March 31, 2006. No single OEM customer, distributor or subcontractmanufacturer accounted for more than ten percent of the Company’s other FocusProduct segment revenues for the three or nine months ended March 31, 2006.

 

In the Commodity Product segment, onedistributor accounted for approximately 13 percent and 14 percent of revenuefor the three and nine months ended March 31, 2006, respectively. In theNon-Aligned Product segment, one OEM customer accounted for approximately 26percent and 24 percent of revenue for the three and nine months ended March 31,2006, respectively, and one distributor accounted for ten percent of therevenue for the three and nine months ended March 31, 2006.

 

12.       Stock-Based Compensation

 

For the three and ninemonths ended March 31, 2006,equity-based compensation awards were granted under one of two stock optionplans:  the 1997 Employee Stock IncentivePlan (“1997 Plan”) and the 2000 Incentive Plan (“2000 Plan”). Options grantedbefore November 22, 2004, generally became exercisable in annual installmentsof 25 percent beginning on the first anniversary date, and expire after sevenyears. Options granted after November 22, 2004, generally became exercisable inannual installments of 33 percent beginning on the first anniversary date, andexpire after five years.

 

Under the 1997 Plan, options to purchaseshares of the Company’s common stock may be granted to the Company’s employeesand consultants. In addition, other stock-based awards (e.g., restricted stockunits (“RSUs”), SARs and performance shares) may be granted. During the threeand nine months ended March 31, 2006 and 2005, non-qualified options and RSUswere issued under the 1997 Plan. As noted below, on November 22, 2004, theCompany’s stockholders approved an amendment to the 2000 Plan to increase theauthorized number of shares from 7,500,000 to 12,000,000, at which point noawards may be granted under the 1997 Plan.

 

Under the 2000 Plan, options to purchaseshares of the Company’s common stock and other stock-based awards may begranted to the Company’s employees, consultants, officers and directors. Theterms of the 2000 Plan were substantially similar to those under the 1997 Plan.On November 22, 2004, the Company’s shareholders approved an amendment to the2000 Plan which increased the authorized number of shares to be granted from7,500,000 to 12,000,000. The amendment changed the options expiration term onfuture grants to five years, and contained certain limitations on the maximumnumber of shares that may be awarded to an individual. No awards may be grantedunder the 2000 Plan after August 24, 2014. As of March 31, 2006, there were3,641,208 shares available for future grants.

 

23

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The following table summarizes the stockoption activities for the nine months ended March 31, 2006 (in thousands exceptper share price data):

 
| ** **                  | ** ** | **Stock  Options  Shares** | ** ** | **Weighted  Average  Option  Exercise  Price Per  Share** | ** ** | **Weighted  Average  Grant Date  Fair  Value Per  Share** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------|------------|----------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding, June 30, 2005  |       | 13,558                     |       | $                                                              | 38.09      |                                                                | —     |                            | $          | 149,290 |   |
| Granted                     |       | 1,185                      |       | $                                                              | 44.44      |                                                                | $          | 12.53                           |       | — |   |
| Exercised                   |       | (1,196                     | )          | $                                                              | 23.19      |                                                                | —     |                            | $          | 25,590 |   |
| Expired                     |       | (382                       | )          | $                                                              | 44.69      |                                                                | —     |                            | —     |   |
| Outstanding, March 31, 2006 |       | 13,165                     |       | $                                                              | 39.82      |                                                                | —     |                            | $          | 45,948 |   |
|                             |            |                            |            |                                                                |            |                                                                     |            |                                 |            |  |  |  |

 

For the three months ended March 31, 2006 and2005, the Company received $3.2 million and $19.6 million, respectively, forstock options exercised. For the nine months ended March 31, 2006 and 2005, theCompany received $27.7 million and $35.2 million, respectively, for stockoptions exercised. Total tax benefit realized for the tax deductions from stockoptions exercised was $0.8 million and $6.1 million for the three months endedMarch 31, 2006 and 2005, respectively and $8.4 million and $11.4 million forthe nine months ended March 31, 2006 and 2005, respectively.

 

The following table summarizes the RSUactivities for the nine months ended March 31, 2006 (in thousands except pershare price data): 

 
| ** **                  | ** ** | **Restricted  Stock  Units** | ** ** | **Weighted  Average  Grant Date  Fair  Value Per  Share** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------|------------|------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding, June 30, 2005  |       | 24                           |       | —                                                              |       | $                               | 1,123      |   |
| Granted                     |       | 6                            |       | $                                                                   | 48.10      |                            |       |   |
| Canceled                    |       | (6                           | )          | —                                                              |       |                            |       |
| Outstanding, March 31, 2006 |       | 24                           |       | —                                                              |       | $                               | 990        |   |
|                             |            |                              |            |                                                                     |            |                                 |            |  |  |

 

The following table summarizes the stock options andRSUs outstanding at March31, 2006, and related weighted average price and life information (inthousands except year and price data):

 
| ** **                                                 | ** ** | **March 31, 2006** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                 | ** ** | **Outstanding**              | ** ** | **Exercisable** | ** ** |
| **Range of Exercise  Price per Share** | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|   $0.00  to $15.38                               |       | 466                          |       | 2.99 |   | $ | 11.18 |   | 442 |   | 2.93 |   | $ | 11.78 |   |
| $15.62 to $25.35                                           |       | 1,849                        |       | 3.28 |   | $ | 20.62 |   | 1,849 |   | 3.28 |   | $ | 20.62 |   |
| $26.00 to $35.90                                           |       | 1,518                        |       | 5.17 |   | $ | 33.92 |   | 1,466 |   | 5.19 |   | $ | 33.92 |   |
| $36.39 to $45.87                                           |       | 6,935                        |       | 4.21 |   | $ | 42.68 |   | 6,377 |   | 4.15 |   | $ | 42.78 |   |
| $46.50 to $54.69                                           |       | 1,459                        |       | 4.36 |   | $ | 50.56 |   | 804 |   | 4.34 |   | $ | 52.43 |   |
| $55.31 to $63.88                                           |       | 962                          |       | 4.66 |   | $ | 61.99 |   | 962 |   | 4.66 |   | $ | 61.99 |   |
|                                                       |       | 13,189                       |       | 4.20 |   | $ | 39.75 |   | 11,900 |   | 4.15 |   | $ | 39.30 |   |

 

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Additional information relating to the stock optionplans, including employee stock options and RSUs, at March 31, 2006 andJune 30, 2005 is as follows (in thousands):

 
| ** **                                                 | ** ** | **March 31,  2006** | ** ** | **June 30,  2005** | ** ** |
|------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Options exercisable                                        |       | 11,900                   |       | 13,422                  |       |
| Options available for grant                                |       | 3,641                    |       | 4,632                   |       |
| Total reserved common stock shares for  stock option plans |       | 16,830                   |       | 18,214                  |       |

 

Beginningin the fiscal year 2006, the Company adopted SFAS No. 123(R), “Share-BasedPayment” (“SFAS No. 123(R)”) on a modified prospective transition method toaccount for its employee stock options. Under the modified prospectivetransition method, fair value of new and previously granted but unvested equityawards are recognized as compensation expense in the income statement, andprior period results are not restated. SFAS No. 123(R) requires thatforfeitures are estimated at the time of grant rather than recorded as theoptions expire. Based on the Company’s historical exercise and termination data, an eightpercent forfeiture rate is assumed. As a result of theadoption, for the three months ended March 31, 2006, the Company’s income fromcontinuing operations, which is the same as income before income taxes,decreased by $0.8 million, net income was decreased by $0.6 million, and basicand diluted earnings per share were negatively impacted by $0.01. For the ninemonths ended March 31, 2006, the Company’s income from continuing operationsdecreased by $1.6 million, net income was decreased by $1.2 million, and basicand diluted earnings per share were negatively impacted by $0.02. In addition,cash flows from operating and financing activities decreased and increased,respectively, by $4.6 million for the nine months ended March 31, 2006.

 

Theadoption of SFAS No. 123(R) did not affect the stock-based compensationassociated with the Company’s RSUs, which were already based on the market price of the stock at date ofgrant and recognized over the service period. Stock-compensation expense attributable to the RSUs were $0.1 millionand $0.2 million for the three months ended March 31, 2006 and 2005,respectively, and $0.3 million and $0.7 million for the nine months ended March31, 2006 and 2005, respectively.

 

Forthe three and nine months ended March 31, 2006, stock-based compensationexpense associated with the Company’s stock options and restricted stock unitsrecognized in the income statement is as follows (in thousands):

 
| ** **                             | ** ** | **March 31, 2006** | ** ** |
|----------------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **Three Months  Ended** | ** ** | **Nine Months  Ended** | ** ** |
| Selling and administrative expense     |       | $                            | 422        |   | $ | 1,360 |   |
| Research and development expense       |       | 367                          |       | 733 |   |
| Cost of sales                          |       | 122                          |       | 221 |   |
|                                   |       |                         |       |   |   |
| Total stock-based compensation expense |       | $                            | 911        |   | $ | 2,314 |   |

 

25

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Forthe three and nine months ended March 31, 2005, stock-based compensationexpense associated with the Company’s restricted stock units recognized in theincome statement is as follows (in thousands):

 
| ** **                             | ** ** | **March 31, 2005** | ** ** |
|----------------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **Three Months  Ended** | ** ** | **Nine Months  Ended** | ** ** |
| Selling and administrative expense     |       | $                            | 124        |   | $ | 332 |   |
| Research and development expense       |       | 105                          |       | 280 |   |
| Cost of sales                          |       | 17                           |       | 45 |   |
|                                   |       |                         |       |   |   |
| Total stock-based compensation expense |       | $                            | 246        |   | $ | 657 |   |

 

Thetotal unrecognized compensation expense for outstanding stock options and RSUswas $11.9 million as of March 31, 2006, and will be recognized, in general,over three years. The weighted average number of years to recognize thecompensation expense is 1.3 years. The fair value of the options associatedwith the above compensation expense for the three and nine months ended March31, 2006, was determined at the date of the grant using the Black-Scholesoption pricing model with the following weighted average assumptions:

 
| ** **              | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
|-------------------------|------------|--------------------------|------------|--------------------------|------------|
| Expected life           |       | 3.5 years           |       | 4.1 years           |       |
| Risk free interest rate |       | 4.3                      | %          | 3.9                      | %          |
| Volatility              |       | 30.0                     | %          | 53.2                     | %          |
| Dividend yield          |       | 0.0                      | %          | 0.0                      | %          |

 

Beginning in January 2005, the Company applied StaffAccounting Bulletin No. 107 (“SAB No. 107”) “plain-vanilla” method fordetermining the expected life. SAB No. 107 provided a simplified “plain-vanilla”formula for determining expected life in valuing stock options, to the extentthat an entity cannot rely on its historical exercise data to determine theexpected life. Subsequent to the 2000 Plan amendments on November 22, 2004, theCompany issued stock options having five-year expiration with generally athree-year annual vesting term, whereas, prior to then, the Company grantedstock options having seven or ten-year expiration with generally a four orfive-year annual vesting term. Prior to January 2005, the Company usedhistorical exercise and termination data to determine the expected life.

 

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

 

With respect to volatility, SAB No. 107clarified that there is not a particular method of estimating volatility and tothe extent that the Company has traded financial instruments from which it canderive the implied volatility, it may be appropriate to use only implied volatilityin its assumptions. The Company has certain financial instruments that arepublicly traded from which it can derive the implied volatility. Therefore,beginning in January 2005, the Company has used average market impliedvolatility of options with similar terms for valuing its stock options, whereaspreviously, it had used historical volatility. The Company believes impliedvolatility is a better indicator of expected volatility because it is generallyreflective of both 

 

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historical volatility and expectations of howfuture volatility will differ from historical volatility.

 

Had the Company accounted for stock-based compensationplans using the fair value based accounting method described by SFAS No. 123for the periods prior to fiscal year 2006, the Company’s diluted net income percommon share–basic and diluted for the three and nine months ended March 31,2005, would have approximated the following (in thousands except per sharedata):

 
| ** **                                                                                                                  | ** ** | **March 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                  | ** ** | **Three Months  Ended** | ** ** | **Nine Months  Ended** | ** ** |
|                                                                                                                        |       |                         |       |   |   |
| Net income                                                                                                                  |       | $                            | 35,673     |   | $ | 112,767 |   |
| Less: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of tax |       | (12,343                      | )          | (38,382 | ) |
| Pro forma net income                                                                                                        |       | $                            | 23,330     |   | $ | 74,385 |   |
|                                                                                                                        |       |                         |       |   |   |
| Net income per common share–basic, as  reported                                                                        |       | $                            | 0.53       |   | $ | 1.68 |   |
| Net income per common share–basic, pro  forma                                                                          |       | $                            | 0.34       |   | $ | 1.11 |   |
|                                                                                                                        |       |                         |       |   |   |
| Net income per common share–diluted, as  reported                                                                      |       | $                            | 0.48       |   | $ | 1.55 |   |
| Net income per common share–diluted, pro  forma                                                                        |       | $                            | 0.32       |   | $ | 1.05 |   |

 

OnApril 17, 2005, the Company accelerated the vesting of all then outstandingequity awards, including employee stock options and restricted stock units,primarily to avoid recognizing in its income statement approximately $108million in associated compensation expense in future periods, of whichapproximately $60 million would have been recognized in fiscal year 2006 uponthe adoption of SFAS No. 123(R). As a result of the accelerated vesting, theCompany recorded $6.0 million in non-cash compensation charge in the fourthquarter of fiscal year 2005, of which $3.9 million is related to the excess ofthe intrinsic value over the fair market value of the Company’s stock on theacceleration date of those options that would have been forfeited or expiredunexercised had the vesting not been accelerated, and $2.1 million is relatedto the recognition of outstanding RSUs, including $0.3 million for the excessof the intrinsic value over the fair market value of the Company’s stock on theacceleration date.  In determining the forfeiture rates of the stockoptions, the Company reviewed the unvested options’ original life, timeremaining to vest and whether these options were held by officers and directorsof the Company.  The compensation charge is adjusted in future periodfinancial results as actual forfeitures are realized. For the three and ninemonths ended March 31, 2006, there were no material changes in actualforfeitures from estimates.

