**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington,D.C.  20549**

**Form 10-Q**

**(MARK ONE)**

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

 

**FOR THE QUARTERLY PERIOD ENDEDDECEMBER 31, 2006**

**COMMISSION FILE NUMBER: 1-7935**

**International RectifierCorporation**

(EXACT NAME OFREGISTRANT AS SPECIFIED IN ITS CHARTER)

| **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 TELEPHONENUMBER, INCLUDING AREA CODE:  **(310) 726-8000**

INDICATE BY CHECK MARKWHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BYSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THEPRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WASREQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILINGREQUIREMENTS FOR THE PAST 90 DAYS.  YES x  NO o

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATEDFILER, AN ACCELERATED FILER, OR A NON-ACCELERATED FILER.  SEE DEFINITION OF “ACCELERATED FILER ANDLARGE ACCELERATED FILER” IN RULE 12b-2 OF THE EXCHANGE ACT. (CHECK ONE):

LARGE ACCELERATED FILER x        ACCELERATED FILER o        NON-ACCELERATED FILER o            

INDICATE BY CHECK MARKWHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12b-2 OF THEEXCHANGE ACT).   YES  o   NO  x

THERE WERE 72,514,910 SHARES OF THE REGISTRANT’S COMMON STOCK, PARVALUE $1.00 PER SHARE, OUTSTANDING ON FEBRUARY 2, 2007.

 

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**Table ofContents**
|               | ** ** | ** **                                                                                                                | ** ** | ** ** |
|---------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **    | ** ** | ** **                                                                                                                | ** ** | ** ** |
| **PART I.**   | ** ** | **FINANCIAL INFORMATION**                                                                                                 | ** ** | ** ** |
|          |       |                                                                                                                      |       |       |
| **ITEM 1.**   | ** ** | **Financial Statements**                                                                                                  |       |       |
| ** **    | ** ** | ** **                                                                                                                |       |       |
|          |       | Unaudited  Consolidated Statements of Income for the Three and Six Months Ended December  31, 2006 and 2005               |       |       |
|          |       |                                                                                                                      |       |       |
|          |       | Unaudited  Consolidated Statements of Comprehensive Income for the Three and Six Months  Ended December 31, 2006 and 2005 |       |       |
|          |       |                                                                                                                      |       |       |
|          |       | Unaudited  Consolidated Balance Sheets as of December 31, 2006 and June 30, 2006                                          |       |       |
|          |       |                                                                                                                      |       |       |
|          |       | Unaudited  Consolidated Statements of Cash Flows for the Six Months Ended December 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 1.**   | ** ** | **Legal Proceedings**                                                                                                     |       |       |
| ** **    | ** ** | ** **                                                                                                                |       |       |
| **ITEM  1A.** | ** ** | **Risk  Factors**                                                                                                         |       |       |
| ** **    | ** ** | ** **                                                                                                                |       |       |
| **ITEM 4.**   | ** ** | **Submission of  Matters to a Vote of Security Holders**                                                                  |       |       |
| ** **    | ** ** | ** **                                                                                                                |       |       |
| **ITEM  6.**  | ** ** | **Exhibits**                                                                                                              |       |       |

 

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**PART I.        FINANCIALINFORMATION**

**ITEM 1.        FinancialStatements.**

**INTERNATIONALRECTIFIER CORPORATION AND SUBSIDIARIESUNAUDITED CONSOLIDATED STATEMENTS OF INCOME(In thousands except per share amounts)**
| ** **                                                                            | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                            | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                              |       | $                                                   | 327,604    |                                              | $          | 254,770 |   | $ | 643,455 |   | $ | 498,789 |   |
| Cost of sales                                                                         |       | 186,864                                             |       | 145,232                                           |       | 369,341 |   | 282,523 |   |
| Gross profit                                                                          |       | 140,740                                             |       | 109,538                                           |       | 274,114 |   | 216,266 |   |
| Selling and  administrative expense                                                   |       | 51,397                                              |       | 43,906                                            |       | 102,770 |   | 86,898 |   |
| Research and  development expense                                                     |       | 34,000                                              |       | 25,661                                            |       | 64,760 |   | 49,197 |   |
| Amortization of  acquisition-related intangibles                                      |       | 662                                                 |       | 1,205                                             |       | 1,347 |   | 2,429 |   |
| Impairment of assets,  restructuring and severance charges                            |       | 1,587                                               |       | 733                                               |       | 5,749 |   | 3,045 |   |
| Other (income) expense,  net                                                          |       | (523                                                | )          | 1,040                                             |       | 278 |   | 1,165 |   |
| Interest income, net                                                                  |       | (1,823                                              | )          | (800                                              | )          | (4,328 | ) | (2,354 | ) |
| Income from continuing  operations, before income taxes                               |       | 55,440                                              |       | 37,793                                            |       | 103,538 |   | 75,886 |   |
| Provision for income  taxes                                                           |       | 10,777                                              |       | 9,955                                             |       | 23,868 |   | 19,988 |   |
| Income from continuing  operations                                                    |       | 44,663                                              |       | 27,838                                            |       | 79,670 |   | 55,898 |   |
| Income (loss) from  discontinued operations, net of tax                               |       | 27,285                                              |       | (3,582                                            | )          | 26,408 |   | (5,400 | ) |
| Net income                                                                            |       | $                                                   | 71,948     |                                              | $          | 24,256 |   | $ | 106,078 |   | $ | 50,498 |   |
|                                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss) per  common share:                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Basic:                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Income from  continuing operations                                                    |       | $                                                   | 0.62       |                                              | $          | 0.39 |   | $ | 1.10 |   | $ | 0.80 |   |
| Income (loss)  from discontinued operations                                           |       | 0.38                                                |       | (0.05                                             | )          | 0.37 |   | (0.08 | ) |
| Net income                                                                            |       | $                                                   | 1.00       |                                              | $          | 0.34 |   | $ | 1.47 |   | $ | 0.72 |   |
|                                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Diluted:                                                                              |       |                                                |       |                                              |       |   |   |   |   |
| Income from  continuing operations                                                    |       | $                                                   | 0.61       |                                              | $          | 0.39 |   | $ | 1.10 |   | $ | 0.78 |   |
| Income (loss)  from discontinued operations                                           |       | 0.38                                                |       | (0.05                                             | )          | 0.36 |   | (0.08 | ) |
| Net income                                                                            |       | $                                                   | 0.99       |                                              | $          | 0.34 |   | $ | 1.46 |   | $ | 0.70 |   |
|                                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Average common shares  outstanding – basic                                       |       | 72,204                                              |       | 70,816                                            |       | 72,128 |   | 70,567 |   |
|                                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Average common shares and potentially dilutive securities outstanding  – diluted |       | 72,854                                              |       | 71,602                                            |       | 72,721 |   | 71,663 |   |

 

The accompanyingnotes are an integral part of these statements.