 

13.       EnvironmentalMatters

 

Federal,state, foreign and local laws and regulations impose various restrictions andcontrols on the storage, use and discharge of certain materials, chemicals andgases used in semiconductor manufacturing processes. The Company does notbelieve that compliance with such laws and regulations as now in effect willhave a 

 

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materialadverse effect on the Company’s results of operations, financial position orcash flows.

 

However, under some of these laws and regulations, the Company could beheld financially responsible for remedial measures if properties arecontaminated or if waste is sent to a landfill or recycling facility thatbecomes contaminated. Also, the Company may be subject to common law claims ifit releases substances that damage or harm third parties. The Company cannotmake assurances that changes in environmental laws and regulations will notrequire additional investments in capital equipment and the implementation of additionalcompliance programs in the future, which could have a material adverse effecton the Company’s results of operations, financial position or cash flows, ascould any failure by the Company to comply with environmental laws andregulations.

 

The Companyand 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 beensettled. The Company has taken the position that none of the wastes generatedby Rachelle were hazardous.

 

Counsel for Rachelle received a letter datedAugust 2001 from the U.S. Department of Justice, directed to all orsubstantially all PRPs for the OII Site, offering to settle claims against suchparties for all work performed through and including the final remedy for theOII Site. The offer required a payment from Rachelle in the amount ofapproximately $9.3 million in order to take advantage of the settlement. Rachelledid not accept the offer.

 

In as muchas Rachelle has not accepted the settlement, the Company cannot predict whetherthe EPA or others would attempt to assert an action for contribution orreimbursement for monies expended to perform remedial actions at the OII Site. TheCompany cannot predict the likelihood that the EPA or such others would prevailagainst Rachelle in any such action. It remains the position of Rachelle thatits wastes were not hazardous. The Company’s insurer has not acceptedliability, although it has made payments for defense costs for the lawsuitagainst the Company. The Company has made no accrual for potential loss, ifany; however, an adverse outcome could have a material adverse effect on theCompany’s results of operations and cash flows.

 

The Company received aletter in June 2001 from a law firm representing UDT Sensors, Inc. relating toenvironmental contamination (chlorinated solvents such as trichlorethene)assertedly found in UDT’s properties in Hawthorne, California. The letteralleges that the Company operated a manufacturing business at that location inthe 1970’s and/or 1980’s and that it may have liability in connection with theclaimed contamination. The Company has made no accrual for any potential 

 

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losses since there has beenno assertion of specific facts on which to form the basis for determination ofliability.

 

14.       Litigation

 

In June 2000, the Company filed suit in Federal District Court in LosAngeles, California against IXYS Corporation, alleging infringement of its keyU.S. patents 4,959,699; 5,008,725 and 5,130,767. The suit sought damages andother relief customary in such matters. The Federal District Court entered apermanent injunction, effective on June 5, 2002, barring IXYS from making,using, offering to sell or selling in, or importing into the United States,MOSFETs (including IGBTs) covered by the Company’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 thatsame year, following trial on damages issues, a Federal District Court jury awardedthe Company $9.1 million in compensatory damages. The Federal District Courtsubsequently tripled the damages, increasing the award from $9.1 million toapproximately $27.2 million, and ruled that the Company is entitled to anadditional award of reasonable attorney’s fees for a total monetary judgment ofabout $29.5 million. In March 2004, the U.S. Court of Appeals for the FederalCircuit reversed the summary judgment granted the Company by the FederalDistrict Court in Los Angeles of infringement by IXYS of the Company’s U.S.patents 4,959,699; 5,008,725 and 5,130,767. The Federal Circuit reversed inpart and vacated in part infringement findings of the District Court, grantedIXYS the right to present certain affirmative defenses, and vacated 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 Company patents.Following remand, a federal court jury in Los Angeles, California held onSeptember 15, 2005, that IXYS elongated octagonal MOSFETs and IGBTs infringedthe Company’s 4,959,699 patent but did not infringe the Company’s 5,008,725 and5,130,767 patents. On October 6, 2005 the jury awarded the Company $6.2 millionin damages. Based on the jury’s verdict, on February 14, 2006 the DistrictCourt entered its final judgment (including permanent injunctions prohibitingIXYS from further infringing sales for the remaining life of the 4,959,699patent) and found that the Company is entitled to $6.2 million in compensatorydamages for infringement through September 30, 2005, plus an additional 6.5% ofinfringing sales after September 30, 2005. The permanent injunctions andenforcement of the monetary judgment have been temporarily stayed pending furtherproceedings. Even though IXYS has appealed the judgment, the Company believesthat it is reasonably assured that the value of the judgment is at least $2.5million and accordingly, for the three months ended March 31, 2006, the Companyrecognized $2.5 million in royalty income related to the judgment.

 

15.       IncomeTaxes

 

TheCompany’s effective tax provision for the three months ended March 31, 2006 and2005 was 27.5 percent and 25.8 percent, respectively, and 27.5 percent and 25.4percent for the nine months ended March 31, 2006 and 2005, respectively, rather than the U.S. federal statutory tax provision of 35percent as a result of lower statutory tax rates in certain foreignjurisdictions, the benefit of foreign tax credits and research and developmentcredits, partially offset by state taxes and certain foreign losses withoutforeign tax benefit.

 

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In December 2004, the FASB issued FASB Staff Position No.109-2, “Accounting and Disclosure Guidance for the Foreign EarningsRepatriation Provision within the American Jobs Creations Act of 2004”, whichintroduces a limited time 85 percent dividends received deduction on therepatriation of certain foreign earnings to a U.S. tax payer (“repatriationprovision”), provided certain criteria are met. The Company is currentlyevaluating the range of possible amounts of unremitted earnings that may berepatriated as a result of the repatriation provision; the related range ofincome tax effects of such repatriation may vary depending on a number offactors, such as the amount and method of repatriation, and whether or notrepatriation will take place. Based on the analysis available at the time, theCompany previously announced that the one-time increase in tax rate for thefourth fiscal quarter ended June 30, 2006 could be two percent. Based on itscurrent analysis, the rate could be significantly higher. The Company’sevaluation is ongoing as is the Company’s decision as to whether to participatein the program. Accordingly, the one-time tax effect for fiscal fourthquarter.cannot be reasonably estimated at this time

 

16.       Related Party Transactions

 

Asdiscussed in Note 3, the Company holds as strategic investment common stock ofNihon Inter Electronics Corporation (“Nihon”), a related party. At March 31,2006 and June 30, 2005, the Company owned approximately 17.5 percent of the outstandingshares of Nihon. As previously reported, the Company’s Chief Financial Officerwas the Chairman of the Board of Nihon until June 28, 2005. In addition, twomanagers of the Company’s Japan subsidiary are directors of Nihon. Although theCompany has two positions on the Board of Directors of Nihon as of March 31,2006, it does not exercise significant influence, and accordingly, the Companyrecords its interest in Nihon based on readily determinable market values inaccordance with SFAS No. 115 (see Note 3, “Cash and Investments”).

 

17.       StockRepurchase Program

 

On November 1, 2005, the Company’s Board of Directors authorized andthe Company announced a stock repurchase program, under which up to $100million of the Company’s common shares may be repurchased without prior notice,through block trades or otherwise. The Company intends that any sharesrepurchased will be held as treasury shares that may be used for generalcorporate purposes. From the date of the repurchase through the followingthirty days, no amounts under the Company’s $150 million credit facility willbe available. Shares repurchased will be paid with the Company’s existing cashand cash investments. As of March 31, 2006, no shares had been repurchasedunder the program.

 

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

 

The followingdiscussion of our financial condition and results of operations should be readtogether with the consolidated financial statements and notes to consolidatedfinancial statements included elsewhere in this Form 10-Q. Except for historicinformation contained herein, 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, as amended. Forward-lookingstatements may be identified by the use of terms such as “anticipate,” “believe,”“expect,” “intend,” “project,” “will,” and similar expressions. Suchforward-looking statements are subject to a variety of risks and uncertainties,including those discussed under the heading “Statement of Caution Under thePrivate Securities Litigation Reform Act of 1995” and elsewhere in thisQuarterly Report on Form 10-Q, that could cause actual results to differmaterially from those anticipated by us. We undertake no obligation to updatethese forward-looking statements to reflect events or circumstances after thedate of this report or to reflect actual outcomes.

 

**Statementof Cash Flows**

 

During the first quarter of ourfiscal year, we adopted SFAS No. 123(R), “Share Based Payment”.  This standard requires the excess tax benefitsfrom the exercise of stock options to be shown as cash flows from financingactivities. In the financial statements included in our Form 10-Q filings forthe quarters ending September 30, 2005 and December 31, 2005, we incorrectlyclassified these amounts as part of cash flows from operating activities.  For the three months ended September 30, 2005and the six months ended December 31, 2005, the excess tax benefits fromoptions exercised was $4.1 million and $4.3 million, respectively.  We had filed amended Quarterly Reports onForm 10-Q/A for these quarters in order to correctly classify these amounts aspart of cash flows from financing activities. As a consequence of such change, net cash provided by operatingactivities was reduced by $4.1 million and $4.3 million for the three monthsended September 30, 2005 and the six months ended December 31, 2005,respectively, and net cash provided by financing activities was increased bythose amounts over the respective time periods. Such changes do not affect the overall net change in cash and cashequivalents in those periods.  

 

The difference in cash flowpresentation of the excess tax benefits from options exercised had no impact tothe unaudited consolidated statements of income for the three months endedSeptember 30, 2005 or for the six months ended December 31, 2005, and had noimpact to the unaudited consolidated balance sheet amounts reported as ofSeptember 30, 2005 or December 31, 2005.

 

We have correctly presentedthese excess tax benefits in the unaudited consolidated statement of cash flowsas cash flows from a financing activity for the nine months ended March 31,2006.

 

**Overview of Results of Operations for the Three Months Ended March 31,2006**

 

Wereport our results in six segments: Computing and Communications (“C&C”),Energy-Saving Products (“ESP”), Aerospace and Defense (“A&D”), IntellectualProperty (“IP”), Commodity Products (“CP”) and Non-Aligned Products (“NAP”). Weinclude our C&C, ESP, A&D and IP segments in our Focus Product group,and our CP and NAP segments in our Non-Focus Product group.

 

Forthe three months ended March 31, 2006, consolidated revenue was $297.1 million,compared to $281.9 million for the prior year three months ended March 31, 2005.Focus Product revenue was $228.2 million (76.8 percent of revenue) for thethree months ended March 31, 2006, compared to $206.0 million (73.1% percent ofrevenue) for the three months ended March 31, 2005, reflecting growth in endmarket demand in our C&C, ESP and A&D segments. Non-Focus Productrevenue was $68.9 million (23.2 percent of revenue) for the three months endedMarch 31, 2006, compared to $75.9 million (26.9 percent of revenue) for thethree months ended March 31, 2005, reflecting decrease in the CP segmentrevenue as we discontinue our lower margin business.

 

Revenue as a percentage of total product revenue based on saleslocation were approximately 29 percent, 48 percent and 23 percent for UnitedStates, Asia and Europe, respectively, for the three months ended March 31,2006, and 35 percent, 44 percent and 21 percent for United States, Asia andEurope, respectively, for the three months ended March 31, 2005.

 

For the June 2006quarter, we expect total company revenue to be up five to eight percent. As ofApril 27, 2006, backlog stood at more than 85 percent of target shipments. Forour Focus Product segments, we expect C&C revenue to reflect end-marketdemand for servers, dual-core notebook platforms and new consumer programsincluding game stations. In the ESP segment, we expect end-market demand tocontinue for energy-efficient appliances and digital televisions. In ourA&D segment, we expect an increase in demand for our advanced powermanagement solutions for fighter and commercial jets. In addition, we expect amoderate increase in commercial and military satellite 

 

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business. For ourNon-Focus Product segments, we continue to manage our exposure to CommodityProducts and review our Non-Aligned Products.

 

We have announced plansfor a potential sale of our entire Non-Focus Products business. That sale iscurrently contemplated to include all the products of our Non-Focus Productsegments as well as certain complementary products of our Focus Productsegments totaling approximately $3 million in annualized sales. A potential saleis currently contemplated to include operations at our Mumbai, India; Borgaro,Italy; Xian, China; Krefeld, Germany; Swansea, Wales; and Halifax, Canada sites.The sale would also include certain wafer manufacturing and product assemblyequipment currently located at our Temecula, California and Tijuana, Mexicolocations. We anticipate that we could enter into agreements for a transactionby the end of June 2006.

 

For the three months ended March 31, 2006, gross profit margin was 40.0percent, compared to 44.4 percent for the prior year three months ended March31, 2005. Overall gross margin declined primarily reflecting product mix, costsassociated with starting up our Newport, Wales wafer fabrication facility,profit sharing and employee stock option expense. Gross profit margin for ourFocus Products was 47.4 percent for the three months ended March 31, 2006,compared to 51.6 percent for the three months ended March 31, 2005. The FocusProduct gross margin declined primarily reflecting product mix in the C&Cand ESP segments, costs associated with starting up our Newport, Walesfacility, and profit sharing and employee stock option expense. Gross profitmargin for our Non-Focus Products was 15.6 percent for the three months endedMarch 31, 2006, compared to 24.9 percent for the three months ended March 31,2005. The Non-Focus Product gross margin declined primarily reflecting lowerutilization, price declines on certain of our Power Components and profitsharing and employee stock option expense.