3

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**INTERNATIONALRECTIFIER CORPORATION AND SUBSIDIARIESUNAUDITED CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME(In thousands)**
| ** **                                                                                                                                     | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Net income                                                                                                                                     |       | $                                                   | 71,948     |                                              | $          | 24,256 |   | $ | 106,078 |   | $ | 50,498 |   |
|                                                                                                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Other  comprehensive income (loss):                                                                                                            |       |                                                |       |                                              |       |   |   |   |   |
| Foreign currency translation adjustments                                                                                                       |       | 19,081                                              |       | (8,198                                            | )          | 28,066 |   | (13,334 | ) |
| Unrealized gains (losses) on securities:                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Unrealized holding (losses) gains on  available-for-sale securities, net of tax effect of $1,996, ($6,920), ($317)  and ($5,232), respectively |       | (3,706                                              | )          | 11,783                                            |       | 280 |   | 8,911 |   |
| Unrealized holding gains on foreign currency forward  contract, net of tax effect of ($522), ($80), ($1,896) and ($235),  respectively         |       | 969                                                 |       | 136                                               |       | 3,522 |   | 399 |   |
| Less: Reclassification adjustments of net losses on  available-for-sale securities and foreign currency forward contract                       |       | (425                                                | )          | (7                                                | )          | (844 | ) | (30 | ) |
|                                                                                                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Other comprehensive income (loss)                                                                                                              |       | 15,919                                              |       | 3,714                                             |       | 31,024 |   | (4,054 | ) |
|                                                                                                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Comprehensive income                                                                                                                           |       | $                                                   | 87,867     |                                              | $          | 27,970 |   | $ | 137,102 |   | $ | 46,444 |   |

 

The accompanyingnotes are an integral part of these statements.

4

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**INTERNATIONALRECTIFIER CORPORATION AND SUBSIDIARIESUNAUDITED CONSOLIDATED BALANCE SHEETS(In thousands)**
| ** **                                           | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                           | ** ** | **2006**              | ** ** | **2006(1)**       | ** ** |
| **Assets**                                           | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current assets:                                      |       |                  |       |              |       |
| Cash and cash equivalents                            |       | $                     | 459,276    |              | $          | 474,965 |   |
| Short-term cash investments                          |       | 108,502               |       | 120,872           |       |
| Trade accounts receivable                            |       | 187,439               |       | 177,495           |       |
| Inventories, net                                     |       | 174,158               |       | 160,320           |       |
| Short-term deferred income taxes                     |       | 49,209                |       | 23,352            |       |
| Assets held for sale                                 |       | 195,179               |       | 166,852           |       |
| Prepaid expenses and other receivables               |       | 78,571                |       | 48,070            |       |
| Total current assets                                 |       | 1,252,334             |       | 1,171,926         |       |
| Long-term cash investments                           |       | 525,128               |       | 488,849           |       |
| Property, plant and equipment, net                   |       | 559,583               |       | 510,346           |       |
| Goodwill                                             |       | 132,298               |       | 130,361           |       |
| Acquisition-related intangible assets, net           |       | 24,826                |       | 26,344            |       |
| Long-term deferred income taxes                      |       | 86,884                |       | 85,754            |       |
| Other assets                                         |       | 91,714                |       | 91,443            |       |
| Total assets                                         |       | $                     | 2,672,767  |              | $          | 2,505,023 |   |
|                                                 |       |                  |       |              |       |
| **Liabilities  and Stockholders’ Equity**       | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current  liabilities:                                |       |                  |       |              |       |
| Bank loans                                           |       | $                     | 6,994      |              | $          | 6,450 |   |
| Long-term debt, due within one year                  |       | 540,183               |       | 627               |       |
| Accounts payable                                     |       | 79,050                |       | 75,117            |       |
| Accrued salaries, wages and commissions              |       | 44,787                |       | 49,844            |       |
| Liabilities related to assets held for sale          |       | 24,597                |       | 27,150            |       |
| Other accrued expenses                               |       | 128,816               |       | 102,813           |       |
| Total current liabilities                            |       | 824,427               |       | 262,001           |       |
| Long-term debt,  less current maturities             |       | 81,263                |       | 616,964           |       |
| Other long-term  liabilities                         |       | 12,689                |       | 21,726            |       |
| Total liabilities                                    |       | 918,379               |       | 900,691           |       |
| Stockholders’ equity:                           |       |                  |       |              |       |
| Common stock                                         |       | 72,314                |       | 71,988            |       |
| Capital contributed in excess of par value of shares |       | 938,231               |       | 925,603           |       |
| Retained earnings                                    |       | 648,379               |       | 542,301           |       |
| Accumulated other comprehensive income               |       | 95,464                |       | 64,440            |       |
| Total stockholders’ equity                      |       | 1,754,388             |       | 1,604,332         |       |
| Total liabilities and stockholders’ equity      |       | $                     | 2,672,767  |              | $          | 2,505,023 |   |

 

The accompanyingnotes are an integral part of these statements.

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(1)   The consolidated balancesheet as of June 30, 2006 has been derived from the audited financialstatements at that date but does not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements.

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**INTERNATIONALRECTIFIER CORPORATION AND SUBSIDIARIESUNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **December 31,**          | ** ** |
| ** **                                                                         | ** ** | **2006**                       | ** ** | **2005** | ** ** |
|                                                                               |       |                           |       |   |   |
| Cash flows from  operating activities:                                             |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 106,078    |   | $ | 50,498 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                      |       | 39,564                         |       | 40,048 |   |
| Amortization of acquisition-related intangible  assets                             |       | 1,668                          |       | 2,885 |   |
| Stock compensation expense                                                         |       | 4,110                          |       | 1,645 |   |
| Unrealized gains on swap transactions                                              |       | (765                           | )          | (1,287 | ) |
| Deferred income taxes                                                              |       | (22,768                        | )          | 7,415 |   |
| Tax benefits from options exercised                                                |       | 1,421                          |       | 8,382 |   |
| Excess tax benefits from options exercised                                         |       | (465                           | )          | (4,264 | ) |
| Changes in operating assets and liabilities, net                                   |       | (46,027                        | )          | (56,729 | ) |
| Net cash  provided by operating activities                                         |       | 82,816                         |       | 48,593 |   |
|                                                                               |       |                           |       |   |   |
| Cash flows from  investing activities:                                             |       |                           |       |   |   |
| Additions to property, plant and equipment                                         |       | (70,380                        | )          | (75,980 | ) |
| Proceeds from sale of property, plant and equipment                                |       | 54                             |       | 298 |   |
| Sale or maturities of cash investments                                             |       | 190,475                        |       | 233,134 |   |
| Purchase of cash investments                                                       |       | (208,746                       | )          | (300,857 | ) |
| Other, net                                                                         |       | (3,066                         | )          | (1,859 | ) |
| Net cash used in  investing activities                                             |       | (91,663                        | )          | (145,264 | ) |
|                                                                               |       |                           |       |   |   |
| Cash flows from  financing activities:                                             |       |                           |       |   |   |
| Proceeds from (repayments of) short-term debt, net                                 |       | 681                            |       | (15,236 | ) |
| Repayments of long-term debt, net                                                  |       | (642                           | )          | — |   |
| Repayments of capital lease obligations, net                                       |       | (144                           | )          | — |   |
| Proceeds from exercise of stock options and stock  purchase plan                   |       | 6,083                          |       | 24,504 |   |
| Excess tax benefits from options exercised                                         |       | 465                            |       | 4,264 |   |
| Other, net                                                                         |       | 515                            |       | (6,209 | ) |
| Net cash  provided by financing activities                                         |       | 6,958                          |       | 7,323 |   |
|                                                                               |       |                           |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | 5,195                          |       | 3,067 |   |
|                                                                               |       |                           |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |       | 3,306                          |       | (86,281 | ) |
|                                                                               |       |                           |       |   |   |
| Cash and cash  equivalents, beginning of period                                    |       | 482,907                        |       | 359,978 |   |
|                                                                               |       |                           |       |   |   |
| Less: Cash and  cash equivalents, held for sale                                    |       | (26,937                        | )          | (5,370 | ) |
|                                                                               |       |                           |       |   |   |
| Cash and cash  equivalents, end of period                                          |       | $                              | 459,276    |   | $ | 268,327 |   |

 

The accompanyingnotes are an integral part of these statements.