 

Capacity utilization was in the 90s percent for the three months endedMarch 31, 2006. As we continue to ramp new capacity, we expect our overallCompany gross margin for the three months ended June 30, 2006 to be 40.0percent, plus or minus one percentage point.

 

As of March 31, 2006, we have substantially completed our restructuringactivities previously announced in 2002 and 2003. We expect to complete theremaining activities, primarily the closing of a fabrication line at ElSegundo, California by calendar year end 2006. For the three months ended March31, 2006, we recorded $3.3 million in total restructuring-related charges,consisting of: $1.7 million for asset impairment, plant closure costs and othercharges and $1.6 million for severance-related costs. We estimate that totalcharges associated with the restructuring will be approximately $285 million.These charges will consist of approximately $223 million for asset impairment,plant closure costs and other charges, $6 million of raw material and work-in-processinventory, and approximately $56 million for severance-related charges. Of the$285 million in total charges, we expect cash charges to be approximately $110million. As of March 31, 2006, we have realized annualized savings ofapproximately $80 million from the restructuring activities, with approximately70 percent of that savings affecting cost of goods sold.

 

During the three months ended March 31, 2006, we spent $46.5 million incapital expenditures, of which $18.2 million was at the Newport, Wales’facility. We began production at this facility during the quarter endedDecember 31, 2005.

 

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We adopted Statement of Financial Accounting Standards No. 123(R), “Share-BasedPayment” (“SFAS No. 123(R)”) that became effective for us in the fiscal firstquarter ended September 30, 2005. SFAS No. 123(R) required that we recognizethe fair value of equity awards granted to our employees as compensationexpense in the income statement over the requisite service period. For thethree months ended March 31, 2006, we recognized $0.8 million in stock-basedcompensation expense associated with employee stock options as a result of theadoption of SFAS No. 123(R), which lowered our basic and diluted earnings per shareby $0.01 for the quarter ended.

 

We are currently evaluating the range of possible amounts of unremittedforeign earnings that may be repatriated as a result of the ForeignRepatriation Provision of the American Jobs Creations Act of 2004. The relatedrange of income tax effects of the repatriation may vary depending on a numberof factors, such as the amount and method of repatriation, and whether or notrepatriation will take place. Based on the analysis available at the time, wepreviously announced that the one-time increase in tax rate for the fourthfiscal quarter ended June 30, 2006 could be two percent. Based on our currentanalysis, the rate could be significantly higher. Our evaluation is ongoing asis our decision as to whether to participate in the program. Accordingly, theone-time tax effect for fiscal fourth quarter cannot be reasonably estimated atthis time.

 

During thethree months ended March 31, 2006, operating activities generated cash flows of$24.6 million. The cash flows for the three months ended March 31, 2006 reflectedthe classification of the excess tax benefits from options exercised as a financingactivity rather than an operating activity (see Note 1, “Certain AccountingPolicies”). Our cash, cash equivalents and cash investments totaled $908.3million at March 31, 2006. Additionally, we have $139.3 million in unusedcredit facilities.

 

Our $550million convertible subordinated notes are due in July 2007. We anticipate thatthese notes will be refinanced through public or private offerings of debt orequity, or be paid down with our existing cash and cash investments.

 

On November 1, 2005, our Board of Directors authorized and we announceda stock repurchase program, under which up to $100 million of our common sharesmay be repurchased without prior notice, through block trades or otherwise. Weintend that any shares repurchased will be held as treasury shares that may beused for general corporate purposes. As of March 31, 2006, no shares had beenrepurchased under the program.

 

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**Results of Operations for the Three and Nine Months Ended March 31,2006 Compared with the Three and Nine Months Ended March 31, 2005**

 

The following table summarizes our operating results as a percentage ofrevenues for the three and nine months ended March 31, 2006 and 2005 ($ inmillions):

 
| ** **                                                 | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                   |       | $                                                | 297.1      |                                            | 100.0      | % | $ | 281.9 |   | 100.0 | % | $ | 848.5 |   | 100.0 | % | $ | 892.7 |   | 100.0 | % |
| Cost of sales                                              |       | 178.3                                            |       | 60.0                                            |       | 156.6 |   | 55.6 |   | 507.2 |   | 59.8 |   | 504.6 |   | 56.5 |   |
|                                                       |       |                                             |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                               |       | 118.8                                            |       | 40.0                                            |       | 125.3 |   | 44.4 |   | 341.3 |   | 40.2 |   | 388.1 |   | 43.5 |   |
| Selling and administrative expense                         |       | 50.9                                             |       | 17.1                                            |       | 40.7 |   | 14.4 |   | 142.2 |   | 16.7 |   | 128.0 |   | 14.3 |   |
| Research and development expense                           |       | 28.6                                             |       | 9.6                                             |       | 27.3 |   | 9.7 |   | 81.0 |   | 9.5 |   | 80.4 |   | 9.1 |   |
| Amortization of acquisition-related  intangible assets     |       | 1.3                                              |       | 0.5                                             |       | 1.5 |   | 0.5 |   | 4.2 |   | 0.5 |   | 4.4 |   | 0.5 |   |
| Impairment of assets, restructuring and  severance charges |       | 3.3                                              |       | 1.1                                             |       | 8.1 |   | 2.9 |   | 10.7 |   | 1.3 |   | 21.6 |   | 2.4 |   |
| Other expense, net                                         |       | 1.7                                              |       | 0.6                                             |       | 0.2 |   | 0.0 |   | 2.9 |   | 0.3 |   | 0.8 |   | 0.1 |   |
| Interest (income) expense, net                             |       | (2.4                                             | )          | (0.8                                            | )          | (0.6 | ) | (0.2 | ) | (4.7 | ) | (0.6 | ) | 1.7 |   | 0.2 |   |
| Income before income taxes                                 |       | 35.4                                             |       | 11.9                                            |       | 48.1 |   | 17.1 |   | 105.0 |   | 12.4 |   | 151.2 |   | 16.9 |   |
| Provision for income taxes                                 |       | 9.7                                              |       | 3.3                                             |       | 12.4 |   | 4.4 |   | 28.9 |   | 3.4 |   | 38.4 |   | 4.3 |   |
|                                                       |       |                                             |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                 |       | $                                                | 25.7       |                                            | 8.6        | % | $ | 35.7 |   | 12.7 | % | $ | 76.2 |   | 9.0 | % | $ | 112.8 |   | 12.6 | % |

 

Revenue and Gross Margin

 

For the three months ended March 31, 2006, consolidated revenueincreased by 6.6 percent from the prior year three months ended March 31, 2005.For the nine months ended March 31, 2006, consolidated revenue decreased by 5.0percent from the prior year nine months ended March 31, 2005. Revenue growthfor the three months ended March 31, 2006 reflected end market demand in ourC&C, ESP and A&D segments, partially offset by decline in our CPsegment as we discontinue our lower margin business.

 

For the three months ended March 31, 2006, gross profit margin was 40.0percent, compared to 44.4 percent for the prior year three months ended March31, 2005. Overall gross margin declined primarily reflecting product mix, costsassociated with starting up our Newport, Wales wafer fabrication facility,stock option and profit sharing expense. In general, our wafer manufacturingfacilities serve all business units as necessary and their operating costs arereflected in the segments’ cost of revenue on the basis of product cost. Manufacturingoverhead and variances are specifically allocated to the segments asappropriate, and general overhead are allocated based on the percentage oftotal revenue.

 

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Revenue as a percentage of total product revenue based on saleslocation were approximately 29 percent, 48 percent and 23 percent for UnitedStates, Asia and Europe, respectively, for the three months ended March 31,2006, and 35 percent, 44 percent and 21 percent for United States, Asia andEurope, respectively, for the three months ended March 31, 2005. Revenue as apercentage of total product revenue based on sales location were approximately28 percent, 49 percent and 22 percent for United States, Asia and Europe,respectively, for the nine months ended March 31, 2006, and 32 percent, 46percent and 22 percent for United States, Asia and Europe, respectively, forthe nine months ended March 31, 2005.

 

Focus Product revenue was $228.2 million (76.8 percent of revenue) forthe three months ended March 31, 2006, compared to $206.0 million (73.1%percent of revenue) for the three months ended March 31, 2005, reflectinggrowth in end market demand in our C&C, ESP and A&D segments. Non-FocusProduct revenue was $68.9 million (23.2 percent of revenue) for the threemonths ended March 31, 2006, compared to $75.9 million (26.9 percent ofrevenue) for the three months ended March 31, 2005, reflecting decrease in theCP segment revenue as we discontinue our lower margin business.

 

Gross profit margin for our Focus Products was 47.4 percent for thethree months ended March 31, 2006, compared to 51.6 percent for the threemonths ended March 31, 2005. The Focus Product gross margin declined primarilyreflecting product mix in the C&C and ESP segments, costs associated withstarting up our Newport, Wales facility, and profit sharing and employee stockoption expense. Gross profit margin for our Non-Focus Products was 15.6 percentfor the three months ended March 31, 2006, compared to 24.9 percent for thethree months ended March 31, 2005. The Non-Focus Product gross margin declinedprimarily reflecting lower utilization, price declines on certain of our PowerComponents and profit sharing and employee stock option expense.

 

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Revenue and gross margin by business segments for the three and ninemonths ended March 31, 2006, are as follows (in thousands except percentages):

 
| ** **                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **March 31, 2006**     | ** ** | **March 31, 2005** | ** ** |
| **Business Segment**    | ** ** | **Revenue**                      | ** ** | **Percentage  of Total  Revenue** | ** ** | **Gross  Margin** | ** ** | **Revenue** | ** ** | **Percentage  of Total  Revenue** | ** ** | **Gross  Margin** | ** ** |
| Computing and Communications |       | $                                | 100,560    |   | 33.8 | % | 39.6 | % | $ | 89,323 |   | 31.8 | % | 45.9 | % |
| Energy-Saving Products       |       | 81,442                           |       | 27.4 |   | 50.1 |   | 73,686 |   | 26.1 |   | 55.5 |   |
| Aerospace and Defense        |       | 36,179                           |       | 12.2 |   | 48.1 |   | 32,431 |   | 11.5 |   | 42.9 |   |
| Intellectual Property        |       | 10,026                           |       | 3.4 |   | 100.0 |   | 10,513 |   | 3.7 |   | 100.0 |   |
|                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Subtotal Focus Products      |       | 228,207                          |       | 76.8 |   | 47.4 |   | 205,953 |   | 73.1 |   | 51.6 |   |
|                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Commodity Products           |       | 42,869                           |       | 14.4 |   | 18.5 |   | 50,980 |   | 18.1 |   | 30.1 |   |
| Non-Aligned Products         |       | 26,000                           |       | 8.8 |   | 10.7 |   | 24,938 |   | 8.8 |   | 14.3 |   |
| Subtotal Non-Focus Products  |       | 68,869                           |       | 23.2 |   | 15.6 |   | 75,918 |   | 26.9 |   | 24.9 |   |
|                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated total           |       | $                                | 297,076    |   | 100.0 | % | 40.0 | % | $ | 281,871 |   | 100.0 | % | 44.4 | % |

 
| ** **                   | ** ** | **Nine Months Ended** | ** ** |
|------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **March 31, 2006**    | ** ** | **March 31, 2005** | ** ** |
| **Business Segment**    | ** ** | **Revenue**                     | ** ** | **Percentage  of Total  Revenue** | ** ** | **Gross  Margin** | ** ** | **Revenue** | ** ** | **Percentage  of Total  Revenue** | ** ** | **Gross  Margin** | ** ** |
| Computing and Communications |       | $                               | 285,377    |   | 33.6 | % | 40.9 | % | $ | 297,156 |   | 33.3 | % | 44.7 | % |
| Energy-Saving Products       |       | 229,406                         |       | 27.0 |   | 50.1 |   | 221,048 |   | 24.8 |   | 54.8 |   |
| Aerospace and Defense        |       | 99,980                          |       | 11.8 |   | 47.5 |   | 96,891 |   | 10.8 |   | 42.3 |   |
| Intellectual Property        |       | 30,540                          |       | 3.6 |   | 100.0 |   | 31,069 |   | 3.5 |   | 100.0 |   |
| Subtotal Focus Products      |       | 645,303                         |       | 76.0 |   | 48.0 |   | 646,164 |   | 72.4 |   | 50.5 |   |
|                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Commodity Products           |       | 124,562                         |       | 14.7 |   | 18.2 |   | 162,987 |   | 18.3 |   | 29.3 |   |
| Non-Aligned Products         |       | 78,595                          |       | 9.3 |   | 11.4 |   | 83,505 |   | 9.3 |   | 17.1 |   |
| Subtotal Non-Focus Products  |       | 203,157                         |       | 24.0 |   | 15.6 |   | 246,492 |   | 27.6 |   | 25.2 |   |
|                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated total           |       | $                               | 848,460    |   | 100.0 | % | 40.2 | % | $ | 892,656 |   | 100.0 | % | 43.5 | % |

 

*Computingand Communications (“C&C”)*

 

Our Computing and Communication segment is comprised of our PowerManagement ICs, Advanced Circuit Devices, including iPowirTMmulti-chip modules and DirectFETTM solutions, and Power Components(primarily MOSFET Power Components) that address servers and high-end desktops,notebooks, communications networking, and digitally-oriented consumer productslike game consoles. Our C&C products are also used in digital television,liquid crystal displays (“LCDs”), portable handheld devices and cellularphones. During the quarter, our iPowir modules were selected for the key powermanagement solution in a major next-generation game station platform, which is expectedto be released in the second half of calendar 2006.

 

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C&C revenue for the three months ended March 31, 2006, increased by$11.2 million (12.6 percent), compared to the three months ended March 31, 2005.The revenue increase reflected strong demand for game station, personalcomputers and servers. C&Crevenue for the nine months ended March 31, 2006, declined by $11.8 million(-4.0 percent) compared to the nine months ended March 31, 2005. The ninemonths revenue decline primarily reflected capacity constraints in the firstsix months of the fiscal year. Westarted production at our new eight-inch sub-micron wafer fabrication facilityin Newport, Wales in the December 2005 quarter.

 

Gross margin for C&C was 39.6 percent and 45.9 percent for thethree months ended March 31, 2006 and 2005, respectively, and 40.9 percent and44.7 percent for the nine months ended March 31, 2006 and 2005, respectively. Thegross margin decline reflected primarily product mix, costs associated withstarting up our Newport, Wales facility, and profit sharing and employee stockoption expense.

 

In the June 2006quarter, we expect C&C revenue to reflect end-market demand for servers,dual-core notebook platforms and new consumer programs including game stations.

 

*Energy-Saving Products (“ESP”)*

 

Our Energy-Saving Product segment is comprised of our Power ManagementICs, Advanced Circuit Devices and Power Components (primarily HEXFET and IGBTPower Components) that provide solutions for variable speed motion control inenergy-saving appliances (such as washing machines, refrigerators and airconditioners), and industrial systems (such as fans, pumps and compressors),advanced lighting products (including fluorescent lamps, high intensitydischarge (“HID”) lamps, cold cathode fluorescent (“CCFL”) tubes and lightemitting diodes (“LED”) lighting), advanced automotive solutions (primarilydiesel injection, electric-gasoline hybrid and electric power steeringsystems), and consumer applications (for example, plasma TVs and digital-audiounits). Our ESP segment does not include our automotive modules (systems)business, which is reported in our Non-Aligned Products segment.

 

ESP revenue for the three months ended March 31, 2006, increased by$7.8 million (10.5 percent) compared to the three months ended March 31, 2005. ESPrevenue for the nine months ended March 31, 2006, increased by $8.4 million(3.8 percent) compared to the nine months ended March 31, 2005. The revenueincrease reflected strong market demand for energy-efficient appliances anddigital televisions.

 

Gross margin for ESP was 50.1 percent and 55.5 percent for the threemonths ended March 31, 2006 and 2005, respectively, and 50.1 percent and 54.8percent for the nine months ended March 31, 2006 and 2005, respectively. Thegross margin declined primarily reflected product mix, costs associated withstarting up our Newport, Wales facility, and profit sharing and employee stockoption expense.

 

In the June 2006quarter, we expect end-market demand for energy-efficient appliances anddigital television to continue.

 

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*Aerospace and Defense (“A&D”)*

 

The Aerospace and Defense segment is comprised of advanced powermanagement solutions, such as radiation-hardened power management modules,radiation-hardened Power Components, and other high-reliability PowerComponents that address power management requirements in satellites, launchvehicles, aircrafts, ships, submarines and other defense and high-reliabilityapplications.

 

A&Drevenue for the three months ended March 31, 2006, increased by $3.7 million(11.6 percent) from the three months ended March 31, 2005. Revenue for the ninemonths ended March 31, 2006, increased by $3.1 million (3.2 percent) from thenine months ended March 31, 2005. The A&D revenue increased primarily dueto military and commercial aviation programs, including new Airbus A380 andBoeing 787, and various satellite programs, where our power management contentis significantly greater than in prior generations.

 

Gross margin for the A&D segment increased to 48.1 percent for thethree months ended March 31, 2006, from 42.9 percent in the three months endedMarch 31, 2005, and to 47.5 percent for the nine months ended March 31, 2006,from 42.3 percent for the nine months ended March 31, 2005. The gross marginimprovement reflected primarily sale of a higher-margin product mix, manufacturingefficiencies and restructuring cost savings, partially offset by profit sharingand employee stock option expense.

 

In the June 2006 quarter,we expect an increase in demand for our advanced power management solutions forfighter and commercial jets. In addition, we expect a moderate increase incommercial and military satellite business. 

 

*Intellectual Property (“IP”)*

 

**The Intellectual Property segment reports ourroyalty income from licensing our intellectual property to third parties, whichmay include claim settlements from successful defense of our licenses. Ourlicensed MOSFET patents expire between 2005 and 2010, with the broadestremaining in effect until 2007 and 2008. We continue to commit to research anddevelopment to generate new patents and other intellectual property andconcentrate on incorporating our technologies into our Focus Products. As partof our Intellectual Property segment, we generate recurring royalties fromexisting license agreements and one-time contributions from litigation and newlicense arrangements.**

** **

**In the IP segment, revenues from royalties andone-time contributions were $10.0 million, of which $2.5 million related to thepending litigation against IXYS (see Note 14, “Litigation”), for the threemonths ended March 31, 2006, compared to $10.5 million for the three monthsended March 31, 2005, of which $0.6 million was from a one-time contribution. IPrevenues were $30.5 million and $31.1 million for the nine months ended March31, 2006 and 2005, respectively. We expect IP revenue based on recurringroyalties and one-time contributions to be about $10 million in the Junequarter, plus or minus a million dollars.**

 

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*Commodity Products (“CP”)*

 

The Commodity Product segment is comprised primarily ofolder-generation Power Components that are sold with margins generally belowour strategic targets and are typically commodity in nature. These productshave widespread use throughout the power management product industry and areoften complementary to many of our Focus Products offerings or allow us toprovide a full range of customer or application offerings. We often offer theseproducts to take advantage of cross-selling opportunities with our otherproduct families.

 

Forthe three months ended March 31, 2006, CP revenue was $42.9 million, down 15.9percent from $51.0 million for the three months ended March 31, 2005. For thenine months ended March 31, 2006, CP revenue was $124.6 million, down 23.6percent from $163.0 million for the nine months ended March 31, 2005. In linewith our strategy, we continue to manage our exposure to Commodity Productsand anticipate that we could enter into agreements to sell the business by theend of June 2006.

 

Gross margin for CP was 18.5 percent and 30.1 percent for the threemonths ended March 31, 2006 and 2005, respectively, and 18.2 percent and 29.3percent for the nine months ended March 31, 2006 and 2005, respectively. Thegross margin decline reflected primarily price pressures, profit sharing andemployee stock option expense.

 

*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. We plan to support our Non-Aligned Products to theextent we believe appropriate, to manage, maintain or increase their value. Currently,product lines reported in this segment include certain modules (including ourautomotive systems products), rectifiers, diodes and thyristors used in theautomotive, industrial, welding and motor control applications. Our automotivemodules (systems) products include our full product line of alternatorregulators, integrated starter alternators, invertors and modules andsubsystems for steering and heating, ventilation and air conditioningapplications.**

** **

Non-AlignedProduct revenue was $26.0 million and $24.9 million in the three months endedMarch 31, 2006 and 2005, respectively, and $78.6 million and $83.5 million inthe nine months ended March 31, 2006 and 2005, respectively. The revenueincrease for the three months primarily reflected program timing and increasedmanufacturing throughput.

 

**Gross margin for our NAP segment was 10.7 percent and 14.3percent for the three months ended March 31, 2006 and 2005, respectively, and11.4 percent and 17.1 percent for the nine months ended March 31, 2006 and2005, respectively, reflecting primarily product mix and profit sharing andemployee stock option expense. We have announced plans for a potential sale ofour entire Non-Focus Products business and anticipate that we could enter intoagreements by the end of June 2006.**

** **

Selling and Administrative Expense

 

For the three and nine months ended March 31, 2006, selling andadministrative expense was $50.9 million (17.1 percent of revenue) and $142.2million (16.7 percent of 

 

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revenue), compared to $40.7 million (14.4 percent of revenue) and$128.0 million (14.3 percent of revenue) for the three and nine months endedMarch 31, 2005, respectively. Selling and administrative expense increasedprimarily reflecting profit sharing and employee stock option expense in thecurrent year. In addition, we also increased spending on employee benefits,Sarbanes-Oxley Rule 404 compliance and special projects in the current threeand nine months ended March 31, 2006, as compared to the comparable prior yearperiods. 

 

Research and Development Expenses

 

For the three and nine months ended March 31, 2006, research anddevelopment expense was $28.6million (9.6 percent of revenue) and $81.0 million (9.5 percent of revenue),compared to $27.3 million (9.7 percent of revenue) and $80.4 million (9.1percent of revenue) for the three and nine months ended March 31, 2005,respectively. Research and development expense primarily reflected ourcontinued development activities on our Focus Products.

 

Impairment of Assets, Restructuring andSeverance

 

During fiscal 2003 second quarter ended December 31, 2002, we announcedour restructuring initiatives. Under our restructuring initiatives, our goalwas to reposition us to better fit the market conditions and de-emphasize thecommodity business. Our restructuring plan included consolidating and closingcertain manufacturing sites, upgrading equipment and processes in designatedfacilities and discontinuing production in a number of others that cannotsupport more advanced technology platforms or products. We also planned tolower overhead costs across our support organizations. We have substantiallycompleted these restructuring activities as of December 31, 2005. We expect tocomplete the remaining activities, primarily the closing of a fabrication lineat El Segundo, California by calendar year end 2006.

 

We estimate that total charges associated with the restructuring willbe approximately $285 million. These charges will consist of approximately $223million for asset impairment, plant closure costs and other charges, $6 millionof raw material and work-in-process inventory, and approximately $56 millionfor severance-related costs. Of the $285 million in total charges, we expectcash charges to be approximately $110 million. As of March 31, 2006, we have realized annualized savings ofapproximately $80 million from the restructuring activities, with approximately70 percent of that savings affecting cost of goods sold.

 

For the three months ended March 31, 2006, we recorded $3.3million in total restructuring-related charges, consisting of: $1.7 million forplant closure costs and relocation costs and other impaired asset charges, and$1.6 million for severance-related costs. For the nine months ended March 31,2006, we recorded $10.7 million in total restructuring related charges,consisting of: $6.8 million for plant closure and relocation costs and otherimpaired assets charges and $3.9 million for severance costs. For the threemonths ended March 31, 2005, we recorded $8.1 million in total restructuring-related charges, consisting of: $6.3million for plant closure and relocation costs and other impaired assetcharges, and $1.8 million for severance-related costs. For the nine monthsended December 31, 2005, we recorded $21.6 million in totalrestructuring-related charges consisting of: $16.8 million for plant closureand relocation costs and other impaired assets charges, and $4.8 million forseverance costs.

 

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Restructuring-related costs were measured in accordancewith SFAS No. 146, “Accounting for the Costs Associated with Exit or DisposalActivities”. Asset impairments were calculated in accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”. Indetermining the asset groups, we grouped assets at the lowest level for whichindependent identifiable cash flows information was available. In determiningwhether an asset was impaired we evaluated undiscounted future cash flows andother factors such as changes in strategy and technology. The undiscounted cashflows from our initial analyses were less than the carrying amount for certainof the asset groups, indicating impairment losses. Based on this, we determinedthe fair value of these asset groups using the present value technique, byapplying a discount rate to the estimated future cash flows that is consistentwith the rate used when analyzing potential acquisitions.

 

As of March 31, 2006, we had recorded $272.1 million intotal charges, consisting of: $216.9 million for asset impairment, plantclosure costs and other charges, $6.0 million for raw material andwork-in-process inventory charges, and $49.2 million for severance-relatedcosts. Components of the $216.9 million asset impairment, plant closure andother charges included the following items:

 

•      As we emphasize more advanced generation planar products, we expect thefuture revenue stream from our less advanced facilities in Temecula, Californiato decrease significantly. These facilities had a net book value of $138.3million and were written down by $77.7 million. It is expected that these facilitieswill continue in use until approximately December 2007 and the remaining basisis being depreciated over units of production during this period. It is assumedthat salvage value will equal disposition costs.

 

•      As we emphasize more advanced generation trench products, we expect thefuture revenue stream from our less advanced facility in El Segundo, Californiato decrease significantly. This facility had a net book value of $59.5 millionand was written down by $57.2 million. This facility had significantly reducedproduction as of fiscal year ended June 30, 2003, and is being used primarilyfor research and development activities.

 

•      As we emphasize more advanced generation Schottky products, we expect thefuture revenue stream from our less advanced facility in Borgaro, Italy todecrease significantly. This facility had a net book value of $20.5 million andwas written down by $13.5 million. It is expected that this facility willcontinue in use until approximately December 2007 and the remaining basis isbeing depreciated over units of production during this period. It is assumedthat salvage value will equal disposition costs.

 

•      We are restructuring our manufacturing activities in Europe. Based on areview of our Swansea, Wales facility, a general-purpose module facility, wedetermined in the December 2002 quarter that this facility would be bettersuited to focus only on automotive applications. The general-purpose assemblyassets in this facility, with a net book value of $13.6 million, were writtendown by $8.2 million. In addition, we have completed the move of ourmanufacturing activities at our automotive facility in Krefeld, Germany to ourSwansea, Wales and Tijuana, Mexico facilities as of September 30, 2005. We havealso moved the production from our Venaria, Italy facility to our Borgaro,Italy and Mumbai, India facilities, which was completed as of December 31, 2003.We stopped manufacturing activities in our Oxted, England facility as ofSeptember 30, 2003.