6

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**INTERNATIONALRECTIFIER CORPORATION AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2006**

1.         Basis of Consolidation

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

The consolidatedfinancial statements included herein are unaudited; however, they contain allnormal recurring adjustments which, in the opinion of the Company’s management,are necessary to state fairly the consolidated financial position of theCompany at December 31, 2006, and the consolidated results of operations andthe consolidated cash flows for the three and six months ended December 31,2006 and 2005.  The results of operationsfor the three and six months ended December 31, 2006 are not necessarilyindicative of the results to be expected for the full year.

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

The Companyoperates on a 52-53 week fiscal year under which the three months endedDecember 2006 and 2005 consisted of 13 weeks ending December 31, 2006 andJanuary 1, 2006, respectively.  For easeof presenting the accompanying consolidated financial statements, the fiscalDecember quarter-end for all periods presented is shown as December 31.  Fiscal June 2006 year-end presented is shownas June 30.  Fiscal 2007 will consist of52 weeks ending July 1, 2007.

As a result of the Power Control Systems businessdivestiture (see Note 2), the Company’s previously reported consolidatedfinancial statements have been restated to present the discontinued operationsseparate from continuing operations, and assets held for sale with theirrelated liabilities separate from the remaining assets and their relatedliabilities.  The reclassifications had no impact on the Company’s totalassets, total liabilities, stockholders’ equity, cash flows or totalconsolidated net income reported.

2.         Divestiture

On November 8, 2006, the Company entered intodefinitive agreements with VishayIntertechnology, Inc. (“Vishay”), to sell its Power Control Systems (“PCS”)business (the “Divestiture”).  The Divestiture consists of operations atthe Company’s Mumbai, India; Borgaro, Italy; Xian, China; Krefeld, Germany;Swansea, Wales; and Halifax, Canada sites. The Divestiture will also include certain wafer manufacturing, productassembly and research and development

7

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equipment currently locatedat the Company’s Temecula, California; Tijuana, Mexico; and El Segundo,California locations.

The PCS business consists ofthe Company’s Non-Aligned Product and Commodity Product segments.  Productlines included in the sale are certain discrete planar MOSFETs, discrete diodesand rectifiers, discrete thyristors, multi-chip modules not includingintergrated circuits and certain other specified products.  The PCSbusiness is being sold for approximately $290 million in cash, subject tocertain adjustments based on the overall level of working capital and the levelof cash in the subsidiaries being sold.  On January 24, 2007, the waitingperiod with respect to the sale under the Hart-Scott-Rodino AntitrustImprovements Act of 1976 expired, and the Company and Vishay have agreed to aclosing by April 1, 2007. The closing which remains subject to customaryclosing conditions.

The transaction agreementsfor the divestiture contain customary representations and warranties, andprovide for the Company to indemnify Vishay, subject to certain exceptions andlimitations, for losses resulting from the breach of representations,warranties and covenants of the Company and certain other liabilities. Thetransaction documents also provide that, for a period of seven years after theclosing, the Company will not engage in the PCS Business anywhere in the world,subject to certain specified product exceptions; however, the documents providethat nothing will prevent the Company from competing against the products ofthe PCS Business with functional or application competitive products, oncertain terms and conditions. The Company will enter into license agreementspursuant to which the Company will license certain of its technology related tothe PCS business to Vishay on a non-exclusive, perpetual and royalty-freebasis, and Vishay, in turn, will license back to the Company the technologythat is being provided to it on a non-exclusive, perpetual and royalty-freebasis. The transaction also provides for the Company entering into certaintransition agreements for, among other things, administrative services, waferand packaging services, and the sale and purchase of certain products.

As a result of theDivestiture, the Company has reported the Non-Aligned Product segment’sfinancial results as discontinued operations.  As part of the Divestiture,the Company will be involved in the transition of certain of the divestedbusiness and assets with Vishay, including providing Commodity Productmanufacturing-related and other support services for up to three years.  Althoughthe assets and liabilities held for sale include those of both the Non-AlignedProduct and Commodity Product segments, the Commodity Product segmentresults were not included in discontinued operations at this time, as theCompany expects to have significant ongoing involvement based on the cash flowsto be derived from the transitional services to be provided to Vishay, asdescribed above.  The Company’s prior period financial statements havebeen restated to conform to current period presentation. The reclassificationshad no impact on the Company’s total assets, total liabilities, stockholders’equity, cash flows or total consolidated net income reported.

Discontinued operationsfinancial results are as follows (in thousands):
|                                                                    | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                               |       |                                                |       |                                              |       |   |   |   |   |
| Revenue                                                            |       | $                                                   | 27,108     |                                              | $          | 24,041 |   | $ | 55,500 |   | $ | 52,594 |   |
| Income (loss)  before income taxes                                 |       | 472                                                 |       | (4,337                                            | )          | 784 |   | (6,232 | ) |
| Benefit from  income taxes (see Note 15, “Income Taxes”) |       | (26,813                                             | )          | (755                                              | )          | (25,624 | ) | (832 | ) |
| Income (loss) from  discontinued operations                        |       | 27,285                                              |       | (3,582                                            | )          | 26,408 |   | (5,400 | ) |
|                                                                    |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 

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Assets held for sale and liabilities related to those assets includedin the accompanying consolidated balance sheets comprised the entire PCSbusiness (including those of both the Non-Aligned Product and Commodity Productsegments), are as follows (in thousands):
|                                             | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                  | ** ** | **2006**              | ** ** | **2006**          | ** ** |
| **ASSETS**                                  | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current assets:                             |       |                  |       |              |       |
| Cash and cash equivalents                   |       | $                     | 26,937     |              | $          | 7,942 |   |
| Trade accounts receivable                   |       | 6,322                 |       | 5,278             |       |
| Inventories, net                            |       | 57,295                |       | 53,774            |       |
| Prepaid expenses and other receivables      |       | 4,720                 |       | 3,387             |       |
| Total current assets                        |       | 95,274                |       | 70,381            |       |
| Property, plant  and equipment, net         |       | 69,192                |       | 66,034            |       |
| Goodwill                                    |       | 25,157                |       | 24,787            |       |
| Acquisition-related  intangible assets, net |       | 5,556                 |       | 5,650             |       |
| Total assets                                |       | $                     | 195,179    |              | $          | 166,852 |   |
|                                        |       |                  |       |              |       |
| **LIABILITIES**                             | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current  liabilities:                       |       |                  |       |              |       |
| Short-term debt                             |       | $                     | —     |              | $          | 51 |   |
| Accounts payable                            |       | 10,305                |       | 9,892             |       |
| Accrued salaries, wages and commissions     |       | 5,673                 |       | 7,800             |       |
| Other accrued expenses                      |       | 1,329                 |       | 2,056             |       |
| Total current liabilities                   |       | 17,307                |       | 19,799            |       |
| Long-term debt                              |       | —                |       | 576               |       |
| Other long-term  liabilities                |       | 7,290                 |       | 6,775             |       |
| Total  liabilities                          |       | $                     | 24,597     |              | $          | 27,150 |   |

 

3.         Net Income per CommonShare

Net income percommon share - basic is computed by dividing net income available to commonstockholders (the numerator) by the weighted average number of common sharesoutstanding (the denominator) during the period. In general, the computation ofnet income per common share - diluted is similar to the computation of netincome per common share - basic except that the denominator is increased toinclude the number of additional common shares that would have been outstandingfor the exercise of stock options using the treasury stock method and theconversion of the Company’s convertible subordinated notes using theif-converted method.  The Company’s useof the treasury stock method reduces the gross number of dilutive shares by thenumber of shares purchasable from the proceeds of the options assumed to beexercised.  The Company’s use of the if-convertedmethod increases reported net income by the interest expense related to theconvertible subordinated notes when computing net income per common share –diluted.

9

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The followingtable provides a reconciliation of the numerator and denominator of the basicand diluted per-share computations (in thousands except per share amounts):
|                                              | ** ** | **Three Months Ended  December 31, 2006** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Income**                                                    | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| ** **                                   | ** ** | **(Numerator)**                                               | ** ** | **(Denominator)** | ** ** | ** ** | ** ** |
|                                         |       |                                                          |       |   |   |   |   |
| Net income per  common share – basic:   |       |                                                          |       |   |   |   |   |
| Income from continuing operations            |       | $                                                             | 44,663     |   | 72,204 |   | $ | 0.62 |   |
| Income from discontinued operations          |       | 27,285                                                        |       | 72,204 |   | 0.38 |   |
| Net income                                   |       | $                                                             | 71,948     |   | 72,204 |   | $ | 1.00 |   |
| Effect of  dilutive securities:              |       |                                                          |       |   |   |   |   |
|                                         |       |                                                          |       |   |   |   |   |
| Stock options  and restricted stock units:   |       |                                                          |       |   |   |   |   |
| Income from continuing operations            |       |                                                          |       | 650 |   | $ | (0.01 | ) |
| Income from discontinued operations          |       |                                                          |       | 650 |   | — |   |
| Net income                                   |       |                                                          |       | 650 |   | $ | (0.01 | ) |
|                                         |       |                                                          |       |   |   |   |   |
| Net income per  common share – diluted: |       |                                                          |       |   |   |   |   |
| Income from continuing operations            |       | $                                                             | 44,663     |   | 72,854 |   | $ | 0.61 |   |
| Income from discontinued operations          |       | 27,285                                                        |       | 72,854 |   | 0.38 |   |
| Net income                                   |       | $                                                             | 71,948     |   | 72,854 |   | $ | 0.99 |   |

 
|                                                     | ** ** | **Three Months Ended  December 31, 2005** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                          | ** ** | **Income**                                                    | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| ** **                                          | ** ** | **(Numerator)**                                               | ** ** | **(Denominator)** | ** ** | ** ** | ** ** |
|                                                |       |                                                          |       |   |   |   |   |
| Net income  (loss) per common share – basic:   |       |                                                          |       |   |   |   |   |
| Income from continuing operations                   |       | $                                                             | 27,838     |   | 70,816 |   | $ | 0.39 |   |
| Loss from discontinued operations                   |       | (3,582                                                        | )          | 70,816 |   | (0.05 | ) |
| Net income                                          |       | $                                                             | 24,256     |   | 70,816 |   | $ | 0.34 |   |
| Effect of  dilutive securities:                     |       |                                                          |       |   |   |   |   |
| Stock options  and restricted stock units:          |       |                                                          |       |   |   |   |   |
| Income from continuing operations                   |       |                                                          |       | 786 |   | $ | — |   |
| Income from discontinued operations                 |       |                                                          |       | 786 |   | — |   |
| Net income                                          |       |                                                          |       | 786 |   | $ | — |   |
|                                                |       |                                                          |       |   |   |   |   |
| Net income  (loss) per common share – diluted: |       |                                                          |       |   |   |   |   |
| Income from continuing operations                   |       | $                                                             | 27,838     |   | 71,602 |   | $ | 0.39 |   |
| Loss from discontinued operations                   |       | (3,582                                                        | )          | 71,602 |   | (0.05 | ) |
| Net income                                          |       | $                                                             | 24,256     |   | 71,602 |   | $ | 0.34 |   |

 

10

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|                                              | ** ** | **Six Months Ended  December 31, 2006** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Income**                                                  | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| ** **                                   | ** ** | **(Numerator)**                                             | ** ** | **(Denominator)** | ** ** | ** ** | ** ** |
|                                         |       |                                                        |       |   |   |   |   |
| Net income per  common share – basic:   |       |                                                        |       |   |   |   |   |
| Income from continuing operations            |       | $                                                           | 79,670     |   | 72,128 |   | $ | 1.10 |   |
| Income from discontinued operations          |       | 26,408                                                      |       | 72,128 |   | 0.37 |   |
| Net income                                   |       | $                                                           | 106,078    |   | 72,128 |   | $ | 1.47 |   |
| Effect of  dilutive securities:              |       |                                                        |       |   |   |   |   |
| Stock options  and restricted stock units:   |       |                                                        |       |   |   |   |   |
| Income from continuing operations            |       |                                                        |       | 593 |   | $ | — |   |
| Income from discontinued operations          |       |                                                        |       | 593 |   | (0.01 | ) |
| Net income                                   |       |                                                        |       | 593 |   | $ | (0.01 | ) |
|                                         |       |                                                        |       |   |   |   |   |
| Net income per  common share – diluted: |       |                                                        |       |   |   |   |   |
| Income from continuing operations            |       | $                                                           | 79,670     |   | 72,721 |   | $ | 1.10 |   |
| Income from discontinued operations          |       | 26,408                                                      |       | 72,721 |   | 0.36 |   |
| Net income                                   |       | $                                                           | 106,078    |   | 72,721 |   | $ | 1.46 |   |

 
|                                                     | ** ** | **Six Months Ended  December 31, 2005** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                          | ** ** | **Income**                                                  | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| ** **                                          | ** ** | **(Numerator)**                                             | ** ** | **(Denominator)** | ** ** | ** ** | ** ** |
|                                                |       |                                                        |       |   |   |   |   |
| Net income  (loss) per common share – basic:   |       |                                                        |       |   |   |   |   |
| Income from continuing operations                   |       | $                                                           | 55,898     |   | 70,567 |   | $ | 0.80 |   |
| Loss from discontinued operations                   |       | (5,400                                                      | )          | 70,567 |   | (0.08 | ) |
| Net income                                          |       | $                                                           | 50,498     |   | 70,567 |   | $ | 0.72 |   |
| Effect of  dilutive securities:                     |       |                                                        |       |   |   |   |   |
| Stock options  and restricted stock units:          |       |                                                        |       |   |   |   |   |
| Income from continuing operations                   |       |                                                        |       | 1,096 |   | $ | (0.02 | ) |
| Income from discontinued operations                 |       |                                                        |       | 1,096 |   | — |   |
| Net income                                          |       |                                                        |       | 1,096 |   | $ | (0.02 | ) |
|                                                |       |                                                        |       |   |   |   |   |
| Net income (loss)  per common share – diluted: |       |                                                        |       |   |   |   |   |
| Income from continuing operations                   |       | $                                                           | 55,898     |   | 71,663 |   | $ | 0.78 |   |
| Loss from discontinued operations                   |       | (5,400                                                      | )          | 71,663 |   | (0.08 | ) |
| Net income                                          |       | $                                                           | 50,498     |   | 71,663 |   | $ | 0.70 |   |

 

For the three andsix months ended December 31, 2006 and 2005, the number of commonshares used in computing the diluted per-share amount for income fromcontinuing operations was used as the control number in computing the dilutedper-share amount for income (loss) from discontinued operations in accordancewith Statement of FinancialAccounting Standards (“SFAS”) No. 128, “Earningsper Share”.  The conversioneffect of the Company’s outstanding convertible subordinated notes into7,439,000 shares of common stock was not included in the computation of dilutedincome from continuing operations per share for the three and six months endedDecember 31, 2006 and 2005.