 

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•      We have eliminated the manufacturing of our non-space military products inour Santa Clara, California facility as of July 31, 2004. Currently,subcontractors handle our non-space qualified products formerly manufactured inthis facility. We have also transitioned the assembly and test of non-spacePower Components from our Leominster, Massachusetts facility to our Tijuana,Mexico facility as of December 31, 2005. Associated with this reduction inmanufacturing activities, certain assets with a net book value of $4.0 millionwere written down by $2.0 million.

 

•      $58.3 million in other miscellaneous items were charged, including $49.0million in relocation costs and other impaired asset charges and $9.3 millionin contract termination and settlement costs.

 

As a result of the restructuring initiatives, certain rawmaterial and work-in-process inventories were impaired, including products thatcould not be completed in other facilities, materials that were not compatiblewith the processes used in the alternative facilities, and materials such asgases and chemicals that could not readily be transferred. Based on thesefactors we wrote down these inventories, with a carrying value of $98.2million, by $6.0 million. We disposed no inventories, for the three monthsended March 31, 2006 and 2005, respectively, and $1.1 million and $0.7 millionfor the nine months ended March 31, 2006 and 2005, respectively, which did notmaterially impact gross margin. As of March 31, 2006, $0.1 million of theseinventories remained to be disposed.

 

Our restructuring activities are expected to result in severancecharges of approximately $56 million through June 2006. Below is a table ofapproximate severance charges by major activity and location:

 
| **Location**                                           | ** ** | **Activity**                                                  | ** ** | **Amount** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------|------------|------------|------------|
|                                                   |       |                                                          |       |       |       |
| El Segundo, California                                 |       | Close manufacturing facilities                                |       | $          | 10 million |   |
| Santa Clara, California and Leominster,  Massachusetts |       | Eliminate certain manufacturing activities                    |       | 4 million  |       |
| Oxted, England                                         |       | Close manufacturing facility                                  |       | 13 million |       |
| Venaria, Italy                                         |       | Move manufacturing to India and discontinue  certain products |       | 11 million |       |
| Company-wide                                           |       | Realign business processes                                    |       | 18 million |       |
|                                                   |       |                                                          |       |       |       |
| Total                                                  |       |                                                          |       | $          | 56 million |   |

 

To date, of the $56 million noted above, we have recorded $49.2 millionin severance-related charges: $44.1 million in severance termination costsrelated to approximately 1,300 administrative, operating and manufacturingpositions, and $5.1 million in pension termination costs at our manufacturingfacility in Oxted, England. The severance charges associated with theelimination of positions, which included the 1,200 persons notified to date,had been and will continue to be recognized over the future service period, asapplicable, in accordance with SFAS No. 146, “Accounting for the CostsAssociated with Exit or Disposal Activities”. We measured the total terminationbenefits at the communication date based on the fair value of the liability asof the termination date. A change resulting from a revision to either thetiming or the amount of estimated cash over the future service period will bemeasured using the credit-adjusted risk-free rate that was used to initiallymeasure the liability. The cumulative effect of the change will be recognizedas an adjustment to the liability in the period of the change.

 

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In fiscal 2002, we had recorded an estimated $5.1 million in severancecosts associated with the acquisition of TechnoFusion GmbH in Krefeld, Germany.In fiscal 2003, we finalized our plan and determined that total severance wouldbe approximately $10 million, and accordingly, we adjusted purchased goodwillby $4.8 million. We communicated the plan and the elimination of approximately250 positions primarily in manufacturing to our affected employees at that time.We have completed the restructuring of our Krefeld facility as of December 31,2005, and determined that $0.7 million of the severance reserve was excess. Accordingly,we decreased TechnoFusion purchased goodwill by $0.7 million.

 

The following summarizes our accrued severanceliability related to the June 2001 restructuring, the TechnoFusion acquisitionand the December 2002 restructuring plan for the three months ended March 31,2006 and the fiscal year ended June 30, 2005. Severance activity related to theelimination of 29 administrative and operating personnel as part of thepreviously reported restructuring in the fiscal quarter ended June 30, 2001, isalso disclosed. The remaining June 2001 severance relates primarily to certainlegal accruals associated with that restructuring, which will be paid orreleased as the outcome is determined (in thousands):

 
| ** **                                                                                          | ** ** | **June  2001  Restructuring** | ** ** | **December  2002  Restructuring** | ** ** | **TechnoFusion  Severance  Liability** | ** ** | **Total  Severance  Liability** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| Accrued severance, June 30, 2004                                                                    |       | $                             | 697        |                              | $          | 7,180                                  |       | $                               | 6,067      |   | $ | 13,944 |   |
| Costs incurred or charged to “impairment of  assets, restructuring and severance charges” |       | —                        |       | 8,677                             |       | —                                 |       | 8,677                           |       |
| Costs paid                                                                                          |       | (326                          | )          | (7,810                            | )          | (3,770                                 | )          | (11,906                         | )          |
| Foreign exchange impact                                                                             |       | —                        |       | 77                                |       | (190                                   | )          | (113                            | )          |
|                                                                                                |       |                          |       |                              |       |                                   |       |                            |       |   |   |   |   |
| Accrued severance, June 30, 2005                                                                    |       | $                             | 371        |                              | $          | 8,124                                  |       | $                               | 2,107      |   | $ | 10,602 |   |
| Costs incurred or charged to “impairment of  assets, restructuring and severance”         |       | —                        |       | 3,895                             |       | —                                 |       | 3,895                           |       |
| Purchase price adjustment                                                                           |       | —                        |       | —                            |       | (708                                   | )          | (708                            | )          |
| Costs paid                                                                                          |       | (115                          | )          | (5,446                            | )          | (900                                   | )          | (6,461                          | )          |
| Foreign exchange impact                                                                             |       | —                        |       | (6                                | )          | (21                                    | )          | (27                             | )          |
|                                                                                                |       |                          |       |                              |       |                                   |       |                            |       |
| Accrued severance, March 31, 2006                                                                   |       | $                             | 256        |                              | $          | 6,567                                  |       | $                               | 478        |   | $ | 7,301 |   |

 

Other Income and Expenses

 

Other expense was $1.7 million and $0.2 million for the three monthsended March 31, 2006 and 2005, respectively, and $2.9 million and $0.8 millionfor the nine months ended March 31, 2006 and 2005, respectively. Other expenseincreased in the current period reflecting losses on claim settlements andfixed asset disposals.

 

Interest Income and Expenses

 

Interest incomewas $8.5 million and $4.4 million for the three months ended March 31, 2006 and 2005, respectively,and $23.4 million and $11.6 million for the nine months ended March 31, 2006 and 2005, respectively,reflecting higher prevailing interest rates on longer-term cash investmentbalances in the current year.

 

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Interest expense was $6.1 million and $3.8 million for the three monthsended March 31, 2006 and 2005, respectively, and $18.7 million and $13.3million for the nine months ended March 31, 2006 and 2005, respectively,primarily reflecting a higher effective interest rate payable on our $550million convertible subordinated notes outstanding.

 

Income Taxes

 

Our effective tax provision for the three months endedMarch 31, 2006 and 2005 was 27.5 percent and 25.8 percent, respectively, and27.5 percent and 25.4 for the nine months ended March 31, 2006 and 2005,respectively, rather than the U.S. federal statutory tax provision of 35percent, as a result of lower statutory tax rates in certain foreignjurisdictions, the benefit of foreign tax credits and research and developmentcredits, partially offset by state taxes and certain foreign losses withoutforeign tax benefits.

 

In December 2004, the FASBissued FASB Staff Position No. 109-2, “Accounting and Disclosure Guidance forthe Foreign Earnings Repatriation Provision within the American Jobs CreationsAct of 2004”, which introduces a limited time 85 percent dividends receiveddeduction on the repatriation of certain foreign earnings to a U.S. tax payer (“repatriationprovision”), provided certain criteria are met. We are currently evaluating therange of possible amounts of unremitted earnings that may be repatriated as aresult of the repatriation provision; the related range of income tax effectsof such repatriation may vary depending on a number of factors, such as theamount and method of repatriation, and whether or not repatriation will takeplace. Based on the analysis available at the time, we previously announcedthat the one-time increase in tax rate for the fourth fiscal quarter ended June30, 2006 could be two percent. Based on our current analysis, the rate could besignificantly higher. Our evaluation is ongoing as is our decision as towhether to participate in the program. Accordingly, the one-time tax effect forfiscal fourth quarter cannot be reasonably estimated at this time.

 

**Liquidity and Capital Resources**

 

At March 31, 2006, we had cash and cash equivalent balances of $258.5million and cash investments in marketable debt securities of $649.7 million.We also have $139.3 million in unused credit facilities. Our investmentportfolio consists of available-for-sale fixed-income, principallyinvestment-grade securities as of March 31, 2006.

 

For the nine months ended March 31, 2006, cash provided by operating activities was $73.0million compared to $142.3 million in the comparable prior year nine monthsended March 31, 2005. Cash provided by operating activities for the nine monthsended March 31, 2006 reflected the reclassification of $4.6 million of the excesstax benefits from options exercised as a financing activity (see Note 1,“Certain Accounting Policies”). Depreciation and amortization adjusted cashflows from operations by $67.5 million. Changes in operating assets andliabilities decreased cash by $80.9 million during the nine months ended March 31, 2006. The increase inworking capital reflected the increase in our inventory balance as a result ofthe build up of inventory to support our backlog, the timing of accounts andother receivable collections, taxes and other accrued expense payments.

 

For the nine months ended March 31, 2006, cash used in investingactivities was $195.9 million. We purchased $654.3 million and sold $578.8million of cash investments. During the nine months ended March 31, 2006, wespent $122.5 million in capital expenditures, of which $45.3 million was at ournew Newport, Wales facility to support the demand for our C&C and ESPproducts. We started production at the Newport, Wales facility in the December2005 quarter. Purchase order commitments for 

 

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capital expenditures were $19.7 million as of March 31, 2006. We intendto fund capital expenditures and working capital requirements through cash andcash equivalents on hand, anticipated cash flow from operations and availablecredit facilities.

 

Financing activities for the nine months ended March 31, 2006 provided$16.2 million. Cash flows from financing activities increased by$4.6 million for the nine months ended, reflecting the proper classification ofthe excess tax benefits from options exercised as a financing activity (seeNote 1, “Certain Accounting Policies”). Proceeds from the exercise of employeestock options and stock participation plan contributed $27.7 million whilerepayments of short-term debt decreased cash by $12.1 million. As of March 31,2006, we had revolving, equipment and foreign credit facilities of $166.5million, against which $27.2 million had been used. As discussed in Note 4 ofthe unaudited consolidated financial statements, we are required to obtainirrevocable 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 of March 31, 2006, $17.7 millionin letters of credit were outstanding related to the transactions. Thecollateral requirement of the transactions may be adversely affected by anincrease in the five-year LIBOR curve, a decrease in our stock price, or both. Wecannot predict what the collateral requirement of the transactions and theletter of credit requirement will be over time. To illustrate the potentialimpact, had a 10 percent increase in the five-year LIBOR curve and a 10 percentdecrease in our stock price occurred at the close of the fiscal quarter endedMarch 31, 2006, our letter of credit commitment would have increased by $3.7million to $21.4 million. We do not have any off-balance sheet arrangements asof March 31, 2006.

 

On November 1,2005, our Board of Directors authorized and we announced a stock repurchaseprogram, under which up to $100 million of our common shares may be repurchasedwithout prior notice, through block trades or otherwise. Any shares repurchasedwill be paid with our existing cash and cash investments. As of March 31, 2006,we have not repurchased any shares.

 

Our $550million convertible subordinated notes are due in July 2007. We anticipate thatthese notes will be refinanced through public or private offerings of debt orequity, or be paid down with our existing cash and cash investments.

 

We believethat our current cash and cash investment balances, cash flows from operationsand borrowing capacity, including unused amounts under the $150 million CreditFacility as discussed in Note 9 of the unaudited consolidated financialstatements, will be sufficient to meet our operations in the next twelvemonths. Although we believe that our current financial resources will besufficient for normal operating activities, we may also consider the use offunds from other external sources, including, but not limited to, public orprivate offerings of debt or equity.

 

**ExecutiveOfficer Compensation**

 

TheCompensation Committee of the Board of Directors established at the beginningof our fiscal year discretionary bonus targets for executive officers based onachievement of certain performance criteria relating to revenues, gross margin,earnings per share and other individualized performance matters.  TheCommittee has reviewed and modified these targets to more align the targetswith the Company’s short and long term strategic goals, including the announceddivesture of our Non-Focus Product businesses.

 

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**Recent Accounting Pronouncements**

 

In February 2006, the FASB issued SFAS No. 155, “Accountingfor Certain Hybrid Financial Instruments, an amendment of FASB StatementsNo. 133 and 140” (SFAS No. 155”). SFAS No. 155 resolves issuesaddressed in SFAS No. 133 Implementation Issue No. D1, “Applicationof Statement 133 to Beneficial Interests in Securitized Financial Assets,” andpermits fair value remeasurement for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation,clarifies which interest-only strips and principal-only strips are not subjectto the requirements of SFAS No. 133, establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments that containan embedded derivative requiring bifurcation, clarifies that concentrations ofcredit risk in the form of subordination are not embedded derivatives andamends SFAS No. 140 to eliminate the prohibition on a qualifyingspecial-purpose entity from holding a derivative financial instrument thatpertains to a beneficial interest other than another derivative financialinstrument. SFAS No. 155 is effective for all financial instrumentsacquired or issued after the beginning of the first fiscal year that beginsafter September 15, 2006. The Company is currently evaluating the effectthe adoption of SFAS No. 155 will have on its financial position orresults of operations.