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4.         Cash and Investments

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

TheCompany invests excess cash in marketable securities consisting primarily ofcommercial paper, corporate notes, corporate bonds and U.S. governmentsecurities.  At December 31, 2006 andJune 30, 2006, all of the Company’s marketable securities are classified asavailable-for-sale.  In accordance withSFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”,unrealized gains and losses on these investments are included in accumulatedother comprehensive income, a separate component of stockholders’ equity, netof related tax effect.  Realized gainsand losses and declines in value considered to be other than temporary areincluded in interest income, net.  AtDecember 31, 2006 and June 30, 2006, no investment was in a material lossposition for greater than one year.

Cash,cash equivalents and cash investments as of December 31, 2006 and June 30, 2006are summarized as follows (in thousands):
|                                                    | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                         | ** ** | **2006**              | ** ** | **2006**          | ** ** |
| Cash and cash  equivalents                         |       | $                     | 459,276    |              | $          | 474,965 |   |
| Short-term cash  investments                       |       | 108,502               |       | 120,872           |       |
| Long-term cash  investments                        |       | 525,128               |       | 488,849           |       |
| Subtotal                                           |       | 1,092,906             |       | 1,084,686         |       |
| Cash and cash  equivalents, held for sale (Note 2) |       | 26,937                |       | 7,942             |       |
| Total cash, cash  equivalents and cash investments |       | $                     | 1,119,843  |              | $          | 1,092,628 |   |

 

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

*Short-TermCash Investments:*
|                                         | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Market  Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------|------------|
| Corporate debt                          |       | $                   | 44,430     |                        | $          | —                      |       | $                 | (168       | ) | $ | 44,262 |   |
| U.S. government  and agency obligations |       | 64,529              |       | —                      |       | (289                        | )          | 64,240            |       |
| Total short-term  cash investments      |       | $                   | 108,959    |                        | $          | —                      |       | $                 | (457       | ) | $ | 108,502 |   |

 

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*Long-TermCash Investments:*
|                                         | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Market  Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------|------------|
| Corporate debt                          |       | $                   | 220,698    |                        | $          | 420                         |       | $                 | (915       | ) | $ | 220,203 |   |
| U.S. government  and agency obligations |       | 127,209             |       | 182                         |       | (632                        | )          | 126,759           |       |
| Other debt                              |       | 178,425             |       | 177                         |       | (436                        | )          | 178,166           |       |
| Total long-term  cash investments       |       | $                   | 526,332    |                        | $          | 779                         |       | $                 | (1,983     | ) | $ | 525,128 |   |

 

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

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

 

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

 

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Cash investmentswith contractual maturity greater than one year for which the Company has theintent and ability to hold for less than one year are classified as short-terminvestments.  The amortized cost andestimated fair value of cash investments at December 31, 2006, by contractualmaturity, are as follows (in thousands):

|                         | ** ** | **Amortized  Cost** | ** ** | **Estimated Fair  Value** | ** ** |
|-------------------------|------------|---------------------|------------|--------------------------------|------------|
| Due in 1 year or  less  |       | $                   | 108,959    |                           | $          | 108,502 |   |
| Due in 1-2 years        |       | 156,765             |       | 155,925                        |       |
| Due in 2-5 years        |       | 188,534             |       | 188,583                        |       |
| Due after 5  years      |       | 181,033             |       | 180,620                        |       |
| Total cash  investments |       | $                   | 635,291    |                           | $          | 633,630 |   |

 

Gross realizedgains were $0.1 million and $0.2 million for the three and six months endedDecember 31, 2006, respectively, and gross realized losses were ($0.4) millionand ($0.7) million for the three and six months ended December 31, 2006,respectively.  Gross realized gains were$0.01 million and $0.02 million for the three and six months ended December 31,2005, respectively, and gross realized losses were ($0.1) million and ($0.4)million for the three and six months ended December 31, 2005,respectively.  The cost of marketable securitiessold is determined by the weighted average cost method.

The Company holdsas strategic investments certain common stock of publicly-traded companies. TheCompany accounts for these available-for-sale investments under SFAS No.115.  Dividend income from the equityinvestments was $0.1 million during the three months ended December 31, 2006and 2005, and $0.6 million and $0.4 million for the six months ended December31, 2006 and 2005, respectively.  Themarket values of the equity investments at December 31, 2006 and June 30, 2006were $48.1 million and $52.9 million, respectively, compared to their combined purchase cost of$18.8 million.  Mark-to-market(losses) gains, net of tax, of ($3.8) million and $11.8 million for the threemonths ended December 31, 2006 and 2005, respectively, and ($3.1) million and$8.9 million for the six months ended December 31, 2006 and 2005, respectively,were included in accumulated other comprehensive income, a separate componentof equity.

5.         Derivative FinancialInstruments

*ForeignCurrency Risk*

The Company conductsbusiness on a global basis in several foreign currencies, and at various times,is exposed to fluctuations with the British Pound Sterling, the Euro and theJapanese Yen.  The Company’s risk to theEuropean currencies is partially offset by the natural hedge of manufacturingand selling goods in both U.S. dollars and the European currencies.  Considering its specific foreign currencyexposures, the Company has the greatest exposure to the Japanese Yen, since ithas significant Yen-based revenues without the Yen-based manufacturingcosts.  The Company has established aforeign-currency hedging program using foreign exchange forward contracts,including the Forward Contract described below, to hedge certain foreigncurrency transaction exposures.  Toprotect against reductions

14

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in value andvolatility of future cash flows caused by changes in currency exchange rates,it has established revenue, expense and balance sheet hedging programs.  Currency forward contracts and local Yen andEuro borrowings are used in these hedging programs.  The Company’s hedging programs reduce, but donot always eliminate, the impact of currency exchange rate movements.

In May 2006, theCompany entered into a five-year foreign exchange forward contract (“theForward Contract”) with BNP Paribas for the purpose of reducing the effect ofexchange rate fluctuations on forecasted intercompany purchases by its Japansubsidiary.  The Company has designatedthe May 2006 Forward Contract as a cash flow hedge.  Under the terms of the Forward Contract, theCompany is required to exchange 507.5 million Yen for $5.0 million on aquarterly basis starting in June 2006 and expiring in the March 2011.  At December 31, 2006, 17 quarterly paymentsof 507.5 million Yen remained to be swapped at a forward exchange rate of 101.5Yen per U.S. dollar.  The market value ofthe Forward Contract was $5.3 million and $1.2 million at December 31, 2006 andJune 30, 2006, respectively, and is included in other assets.  The mark-to-market gains included in othercomprehensive income were $1.0 million and $3.5 million, net of tax, for thethree and six months ended December 31, 2006, respectively.  Based on effectiveness tests comparingforecasted transactions through the Forward Contract expiration date to itscash flow requirements, the Company does not expect to incur a material chargeto income during the next twelve months as a result of the Forward Contract.

The Company hadapproximately $113.1 million and $103.1 million in notional amounts of forwardcontracts not designated as accounting hedges under SFAS No. 133 at December31, 2006 and June 30, 2006, respectively. Net realized and unrealizedforeign-currency gains recognized in earnings were $1.5 million and $1.4million for the three and six months ended December 31, 2006, respectively, andless than $1.0 millionfor the three and six months ended December 31, 2005.

*InterestRate Risk*

In December 2001, theCompany entered into an interest rate swap transaction (the “December 2001Transaction”) with an investment bank, JP Morgan Chase Bank (the “Bank”), tomodify the Company’s effective interest payable with respect to $412.5 millionof its $550 million outstanding convertible debt (the “Debt”) (see Note 9, “BankLoans and Long-Term Debt”).   In April2004, the Company 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 Company will receive from the Bank fixedpayments equal to 4.25 percent of the notional amount, payable on January 15and July 15.  In exchange, the Companywill pay to the Bank floating rate payments based upon the London InterBankOffered Rate (“LIBOR”) multiplied by the notional amount.  At the inception of the swap transactions,interest rates were lower than that of the Debt and the Company believed thatinterest rates would remain lower for an extended period of time.  The variable interest rate paid since theinception of the swaps has averaged 3.34 percent, compared to a coupon of 4.25percent on the Debt.  During the threemonths ended December 31, 2006, the LIBOR was 5.37 percent, and includingcertain spreads and mark-to-market adjustments associated with the interestswaps, this arrangement increased (decreased) interest expense by $2.5 millionand $0.8 million, for the three months ended December 31, 2006 and 2005,

15

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respectively, and $4.1million and ($0.1) million for the six months ended December 31, 2006 and 2005,respectively.  Our obligation to provide letterof credit support for certain obligations under the December 2001 Transactionand April 2004 Transaction ceased with the November 6, 2006 consumation of thenew five-year multi-currency revolving credit facility (See Note 9, “Bank Loansand Long-Term Debt’’).

Accounted for as fair valuehedges under SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities”, the mark-to-market adjustments of the December 2001 and April 2004Transactions were offset by the mark-to-market adjustments on the Debt,resulting in no material impact to earnings. The market value of the swaps was a liability of $6.3 million and $11.6million at December 31, 2006 and June 30, 2006, respectively.

TheDecember 2001 Transaction and the April 2004 Transaction terminate on July 15,2007 (“Termination Date”), subject to certain early terminationprovisions.  On or after July 18, 2003and prior to July 14, 2007, if the ten-day average closing price of the Company’scommon stock equals or exceeds $77.63, the transactions will terminate.  Depending on the timing of the earlytermination event, the Bank would be obligated to pay the Company an amountequal to the redemption premium called for under the terms of the Debt.

TheDecember 2001 Transaction and the April 2004 Transaction qualify as fair valuehedges under SFAS No. 133.  To testeffectiveness of the hedge, regression analysis is performed quarterlycomparing the change in fair value of the Transactions and the Debt.  The fair values of the transactions and theDebt are calculated quarterly as the present value of the contractual cashflows to the expected maturity date, where the expected maturity date is basedon probability-weighted analysis of interest rates relating to the five-yearLIBOR curve and the Company’s stock prices. For the three and six months ended December 31, 2006 and 2005, thehedges were highly effective and the ineffective portion did not have amaterial impact on earnings.

In April 2002, the Companyentered into an interest rate contract (the “Contract”) with an investmentbank, Lehman Brothers (“Lehman”), to reduce the variable interest rate risk ofthe December 2001 Transaction.  Thenotional amount of the Contract is $412.0 million, representing approximately75 percent of the Debt.  Under the termsof the Contract, the Company has the option to receive a payout from Lehmancovering its exposure to LIBOR fluctuations between 5.5 percent and 7.5 percentfor any four designated quarters.  Themarket value of the Contract at December 31, 2006 and June 30, 2006, was $0.1million and $0.6 million, respectively, and was included in other long-termassets.  Mark-to-market gains (losses) of$0.03 million and ($0.05) million, for the three months ended December 31, 2006and 2005, respectively, and ($0.5) million and $0.1 million, for the six monthsended December 31, 2006 and 2005, respectively, were charged to interestexpense.

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6.         Inventories

Inventories arestated at the lower of cost (principally first-in, first-out) or market.  Inventories are reviewed for excess andobsolescence based upon demand forecast within a specific time horizon, andreserves are established accordingly.  Inaccordance with SFAS No. 151, “Inventory Cost”, the Company allocates fixedproduction overheads to inventory based on the normal capacity of theproduction facilities and abnormal amounts of idle facility expense arerecognized as current period charges. Inventories at December 31, 2006 and June30, 2006 were comprised of the following (in thousands):
|                                      | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                           | ** ** | **2006**              | ** ** | **2006**          | ** ** |
|                                 |       |                  |       |              |       |
| Raw materials                        |       | $                     | 29,072     |              | $          | 25,704 |   |
| Work-in-process                      |       | 74,819                |       | 71,661            |       |
| Finished goods                       |       | 70,267                |       | 62,955            |       |
| Sub-total                            |       | 174,158               |       | 160,320           |       |
| Inventories,  held for sale (Note 2) |       | 57,295                |       | 53,774            |       |
| Total  inventories                   |       | $                     | 231,453    |              | $          | 214,094 |   |

 

7.         Goodwill andAcquisition-Related Intangible Assets

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

The Company evaluates the carrying value of goodwill andacquisition-related intangible assets, including the related amortizationperiod, in the fourth quarter of each fiscal year and when events andcircumstances warrant an impairment test. In evaluating goodwill and intangible assets not subject toamortization, the Company completes the two-step goodwill impairment test asrequired by SFAS No. 142.  In order totest goodwill and acquisition-related intangible assets, the Company identifiedits reporting units, which is the lowest level of the Company for which thereis discrete information and whose results are regularly reviewed by the Company’sChief Operating Decision Maker as defined by SFAS No. 142.  Although the Company does not allocate assetsto its reporting units in order to assess the performance of those units, forpurposes of this impairment test, the Company determined the carrying value ofeach reporting unit by assigning the assets and liabilities includingthe existing goodwill and intangible assets to the reporting units.

In the first of the two-stepgoodwill impairment test, the Company determined the fair value of thereporting units using a discounted cash flow valuation model.  The Company compared the discounted cashflows for the reporting unit to its carrying value.  If

17

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the fair value of areporting unit exceeds its carrying value, goodwill of the reporting unit isconsidered not impaired and no further testing is required.  If the fair value does not exceed thecarrying value, the second step of the goodwill impairment test shall beperformed to measure the amount of impairment loss, if any.  The second step compared the implied fairvalue of the reporting unit with the carrying amount of that goodwill.

As described in Note 2, theCompany is divesting its PCS business, which is comprised of the Non-AlignedProduct and Commodity Product segments. As a result of the contemplated sale, the Company performed animpairment test of these reporting units in the fiscal quarter ended December31, 2006, in addition to the fourth quarter of fiscal year ended June 30, 2006,to determine whether certain of the goodwill assets may be impaired.  Based on these impairment tests, the Companydetermined that goodwill was not impaired at December 31, 2006 or June 30,2006.