 

In March 2006, the FASB issued SFAS No. 156, “Accounting forServicing of Financial Assets, an amendment of FASB Statement No. 140” (“SFASNo. 156”). SFAS No. 156 requires an entity to recognize a servicing assetor liability each time it undertakes an obligation to service a financial assetby entering into a servicing contract under a transfer of the servicer’sfinancial assets that meets the requirements for sale accounting, a transfer ofthe servicer’s financial assets to a qualified special-purpose entity in aguaranteed mortgage securitization in which the transferor retains all of theresulting securities and classifies them as either available-for-sale ortrading securities in accordance with SFAS No. 115, “Accounting forCertain Investments in Debt and Equity Securities” and an acquisition orassumption of an obligation to service a financial asset that does not relateto financial assets of the servicer or its consolidated affiliates.Additionally, SFAS No. 156 requires all separately recognized servicingassets and servicing liabilities to be initially measured at fair value,permits an entity to choose either the use of an amortization or fair valuemethod for subsequent measurements, permits at initial adoption a one-timereclassification of available-for-sale securities to trading securities byentities with recognized servicing rights and requires separate presentation ofservicing assets and liabilities subsequently measured at fair value andadditional disclosures for all separately recognized servicing assets andliabilities. SFAS No. 156 is effective for transactions entered into afterthe beginning of the first fiscal year that begins after September 15,2006. The Company is currently evaluating the effect the adoption of SFASNo. 156 will have on its financial position or results of operations.

 

**Critical Accounting Estimates**

 

The consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States whichrequire us to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the consolidated financial statementsand revenues and expenses during the periods reported. Actual results coulddiffer from those estimates. Information with respect to our criticalaccounting policies which we believe could have the most 

 

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significant effect on our reported results and require subjective orcomplex judgments is contained in Item 7, Management’s Discussion and Analysisof Financial Condition and Results of Operations, of our Annual Report onForm 10-K for the fiscal year ended June 30, 2005.

 

Effective in the first fiscal quarter ended September 30, 2005, in July2005, we adopted the provisions of Statement of Financial Accounting StandardsNo. 123 “Share-Based Payment” (“SFAS No. 123R”) to account forstock-based compensation. Under SFAS No. 123R, we estimate the fair valueof stock options granted using the Black-Scholes option pricing model. The fairvalue for awards that are expected to vest is then amortized on a straight-linebasis over the requisite service period of the award, which is generally theoption vesting term. The amount of expense attributed is based on estimatedforfeiture rate, which is revised as information is updated. This optionpricing model requires the input of highly subjective assumptions, includingthe expected volatility of our common stock and an option’s expected life. Thefinancial statements include amounts that are based on our best estimates andjudgments. 

 

**Statementof Caution Under the Private Securities Litigation Reform Act of 1995**

 

This Quarterly Report on Form 10-Q includes some statements and otherinformation that are not historical facts but are “forward-looking statements”as that term is defined in the Private Securities Litigation Reform Act of 1995.The materials presented can be identified by the use of forward-lookingterminology such as “anticipate,” “believe,” “estimate,” “expect,” “may,” “should,”“view,” or “will” or the negative or other variations thereof. We caution thatsuch statements are subject to a number of uncertainties, and actual resultsmay differ materially. Factors that could affect our actual results includethose set forth below under Part II, “Other Information”, Item 1A. “RiskFactors” and other uncertainties disclosed in our reports filed from time totime with the Securities and Exchange Commission. Unless required by law, weundertake no obligation to publicly update or revise any forward lookingstatements, to reflect new information, future events or otherwise.

 

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**ITEM 3.****  Quantitative and Qualitative Disclosures aboutMarket Risk**

 

We are exposed to various risks, including fluctuations in interest andforeign currency rates. In the normal course of business, we also face risksthat are either non-financial or non-quantifiable. Such risks principallyinclude country risk, credit risk and legal risk and are not discussed orquantified in the following analyses, as well as risks set forth under theheading “Factors that May Affect Future Results” in this Quarterly Report onForm 10-Q and in our Annual Report on Form 10-K for the fiscal year ended June30, 2005.

 

*Interest Rate Risk*

 

Our financial assets and liabilities subject to interest rate risk arecash investments, convertible debt, credit facilities and interest rate swaps. Ourprimary objective is to preserve principal while maximizing yield withoutsignificantly increasing risk. At March 31, 2006, we evaluated the effect thatnear-term changes in interest rates would have had on these transactions. Achange of as much as ten percent in the London InterBank Offered Rate (“LIBOR”)would have had a favorable impact of approximately $0.5 million and $0.9million on net interest income/expense for the three and nine months endedMarch 31, 2006, since the interest income on our cash and cash investmentswould have outweighed additional interest expense on our outstanding debt. For our interest rate contract with Lehman Brothers, an increase of tenpercent in interest rates would have had a favorable impact of $1.1 million, anda decrease of ten percent in interest rates would have had an adverse impact of($0.3) million, on net interest income/expense. These changes would not havehad a material impact on our results of operations, financial position or cashflows.

 

In December 2001, weentered into an interest rate swap transaction (the “Transaction”) with JPMorgan Chase Bank (the “Bank”), to modify our effective interest payable withrespect to $412.5 million of our $550 million outstanding convertible debt (the“Debt”)  (see Notes 4, “DerivativeFinancial Instruments,” and 9, “Bank Loans and Long-Term Debt”). At theinception of the Transaction, interest rates were lower than that of the Debtand we believed that interest rates would remain lower for an extended periodof time. In April 2004, we entered into an interest rate swap transaction (the “April2004 Transaction”) with the Bank to modify the effective interest payable withrespect to the remaining $137.5 million of the Debt. The variable interest ratewe have paid since the inception of the swap has averaged 2.76 percent,compared to a coupon of 4.25 percent on the Debt. For the three months endedMarch 31, 2006 and 2005, this arrangement (decreased) increased interestexpense by ($0.2) million and $2.6 million, respectively, and $0.3 million and$7.3 million for the nine months ended March 31, 2006 and 2005, respectively.

 

Accounted for as fairvalue hedges under SFAS No. 133, the mark-to-market adjustments of the twoTransactions were offset by the mark-to-market adjustments on the Debt,resulting in no material impact to earnings. To measure the effectiveness ofthe hedge relationship, we used a regression analysis. To evaluate therelationship of the fair value of the two transactions and the changes in fairvalue of the Debt attributable to changes in the benchmark rate, we discountedthe estimated cash flows by the LIBOR swap rate that corresponds to the Debt’sexpected maturity date. In addition, our ability to call the Debt wasconsidered in assessing the effectiveness of the hedging relationship. Forthose years that were projected to include at least a portion of redemption ofthe convertible debentures, we employed a valuation model known as a 

 

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Monte Carlo simulation. Thissimulation allowed us to project probability-weighted contractual cash flowsdiscounted at the LIBOR swap rate that corresponded to the Debt’s expectedmaturity date. The market value of the December 2001 Transaction was aliability of $6.8 million and $0.3 million at March 31, 2006 and June 30, 2005,respectively. The market value of the April 2004 Transaction was a liability of$4.2 million and $3.4 million at March 31, 2006 and June 30, 2005,respectively.

 

In April 2002, weentered into an interest rate contract (the “Contract”) with an investmentbank, Lehman Brothers (“Lehman”), to reduce the variable interest rate risk ofthe Transaction. The notional amount of the Contract is $412.0 million,representing approximately 75 percent of the Debt. Under the terms of theContract, we have the option to receive a payout from Lehman covering ourexposure to LIBOR fluctuations between 5.5 percent and 7.5 percent for any fourdesignated quarters. The market value of the Contract at March 31, 2006 and June30, 2005, respectively, was $0.3 million and $0.1 million, respectively, andwas included in other long-term assets. Mark-to-market gains (losses) of $0.1million and $0.2 million for the three months ended March 31, 2006 and 2005,respectively, and $0.2 million and ($0.4) million, for the nine months endedMarch 31, 2006 and 2005, respectively, were charged to interest expense.

 

*Foreign Currency Risk*

 

We conduct business on a global basis in several foreign currencies andhave currency exposure related primarily to the British Pound Sterling, theEuro and the Japanese Yen. Considering our foreign currency risks, we have thegreatest exposure to the Japanese Yen, since we have significant Yen-basedrevenue without the Yen-based manufacturing costs. The risk of our revenues inthe European currencies is partially offset by the cost of manufacturing goodsin the European currencies.

 

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 againstreductions in value and volatility of future cash flows caused by changes incurrency exchange rates, we have established revenue, expense and balance sheethedging programs. Currency forward contracts and local Yen and Euro borrowingsare 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 a change, after taking intoaccount our derivative financial instruments and offsetting positions, wouldhave resulted in an annualized adverse impact on income before taxes of lessthan $1 million for the three and nine months ended March 31, 2006 and 2005.

 

InMarch 2001, we entered into a five-year foreign exchange forward contract (the “ForwardContract”) for the purpose of reducing the effect of exchange rate fluctuationson forecasted intercompany purchases by our subsidiary in Japan. We designatedthe Forward Contract as a cash flow hedge under which mark-to-marketadjustments were recorded in accumulated other comprehensive income ofstockholders’ equity, until the forecasted transactions were recorded inearnings. Under the terms of the Forward Contract, we were required to exchange1.2 billion Yen for $11.0 million on a quarterly basis starting in June 2001and expiring in the current March 2006 quarter. The market value of the forwardcontract was $0.1 million at June 30, 2005. Mark-to-market gains (losses),included in other comprehensive income, net of tax, were $0 million and $1.8million for the three months ended March 31, 2006 and 2005,

 

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respectively,and $0 and ($0.3) million for the nine months ended March 31, 2006 and 2005,respectively. Following the expiration of the Forward Contract, on May 8, 2006,we entered into another five-year foreign exchange forward contract with BNPParibas (the “May 2006 Forward Contract”), for the purpose of reducing theeffect of exchange rate fluctuations on forecasted intercompany purchases byour Japan subsidiary. We have designated the May 2006 Forward Contract as acash flow hedge. Under the terms of the May 2006 Forward Contract, we arerequired to exchange 507.5 million Yen for $5.0 million on a quarterly basisstarting in June 2006 and expiring in the March 2011 quarter. We believe thatour operations will generate sufficient Yen to meet our contractualcommitments.

 

We had approximately $67.3 million and $75.9 million in notionalamounts of forward contracts not designated as accounting hedges under SFAS No.133 at March 31, 2006 and June 30, 2005, respectively. Net realized andunrealized foreign-currency gains recognized in earnings were less than $1million for the three and nine months ended March 31, 2006 and 2005.

 

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**ITEM4.****                                                     CONTROLSAND PROCEDURES**

 

(a)          Evaluationof disclosure controls and procedures

 

The term “disclosure controls and procedures” refersto the controls and other procedures of a company that are designed to ensurethat information required to be disclosed by the company in the reports that itfiles under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded,processed, summarized and reported, within required time periods specified inSecurities and Exchange Commission rules and forms, and that suchinformation is accumulated and communicated to management as appropriate toallow timely decisions regarding required disclosures. Our management, with theparticipation of our Chief Executive Officer, Alexander Lidow, and ChiefFinancial Officer, Michael P. McGee, carried out an evaluation of theeffectiveness of our disclosure controls and procedures pursuant to ExchangeAct Rule 13a-15(b). Based on that evaluation, the Chief Executive Officerand Chief Financial Officer concluded that, as of the end of the period coveredby this report, such controls and procedures are not effective at thereasonable assurance level due to the material weakness discussed below.

 

Disclosure controls and procedures, no matter howwell designed and implemented, can provide only reasonable assurance ofachieving an entity’s disclosure objectives. The likelihood of achieving suchobjectives is affected by limitations inherent in disclosure controls andprocedures. These include the fact that human judgment in decision-making canbe faulty and that breakdowns in internal control can occur because of humanfailures such as simple errors, mistakes or intentional circumvention of theestablished processes.

 

(b)         Materialweakness in internal control over financial reporting

 

Amaterial weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected.

 

Asof March 31, 2006, we did not maintain effective controls over the preparation,review, presentation and disclosure of our consolidated statement of cashflows. Specifically, the controls were not effective to ensure that cash flowsfrom the excess tax benefit from stock option exercised were presented as cashflows from financing activities in the consolidated statement of cash flows inaccordance with generally accepted accounting principles. This controldeficiency resulted in the restatement of our interim consolidated financialstatements for the first and second quarters of fiscal 2006. In addition, thiscontrol deficiency could result in a misstatement of our cash flows fromoperating activities and cash flows from financing activities that would resultin a material misstatement to our annual or interim consolidated statements ofcash flows that would not be prevented or detected. Accordingly, we havedetermined that this control deficiency constitutes a material weakness.

 

Plan for remediation of material weakness 

 

Duringthe fourth quarter of fiscal 2006, we are implementing enhanced procedures andcontrols which include improved training and review processes to ensure properpreparation, review, presentation and disclosure of amounts included in itsconsolidated statement of cash flows.

 

(c)          Changesin internal controls

 

There was no change in our internal controls duringthe fiscal third quarter 2006 that has materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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### **PART II.**                                                OTHERINFORMATION

### ** **

### **ITEM 1A.**                                            RiskFactors

### ** **

***Changes in end-market demand ordownturns in the highly cyclical semiconductor industry could affect ouroperating results and the value of our business.***

 

Wemay experience significant changes in our profitability as a result ofvariations in sales, changes in product mix sought by customers, seasonality,price competition for orders and the costs associated with the introduction ofnew products and start-up of new facilities and additional capacity lines. Themarkets for our products depend on continued demand with the producttechnological platforms and in the mix we plan for and produce in theinformation technology, consumer, industrial, aerospace and defense andautomotive markets. Changes in the demand mix, needed technologies and theseend markets may adversely affect our ability to match our products,inventory and capacity to meet customer demand and could adversely affect ouroperating results and financial condition.