At December 31, 2006 and June 30,2006 acquisition-related intangible assets included the following (inthousands):
|                                                                | ** ** | ** **                      | ** ** | **December 31, 2006** | ** ** | **June 30, 2006**         | ** ** |
|----------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| ** **                                                     | ** ** | **Amortization   Periods** | ** ** | **Gross  Carrying  Amount**     | ** ** | **Accumulated   Amortization** | ** ** | **Gross  Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** |
| ** **                                                     | ** ** | **(Years)**                     | ** ** | ** **                      | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Acquisition-related  intangible assets:                        |       |                            |       |                            |       |                                |       |   |   |   |   |
| Complete technology                                            |       | 4 – 12                     |       | $                               | 28,681     |                                | $          | (11,377 | ) | $ | 28,678 |   | $ | (10,885 | ) |
| Distribution rights and customer lists                         |       | 5 – 12                     |       | 15,446                          |       | (9,459                              | )          | 15,446 |   | (8,744 | ) |
| Intellectual property and other                                |       | 5 – 12                     |       | 7,960                           |       | (6,425                              | )          | 7,963 |   | (6,114 | ) |
| Sub-total                                                      |       |                            |       | 52,087                          |       | (27,261                             | )          | 52,087 |   | (25,743 | ) |
| Acquisition-related  intangible assets, held for sale (Note 2) |       | 4 – 12                     |       | 9,646                           |       | (4,090                              | )          | 9,646 |   | (3,996 | ) |
| Total  acquisition-related intangible assets                   |       |                            |       | $                               | 61,733     |                                | $          | (31,351 | ) | $ | 61,733 |   | $ | (29,739 | ) |

 

As of December 31, 2006, estimated amortizationexpense for the next five years is as follows (in thousands): remainder offiscal 2007: $1,459; fiscal 2008: $2,515; fiscal 2009: $2,515; fiscal 2010:$2,515; fiscal 2011: $1,689 and fiscal 2012: $812.

The carrying amount of goodwill by businesssegment as of December 31, 2006, is as follows (in thousands):

| ** **                        | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| Energy-Saving  Products           |       | $                               | 49,045     |   |
| Aerospace and  Defense            |       | 19,240                          |       |
| Computing and  Communications     |       | 43,641                          |       |
| Intellectual  Property            |       | 20,372                          |       |
| Sub-total                         |       | 132,298                         |       |
| Goodwill, held  for sale (Note 2) |       | 25,157                          |       |
| Total goodwill                    |       | $                               | 157,455    |   |

 

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As of December 31, 2006 and June 30, 2006, $43.3million of goodwill is deductible for income tax purposes.

Thechanges in the carrying amount of goodwill including assets held for sale forthe period ended December 31, 2006 and June 30, 2006 are as follows (inthousands):
|                                   | ** ** | **Goodwill** | ** ** |
|-----------------------------------|------------|--------------|------------|
| Balance, June  30, 2006           |       | $            | 130,361    |   |
| Foreign exchange  impact          |       | 1,937        |       |
| Subtotal                          |       | 132,298      |       |
| Goodwill, held  for sale (Note 2) |       | 25,157       |       |
| Total goodwill                    |       | $            | 157,455    |   |

 

8.         Other accrued expenses

Otheraccrued expenses at December 31, 2006 and June 30, 2006 were comprised of thefollowing (in thousands):
|                                           | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2006**              | ** ** | **2006**          | ** ** |
| Accrued taxes                             |       | $                     | 61,910     |              | $          | 54,497 |   |
| Other accrued  expenses                   |       | 66,906                |       | 48,316            |       |
| Sub-total                                 |       | 128,816               |       | 102,813           |       |
| Accrued  expenses, held for sale (Note 2) |       | 1,329                 |       | 2,056             |       |
| Total accrued  expenses                   |       | $                     | 130,145    |              | $          | 104,869 |   |

 

9.         Bank Loans andLong-Term Debt 

Asummary of the Company’s long-term debt and other loans at December 31, 2006and June 30, 2006 is as follows (in thousands):
|                                                                                                                                                                                                            | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                 | ** ** | **2006**              | ** ** | **2006**          | ** ** |
| Convertible  subordinated notes at 4.25% due in 2007 ($550,000 principal amount, plus  accumulated fair value adjustment of ($10,393) and ($14,443) at December 31, 2006 and  June 30, 2006, respectively) |       | $                     | 539,607    |              | $          | 535,557 |   |
| Other loans and  capitalized lease obligations                                                                                                                                                             |       | 81,839                |       | 82,034            |       |
| Debt, including  current portion of long-term debt ($540,000 and $627 at December 31, 2006 and  June 30, 2006, respectively)                                                                               |       | 621,446               |       | 617,591           |       |
| Foreign  revolving bank loans at rates from 0.81% to 1.63%                                                                                                                                                 |       | 6,994                 |       | 6,450             |       |
| Sub-total                                                                                                                                                                                                  |       | 628,440               |       | 624,041           |       |
| Debt, held for  sale (Note 2)                                                                                                                                                                              |       | —                |       | 627               |       |
| Total debt                                                                                                                                                                                                 |       | $                     | 628,440    |              | $          | 624,668 |   |

 

InJuly 2000, the Company sold $550 million principal amount of 4.25 percentConvertible Subordinated Notes due 2007. The interest rate is 4.25 percent peryear on the principal amount, payable in cash in arrears semi-annually onJanuary 15 and July 15.  The notes aresubordinated to all of the Company’s existing and

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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 tocertain call premiums on or after July 18, 2003, as specified in the notes andrelated indenture agreement.  In December2001 and April 2004, the Company entered into swap transactions with JP MorganChase Bank for $412.5 million and $137.5 million in notional amounts,respectively, which had the effect to the Company of converting the interestrate to variable and requiring that the swaps and underlying hedged convertiblenotes be marked to market (see Note 5, “Derivative Financial Instruments”).

The Company had been a party to a three-year syndicated multi-currencyrevolving credit facility led by BNP Paribas (the “BNP Facility”) that expiredin November 2006.  The BNP Facilityprovided a credit line of $150 million of which up to $150 million could havebeen used for standby letters of credit. At June 30, 2006, the Company had no borrowings and $25.0 millionletters of credit outstanding under the BNP Facility.

On November 6, 2006, the Company entered into a new five-yearmulti-currency revolving credit facility with a syndicate of lenders includingof JP Morgan Chase Bank, Bank of America, N.A., HSBC Bank USA, and DeutscheBank AG (the “Facility”), to replace the BNP Facility.  The Facility expires in November 2011 andprovides a credit line of $150 million with an option to increase the facilitylimit to $250 million.  Up to $75 millionof the Facility may be used for standby letters of credit and up to $10 millionmay be used for swing-line loans.  TheFacility bears interest at (i) local currency rates plus (ii) a margin between0 percent and 0.25 percent for base rate advances and a margin between 0.875percent and 1.25 percent for Euro-currency rate advances, based on the Company’ssenior leverage ratio.  Other advancesbear interest as set forth in the credit agreement.  The annual commitment fee for the Facilityranges between 0.175 and 0.25 percent of the unused portion of the totalfacility, depending upon the Company’s senior leverage ratio.  After December 31, 2006, the Company isrequired to pledge as collateral shares of certain of its subsidiaries andcertain of the Company’s subsidiaries are required to guarantee the creditfacility.  The Facility also containscertain financial and other covenants, with which the Company was in complianceat December 31, 2006.  At December 31,2006, the Company had no borrowings and $4.3 million letters of creditoutstanding under the Facility.