 

Inaddition, the semiconductor industry is highly cyclical and the value of ourbusiness may decline during the down portion of these cycles. We haveexperienced these conditions in our business in the recent past and we cannotpredict when we may experience such downturns 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 spendingfor the end-market applications which incorporate our products may bereduced due to increased oil prices or otherwise.***

 

Ourrevenue and gross margin guidance is dependent on a certain level of consumerand/or corporate spending for the specific mix of products we produce and havethe capacity to produce. If our projections of these expenditures fail tomaterialize, or materialize in a mix different from that for which weanticipate and build inventory, whether due to reduced consumer or corporatespending from increased oil prices or otherwise, our revenue and gross margincould be adversely impacted.

 

***We maintain backlog of customerorders that is subject to cancellation, reduction or delay in delivery schedules,which may result in lower than expected revenue.***

 

Withcertain exceptions related to products within our Aerospace and Defense andNon-Aligned Product segments, we manufacture primarily pursuant to purchaseorders for current delivery or to forecast, rather than pursuant to long-termsupply contracts. The semiconductor industry is subject to rapid changes incustomer outlooks or unexpected build ups of inventory in the supply channel asa result of shifts in end-market demand generally or in the mix of that demand.Accordingly, many of these purchase orders or forecasts may be revised orcanceled without penalty. As a result, we must commit resources to themanufacturing of products, and a specific mix of products, without any advancepurchase commitments from customers. Our inability to sell products after wedevote significant resources to build them could have a material adverse effecton our

 

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levelsof inventory (the value of our inventory), our revenue and our operatingresults generally.

 

***We build and maintain inventory inorder to meet our historic and projected needs, but cannot guarantee that ourinventory will be adequate to meet our needs or will be usable at a futuredate.***

 

Atthe end of fiscal quarter ended March 31, 2006, we reported net inventories ofapproximately $208.7 million. We build and maintain inventory in order to meetour historic and projected needs, but cannot guarantee that the inventory webuild will be adequate or the right mix of products to meet market demand. Ifwe do not project and build the proper mix and amount of inventory, our revenueand gross margin may be adversely affected. Additionally, if we produce orhave produced inventory that does not meet current or future demand, we may determineat some point that certain of the inventory may only be sold at a discountor may not be sold at all, resulting in the reduction in the carryingvalue of our inventory and a material adverse effect on our financial conditionand operating results.

 

***The semiconductor business is highlycompetitive and increased competition could adversely affect the price of ourproducts and otherwise reduce 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 competitive pressures can adversely affect ourrevenue and gross margin, and hence, our profitability. 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 introducecompeting products in the future.

 

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***Failure to timely complete ourexpansion plans for our wafer fabrication facility could adversely affect ourrevenue growth and ability to achieve our margin targets.***

 

Weare operating in the 90s percent of our worldwide semiconductor fabrication andassembly/module manufacturing capacities, without taking into accountsubcontract or foundry capacity. We are also expanding our most advanced waferfabrication facility in Newport, Wales to provide additional capacity tosupport the growth of our Focus Products. We started production at certain ofsuch new facilities during the December 2005 quarter, and expect tocomplete our expansion of that facility in about calendar year 2006. If we failto timely execute on those plans in advance of demand for our products, thatfailure could adversely affect our revenue growth and ability to achieve ourmargin targets. We cannot assure you that we will complete our plans timely,that the ramp-up of the expanded facilities will occur effectively and withouterror or delay, or that sufficient third party sources would be available tosatisfy our ability to meet customer demand. Even if we fully execute andimplement our plans, we cannot guarantee that we will have sufficient worldwidesemiconductor fabrication and assembly/module manufacturing capacities to meetdemand and there may be other unforeseen factors that could adverselyimpact our operating results.

 

***Delays in initiation ofproduction at new facilities, implementing new production techniques orresolving problems associated with technical equipment malfunctions couldadversely affect our manufacturing efficiencies***.

 

Ourmanufacturing efficiency has been and will be an important factor in our futureprofitability, and we may not be able to maintain or increase ourmanufacturing efficiency. Our manufacturing and testing processes are complex,require advanced and costly equipment and are continually being modified in ourefforts to improve yields and product performance. Difficulties in themanufacturing process can lower yields. Technical or other problems could leadto production delays, order cancellations and lost revenue. In addition, anyproblems in achieving acceptable yields, construction delays, or other problemsin upgrading or expanding existing facilities, building new facilities,problems in bringing other new manufacturing capacity to full production orchanging our process technologies, could also result in capacity constraints,production delays and a loss of future revenue and customers. Our operatingresults also could be adversely affected by any increase in fixed costs andoperating expenses related to increases in production capacity if net sales inthe appropriate mix do not increase proportionately, or in the event of adecline in demand for some or all of our products.

 

***If we are unable to implement ourbusiness strategy, our revenue and profitability may be adverselyaffected.***

 

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 potential sale of our entire Non-FocusProducts business. We cannot assure you that we will continue to successfullyimplement our business strategy or that implementing our strategy will sustainor improve our results of operations.

 

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***The failure to execute on our plansto divest or discontinue product lines that are not consistent with ourbusiness objectives, and replace those revenues with higher-margin productsales could adversely affect our operating results.***

 

Wehave announced the divestiture, discontinuation or change in business model ofour Non-Focus Products. Our plan is to replace the divested or discontinuedrevenues with (or change the business model to achieve) higher-margin productsales and target gross margin of greater 50 percent. We cannot assure you thatwe will complete our plans or achieve our target gross margin, timely or at all.Additionally, we have announced that we could enter into agreements withrespect to certain divestitures by the end of June 2006. As a number offactors, among those factors controlled by third parties, affect our ability tocomplete those plans, we cannot assure you that we can achieve our target datesor complete such plans at all.

 

Theactivities involved with the divestiture, discontinuation and re-alignment ofproduct sales could involve changes to various aspects of our business whichcould have a material adverse effect on our profitability to an extent we havenot anticipated. Even if we fully execute and implement our plans, there may beunforeseen factors that could have a material adverse impact on our operatingresults.

 

***The failure to implement andcomplete our restructuring programs and accomplish planned cost reductionscould adversely affect our business.***

 

InDecember 2002, we announced a number of restructuring initiatives. Ourgoal was to reposition our company to better fit the market conditions,de-emphasize our commodity business and accelerate the move to what wecategorize as our proprietary products, which refer to our Power ManagementICs, Advanced Circuit Devices, and Power Systems. The restructuring includesconsolidating and closing certain manufacturing sites, upgrading equipment andprocesses in designated facilities and discontinuing production in a number ofothers that cannot support more advanced technology platforms or products. Therestructuring also includes lowering overhead costs across our supportorganization. We cannot assure you that these restructuring initiatives willachieve their goals, accomplish the cost reductions planned, or be accomplishedwithin our expectations as to the amount of charges to be taken in connectionwith that activity. Additionally, because our restructuring activities involvechanges to many aspects of our business, the activities could adversely affectproductivity and sales to an extent we have not anticipated. Even if we fullyexecute and implement these restructuring activities, and they generate theanticipated cost savings, there may be other unforeseen factors that couldresult in the amount of charges to be taken in connection with ourrestructuring activities or otherwise adversely impact our profitability andbusiness.

 

***Our products may be found to be defective and,as a result, product claims may be asserted against us, which may harmour business and our reputation with our customers and significantly adverselyaffect our results and financial condition.***

 

Ourproducts are typically sold at prices that are significantly lower than thecost of the equipment or other goods in which they are incorporated. Althoughwe maintain rigorous quality control systems, we shipped large quantities ofsemiconductor devices in 2005 to a wide range of customers around the world, ina variety of high profile and critical applications, and continue to do so. Inthe ordinary course of our business we receive warranty claims for some ofthese products that are defective, or that do not perform to publishedspecifications. Since a defect or failure in our products could give

 

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riseto failures in the end products that incorporate them (and consequential claimsfor damages against our customers from their customers depending on applicablelaw and contract), we often need to defend against claims for damages that aredisproportionate to the revenue and profit we receive from the productsinvolved. In addition, our ability to reduce such liabilities may belimited by the laws or the customary business practices of the countries wherewe do business. Even in cases where we do not believe we have legal liabilityfor such claims, we may choose to pay for them to retain a customer’sbusiness or goodwill or to settle claims to avoid protracted litigation. Ourresults of operations and business would be adversely affected as a result of asignificant alleged quality or performance issues in our products, if we arerequired or choose to pay for the damages 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 product liabilityand other types of insurance, we have certain deductibles and exclusions tosuch policies and may not have sufficient insurance coverage. We also may nothave sufficient resources to satisfy all possible product liability or othertypes of product claims. In addition, any perception that our products aredefective would likely result in reduced sales of our products, loss ofcustomers and harm to our business and reputation.

 

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

 

Wehave established procedures for the review and monitoring of the creditworthiness of our customers and/or significant amounts owing from customers.However, from time to time, we may find that, despite our efforts, one ormore of our customers become insolvent or face bankruptcy proceedings (Delphiis currently one such customer). Such events could have an adverse effect onour operating results if our receivables applicable to that customer becomeuncollectible in whole or in part, or if our customers’ financial situationresult in reductions in whole or in part of our ability to continue tosell our products or services to such customers at the same levels or at all.

 

***If some original equipment manufacturers(“OEMs”) do not design our products into their equipment or convert design orprogram wins to actual sales, a portion of our revenue may be adverselyaffected.***

 

A“design win” or program award from a customer does not guarantee that thedesign or program win will become future sales to that customer. For example,in our Computing and Communications segment, we have announced new design orprogram wins in next generation game stations, and our other segments have hadother design or program wins. We also are unable to guarantee that we will beable to convert design or program wins into sales for the life of anyparticular program, or at all, or that the revenue from such wins would besignificant. We also cannot guarantee that we will achieve the same level ofdesign or program wins as we have in the past, or at all. Without design orprogram wins from OEMs, we would only be able to sell our products to theseOEMs as a second source, if at all. Once an OEM designs another supplier’ssemiconductor into one of its product platforms, it is more difficult for us toachieve future design or program wins with that OEM’s product platform becausechanging suppliers involves significant cost, time, effort and risk. Achievinga design or program win with a customer does not ensure that we will receivesignificant revenue from that customer and we may be unable to convert designor program wins into actual sales.

 

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***Corporate investment andexpenditures in the Information Technology sector and in Information Technologypurchases may not materialize as we have planned.***

 

Ourrevenue and gross margin guidance is dependent on a certain level of corporateinvestment and expenditures in the Information Technology sector and inInformation Technology purchases. If our projections of these expenditures failto materialize, whether due to increased oil prices, change in marketconditions, or otherwise, our revenue and gross margin could be adverselyimpacted.

 

***New technologies could result in thedevelopment of new products and a decrease in demand for our products, and we may notbe able 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 diesizes and improve manufacturing yields. We cannot assure you that we canaccomplish these goals.

 

***Our failure to obtain or maintainthe right to use certain technologies may negatively affect our financialresults.***

 

Ourfuture success and competitive position may depend in part upon ourability to obtain or maintain certain proprietary technologies used in ourprincipal products, which is achieved in part by defending and maintainingthe validity of our patents and defending claims by our competitors ofintellectual property infringement. We license certain patents owned by others.We have also been notified that certain of our products may infringe thepatents of third parties. Although licenses are generally offered in suchsituations, we cannot eliminate the risk of litigation alleging patentinfringement. We are currently a defendant in intellectual property claims andwe could become subject to other lawsuits in which it is alleged that we haveinfringed upon the intellectual property rights of others.

 

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 exposedto substantial liability for damages and may need to obtain licenses fromthe patent 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.

 

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***Our ongoing protection and relianceon our intellectual property assets expose us to risks and continued levels ofrevenue in our IP segment is subject to our ability to maintain currentlicenses, licensee and market factors not within our control and our ability toobtain new licenses.***

 

Wehave traditionally 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 2005 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 of productsthat are not covered by our patents; remaining covered under unexpired MOSFETpatents; the defensibility and enforceability of our patents; changes in ourlicensees’ 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 also cannot guarantee that we can obtainnew licenses to offset reductions in royalties from existing licenses. While wetry to predict the effects of these factors and efforts, often there arevariations or factors that can significantly affect results different from thatpredicted. Accordingly, we cannot guarantee that our predictions of our IPsegment revenue will be consistent with actual results. We also cannotguarantee that our royalty income will continue at levels consistent with priorperiods. Any decrease in our royalty income could have a material adverseeffect on our operating results and financial condition.

 

***Our international operations exposeus to material risks.***

 

We expect revenue from foreign markets tocontinue to represent a significant portion of total revenue. We maintain orcontract with significant operations in 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. If such laws or the implementation of theserestrictions change, or if in the course of operating under such laws we becomesubject to claims, we cannot assure you that such factors would not have amaterial adverse effect on our financial 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 havenot experienced any material adverse effect on our operating results as aresult of these and other factors, we cannot assure you that such factors willnot have a material adverse effect on our financial condition and operatingresults in the future.

 

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***Delays in initiation of productionat new facilities, 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.

 

Wehave transferred manufacturing from our Krefeld, Germany to our Swansea, Walesand Tijuana, Mexico facilities. We are ramping up our Newport, Wales facility,and anticipate transferring our El Segundo manufacturing to the Newport, Walesfacility by calendar year end 2006. We have experienced some delays and/ortechnical problems in moving our various facilities. Continued delays and/ortechnical problems in completing the remaining transfers could lead toincreased costs, reduced yields, delays in product deliveries, ordercancellations and/or lost revenue.

 

***Interruptions, delays or costincreases affecting our materials, parts or equipment may impair ourcompetitive position and 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 extend lead times, limit supplies or increase prices due tocapacity constraints or other factors. We have a limited number of suppliers forsome materials, parts and equipment, and any interruption could materiallyimpair our operations.

 

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, we do not have immediate control over our product delivery schedules orproduct quality. Due to the amount of time often required to qualify assemblersand testers and the high cost of qualifying multiple parties for the same products,we could experience delays in

 

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theshipment of our products if we are forced to find alternative third parties toassemble or test them. Any product delivery delays in the future could have amaterial adverse effect on our operating results and financial condition. Ouroperations and ability to satisfy customer obligations could be adverselyaffected if our relationships with these subcontractors were disrupted orterminated.

 

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

 

Wesell products 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 a result, we must commit resources to the manufacturing of products withoutany advance 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 ofour revenue 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 orretain the qualified technical, sales, marketing and managerial personnelrequired to operate 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 toretain existing key technical, sales, marketing and managerial employees orthat we will be successful in attracting, assimilating or retaining otherhighly qualified technical, sales, marketing and managerial personnel in thefuture. If we are unable to retain existing key employees or are unsuccessfulin attracting new highly qualified employees, our business, financial conditionand results of operations could be materially and adversely affected.

 

***We have acquired and may continueto acquire other companies and may be unable to successfully integratesuch companies with our operations.***

 

Wehave acquired several companies over the past few years. We may continue toexpand and diversify our operations with additional acquisitions. If we areunsuccessful in integrating these companies with our operations, or ifintegration is more difficult than anticipated, we may experiencedisruptions that could have a material adverse effect on our business,financial condition and results of operations.

 

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***The price of our common stock hasfluctuated widely in the past and may fluctuate widely in the future.***

 

Ourcommon stock, which is traded on The New York Stock Exchange, has experiencedand may continue to experience significant price and volume fluctuationsthat could adversely affect the market price of our common stock without regardto our operating performance. In addition, we believe that factors such asquarterly fluctuations in financial results, earnings below analysts’ estimatesand financial performance and other activities of other publicly tradedcompanies in the semiconductor industry could cause the price of our commonstock to fluctuate substantially. In addition, in recent periods, our commonstock, the stock market in general and the market for shares of semiconductorindustry-related stocks in particular have experienced extreme pricefluctuations which have often been unrelated to the operating performance ofthe affected companies. Any similar fluctuations in the future could adverselyaffect the market price of our common stock.

 

***Our investments in certainsecurities expose us to market risks.***

 

Weinvest excess cash in marketable securities consisting primarily of commercialpaper, corporate notes, corporate bonds and governmental securities. We alsohold as strategic investments the common stock of two publicly-traded Japanesecompanies, one of which is Nihon Inter Electronics Corporation. The value ofthese investments is subject to market fluctuations, which if adverse, couldhave a material adverse effect on our operating results and financialcondition.

 

***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.***

 

Wehave disclosed that we have discovered a material weakness in our internalcontrol over financial reporting. While we are implementing enhanced proceduresand controls in our fourth quarter of fiscal 2006 to cure the material weaknessand management believes that it will cure such weakness within a reasonableperiod of time, we cannot assure you that such procedures will timely cure suchweakness.

 

Effectiveinternal controls are necessary for us to produce reliable financial reportsand are important in our effort to prevent financial fraud. We are required toperiodically evaluate the effectiveness of the design and operation of ourinternal controls. These evaluations may result in the conclusion thatenhancements, modifications or changes to our internal controls are necessaryor desirable. As noted with the disclosed material weakness, while managementevaluates the effectiveness of our internal controls on a regular basis, wecannot provide absolute assurance that these controls will always be effectiveor any assurance that the controls, accounting processes, procedures andunderlying assumptions will not be subject to revision. There are also inherentlimitations on the effectiveness of internal controls and financial reportingpractices, including collusion, management override, and failure of humanjudgment. Because of this, control procedures are designed and financialreporting practices to reduce rather than eliminate business risks. If we failto maintain an effective system of internal control over financial reporting orif and for so long as management or our independent registered publicaccounting firm were to discover material weaknesses in our internal controlover financial reporting (or if our system of controls and audits result in achange of practices or new information or conclusions about our financialreporting) like the disclosed material weakness, we may be unable to producereliable financial reports or prevent fraud and it could harm our financialcondition and results of operations and result in loss of investor confidenceand a decline in our stock price.

 

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***Large potential environmentalliabilities, including those relating to a former operating subsidiary, may adverselyimpact our financial position.***

 

Federal,state, foreign and local laws and regulations impose various restrictions andcontrols on the discharge of materials, chemicals and gases used in oursemiconductor manufacturing processes. In addition, 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.Also, we may be subject to common law claims if we release substances thatdamage or harm third parties. Further, we cannot assure you that changes inenvironmental laws or regulations will not require additional investments incapital equipment or the implementation of additional compliance programs inthe future. Any failure to comply with environmental laws or regulations couldsubject us to serious liabilities and could have a material adverse effect onour operating results and financial condition.

 

***Some of our facilities are locatednear major earthquake fault lines.***

 

Ourcorporate headquarters, one of our manufacturing facilities, one of ourresearch facility and certain other critical business operations are locatednear major earthquake fault lines. We could be materially and adverselyaffected in the event of a major earthquake. Although we maintain earthquakeinsurance, we can give you no assurance that we have obtained or will maintainsufficient insurance coverage.

 

***There can be no assurance that wewill have sufficient capital resources to make necessary investments inmanufacturing technology and equipment.***

 

Thesemiconductor industry is capital intensive. Semiconductor manufacturingrequires a constant upgrading of process technology to remain competitive, asnew and enhanced semiconductor processes are developed which permit smaller,more efficient and more powerful semiconductor devices. We maintain certain ofour own manufacturing, assembly and test facilities, which have required andwill continue to require significant investments in manufacturing technologyand equipment. We are also attempting to add the appropriate level and mix ofcapacity to meet our customers’ future demand. There can be no assurance thatwe will have sufficient capital resources to make necessary investments inmanufacturing technology and equipment. Although we believe that anticipatedcash flows from operations, existing cash reserves and other equity or debtfinancings that we may obtain will be sufficient to satisfy our futurecapital expenditure requirements, there can be no assurance that this will bethe case or that alternative sources of capital will be available to us onfavorable terms or at all.

 

***The maturity of our outstandingConvertible Subordinated Notes due in July 2007 may expose us torisks.***

 

We have outstanding $550million in Convertible Subordinated Notes due in July 2007. While weintend to refinance or pay down such notes prior to maturity, if we decide torefinance such notes, in whole or in part, we cannot guarantee that the terms,including interest rate and costs, would be comparable to the current interestrates and costs, and if higher, could adversely affect our future results. Additionally,if we elect in whole or in part to pay down such notes, it would lower theamount of funds we have available for operations or investment.

 

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***Unforeseen changes in marketconditions, tax laws and other factors could impact our judgment about therealizability of our deferred tax assets.***

 

Wehave made certain judgments regarding the realizability of our deferred taxassets. In accordance with SFAS No. 109, “Accounting for Income Taxes”,the carrying value of the net deferred tax assets is based on the belief thatit is more likely than not that we will generate sufficient future taxableincome in certain jurisdictions to realize these deferred tax assets, afterconsidering all available positive and negative evidence. If our assumptionsand estimates change in the future given unforeseen changes in marketconditions, tax laws or other factors, then the valuation allowancesestablished may be increased, resulting in increased income tax expense. Conversely,if we are ultimately able to use all or a portion of the deferred tax assetsfor which a valuation allowance has been established, then the related portionof the valuation allowance will be released to income as a credit to income taxexpense.

 

***Final outcomes from the various taxauthorities’ audits are difficult to predict and an unfavorable finding may negativelyimpact our financial results.***

 

Asis common with corporations of our size, we are from time to time under auditby various taxing authorities. It is often difficult to predict the finaloutcome or the timing of resolution of any particular tax matter. We haveprovided certain tax reserves which have been included in the determination ofour financial results. However, unpredicted unfavorable settlements may requireadditional use of cash and negatively impact our financial position or resultsof operations.

 

***Terrorist attacks, such as thosethat took place on September 11, 2001, or threats or occurrences of otherterrorist activities whether in the United States or internationally may affectthe markets in which our common stock trades, the markets in which we operateand our profitability.***

 

Terroristattacks, such as those that took place on September 11, 2001, or threatsor occurrences of other terrorist or related activities, whether in the UnitedStates or internationally, may affect the markets in which our commonstock trades, the markets in which we operate and our profitability. Futureterrorist or related activities could affect our domestic and internationalsales, disrupt our supply chains and impair our ability to produce and deliverour products. Such activities could affect our physical facilities or those ofour suppliers or customers, and make transportation of our supplies andproducts more difficult or cost prohibitive. Due to the broad and uncertaineffects that terrorist attacks have had on financial and economic marketsgenerally, we cannot provide any estimate of how these activities might affectour future results.

 

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

 

Naturaldisasters, like those related to Hurricanes Katrina and Wilma, or threats oroccurrences of other similar events, whether in the United States orinternationally, may affect the markets in which our common stock trades,the markets in which we operate and our profitability. Such events could affectour domestic and international sales, disrupt our supply chains, and impair ourability to produce and deliver our products. While we do not have facilitieslocated near the affected areas, such activities could affect

 

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physicalfacilities, primarily for raw materials and process chemicals and gases of oursuppliers or customers, and make transportation of our supplies and productsmore 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.

 

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**ITEM2.****                                                     UnregisteredSales of Equity Securities and Use of Proceeds**

 

On November 1,2005, our Board of Directors authorized a stock repurchase program, under whichup to $100 million of our common shares may be repurchased without priornotice, through block trades or otherwise. We intend that any sharesrepurchased will be held as treasury shares that may be used for generalcorporate purposes. The following lists the number of the shares purchasedunder the repurchase program and, as of each month, the number of shares that may yetbe repurchased under announced plans (in thousands):

 
| **Period**                                                | ** ** | **(a) Total Number  of Shares (or  Units) Purchased** | ** ** | **(b) Average Price  Paid per Share (or  Unit)** | ** ** | **(c) Total Number  of Shares (or  Unites) Purchased  as part of Publicly  Announced Plans  or Programs** | ** ** | **(d) Maximum  Number (or  Approximate  Dollar Value) of  Shares (or Units)  that can be  Purchased Under  the Plans or  Programs** | ** **  |
|-----------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|
|                                                      |       |                                                                           |       |                                                                      |       |                                                                                                                                                        |       |                                                                                                                                                                                       |        |
| Month #1 (November 1 to November 30, 2005) |       | 0                                                                              |       | 0                                                                         |       | 0                                                                                                                                                           |       | $                                                                                                                                                                                          | 100 million |   |
|                                                      |       |                                                                           |       |                                                                      |       |                                                                                                                                                        |       |                                                                                                                                                                                       |        |   |
| Month #2 (December 1 to December 31, 2005) |       | 0                                                                              |       | 0                                                                         |       | 0                                                                                                                                                           |       | $                                                                                                                                                                                          | 100 million |   |
|                                                      |       |                                                                           |       |                                                                      |       |                                                                                                                                                        |       |                                                                                                                                                                                       |        |   |
| Month #3 (January 1 to January 31, 2006)   |       | 0                                                                              |       | 0                                                                         |       | 0                                                                                                                                                           |       | $                                                                                                                                                                                          | 100 million |   |
|                                                      |       |                                                                           |       |                                                                      |       |                                                                                                                                                        |       |                                                                                                                                                                                       |        |   |
| Month #4 (February 1 to February 28, 2006)      |       | 0                                                                              |       | 0                                                                         |       | 0                                                                                                                                                           |       | $                                                                                                                                                                                          | 100 million |   |
|                                                      |       |                                                                           |       |                                                                      |       |                                                                                                                                                        |       |                                                                                                                                                                                       |        |   |
| Month #5 (March 1 to March 31, 2006)       |       | 0                                                                              |       | 0                                                                         |       | 0                                                                                                                                                           |       | $                                                                                                                                                                                          | 100 million |   |

 

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**ITEM6.****                  Exhibits**

 

Index:

 

3.1                                 Certificate ofIncorporation, as Amended to date (incorporated by reference to Exhibit 3.1to the Company’s Registration Statement on Form S-8 filed with theCommission on July 19, 2005; Registration No. 333-117489)

 

3.2                                 Bylaws, asAmended (incorporated by reference to Exhibit 3.2 to the Company’s QuarterlyReport on Form 10-Q filed with the Commission on November 11, 2005)

 

11.1                           StatementRegarding Computation of Per Share Earnings (incorporated by reference to Note2, “Net Income Per Common Share”, of the Notes to Unaudited ConsolidatedFinancial Statements contained herein)

 

31.1                           CertificationPursuant 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                           CertificationPursuant 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                           CertificationPursuant to 18 U.S.C. 1350, Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

32.2                           CertificationPursuant to 18 U.S.C. 1350, Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

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**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.

 

 
| ** **         | ** ** | **INTERNATIONAL  RECTIFIER CORPORATION**     | ** ** |
|--------------------|------------|----------------------------------------------|------------|
|               |       | **Registrant**                               |
|               |       |                                         |
|               |       |                                         |
| May 17,  2006 |       | /s/ Michael P.  McGee                        |       |
|               |       | Michael P. McGee                             |
|               |       | Executive Vice  President,                   |
|               |       | Chief Financial  Officer                     |
|               |       | (Duly authorized  officer and                |
|               |       | principal  financial and accounting officer) |

 

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