At December 31,2006, including the new Facility, the Company had $171.0 million in totalrevolving lines of credit, of which $11.3 million had been utilized, consistingof $4.3 million in letters of credit and $7.0 million in foreign revolving bankloans, which are included in the preceding table.

10.       Impairment of Assets,Restructuring and Severance

The Company accounts for the impairment of assets, restructuring andseverance costs in accordance with SFAS No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets” and SFAS No. 146, “Accounting for the CostsAssociated with Exit or Disposal Activities”. Severance charges are recognized ratably over the future service period,as applicable.  The Company measures thetotal termination benefits at the communication date based on the fair value ofthe

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liability as of the termination date. A change resulting from a revision to either the timing or the amount ofestimated cash over the future service period will be measured using thecredit-adjusted risk-free rate that was used to initially measure theliability.  The cumulative effect of thechange will be recognized as an adjustment to the liability in the period ofthe change.

During fiscal 2003 second quarter ended December 31, 2002, the Companyannounced certain restructuring initiatives. Charges associated with theseinitiatives were completed as of December 31, 2006.  Of such charges primarily accrued severanceliability has not been paid or released as of December 31, 2006. Thecompany anticipates that the remaining severance liability will be paid orreleased as appropriate by fiscal year end June 30, 2007.

As discussed in Note 2, “Divestiture”, on November 8, 2006, the Companyentered into definitive agreements with Vishay Intertechnology, Inc. to sellits Power Control Systems business consisting of the Company’s Non-AlignedProduct and Commodity Product segments (the “Divestiture”).  Associated with the Divestiture, the Companyplans to realign its sales, distribution and product development functions to abusiness based solely on its Focus Products. It also plans to configure its manufacturing and support infrastructureto address the initially lower revenue levels following the Divestiture.  The Company expects that there may be certainimpairments of assets, severance and other restructuring-related chargesassociated with the Divestiture and subsequent reorganization, which will berecorded as incurred.  The Company hasestimated that total severance-related charges will be approximately $10million, of which approximately $5.3 million has been recognized over theretention period as of December 31, 2006, in accordance with SFAS No. 146.   The Company is currently evaluating otherpotential charges associated with the Divestiture pending its closure.

Forthe three months ended December 31, 2006, the Company recorded $2.0 million intotal restructuring-related charges of which $1.3 million was related to theDecember 2002 restructuring initiatives and $0.7 million was associated withthe Divestiture including $0.4 million reported in discontinued operations.  The $2.0 million charge consisted of $1.7million severance-related costs and $0.3 million facility move-related costsand other charges.  For the six monthsended December 31, 2006, the Company recorded $7.2 million ofrestructuring-related charges of which $1.9 million was related to the December2002 restructuring initiatives and $5.3 million was associated with theDivestiture including $1.4 million reported in discontinued operations.  The $7.2 million charge consisted of $6.3million for severance-related costs and $0.9 million for facility move-relatedcosts.

Forthe three months ended December 31, 2005, the Company recorded $3.1 million inDecember 2002 restructuring charges including $2.3 reported in discontinuedoperations.  The $3.1 million chargeconsisted of $2.1 for million facility move-related costs, contract terminationand asset impairment charges and $1.0 million for severance-related costs.  For the six months ended December 31, 2005,the Company recorded $7.4 million in December 2002 restructuring chargesincluding $4.3 million reported in discontinued operations.  The $7.4 million charge consisted of $5.1million for facility move-related costs, contract termination and assetimpairment charges, and $2.3 million for severance costs.

As of December 31, 2006, charges associated with the December 2002restructuring activities were completed. Total charges were $279.1 million ofwhich

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approximately $108 million were cash charges. These charges consistedof $219.2 million for asset impairment, plant closure and other charges, $6.0million of raw material and work-in-process inventory, and $53.9 million forseverance-related costs.   Components ofthe $219.2 million asset impairment, plant closure and other charges includedthe following items:

·      As the Company emphasized more advancedgeneration planar products, it expected the future revenue stream from its lessadvanced facilities in Temecula, California to decrease significantly.  These facilities had a net book value of$138.3 million and were written down by $77.7 million.  Certain equipment at this facility is beingsold with the Divestiture.  The Companyexpects to continue to use these facilities until approximately March 2008, tosupport certain transitional service level agreements associated with theDivestiture, and the remaining basis will be depreciated over units ofproduction over this period.

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

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

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

·      The Company eliminated the manufacturing of itsnon-space military products in its Santa Clara, California facility as of July31, 2004. Currently, subcontractors handle the Company’s non-space qualifiedproducts previously manufactured in this facility. The Company alsotransitioned the assembly and test of non-space power components from itsLeominster, Massachusetts facility to its Tijuana, Mexico facility as ofDecember 31, 2005.  Associated with thesereductions in manufacturing activities, certain assets with a net book value of$4.0 million were written down by $2.1 million.

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·      The Company incurred $60.1 million in othermiscellaneous items since December 2002, including $50.9 million in facilitymove-related costs and other impaired asset charges and $9.2 million incontract termination and settlement costs.

As a result of the restructuring initiatives,certain raw material and work-in-process inventories were impaired, includingproducts that could not be completed in other facilities, materials that werenot compatible with the processes used in the alternative facilities, andmaterials such as gases and chemicals that could not readily be transferred.Based on these factors the Company wrote down these inventories with a carryingvalue of $98.2 million by $6.0 million to their net realizable value. Asof September 30, 2006,the Company had disposed of all of the inventory.

As of December 31, 2006, the Company hasrecorded $59.2 million in severance-related charges, including $8.5 million inpension termination costs at its manufacturing facility in Oxted, England, and$5.7 million of severance-related costs associated with the Divestiture.  Approximately 2,700 administrative, operatingand manufacturing positions are anticipated to be affected, includingapproximately 1,300 employees associated with the PCS business.

The followingtable summarizes the Company’s severance accrual related to the June 2001restructuring, the December 2002 restructuring, and the Divestiture for the sixmonths ended December 31, 2006 (in thousands):
| ** **                                                                                          | ** ** | **June  2001  Restructuring** | ** ** | **December  2002  Restructuring** | ** ** | **The  Divestiture** | ** ** | **Total  Severance  Liability** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|----------------------|------------|---------------------------------|------------|
| Accrued severance, June  30, 2006                                                                   |       | $                             | 235        |                              | $          | 6,538                |       | $                               | —     |   | $ | 6,773 |   |
| Costs incurred or  charged to “impairment of assets, restructuring and severance charges” |       | (211                          | )          | 1,244                             |       | 5,254                |       | 6,287                           |       |
| Costs paid                                                                                          |       | (24                           | )          | (5,109                            | )          | —               |       | (5,133                          | )          |
| Accrued severance, December 31, 2006                                                                |       | $                             | —     |                              | $          | 2,673                |       | $                               | 5,254      |   | $ | 7,927 |   |

 

The June 2001 severance liability is primarily related to certain legalaccruals associated with the termination of 29 administrative and operatingpersonnel.  The liability was paid orreleased during the six months ended December 31, 2006.  The December 2002 Restructuring severanceliability is primarily related to severance-related costs of approximately 130manufacturing personnel at the El Segundo, California facility and theassociated liability is expected to be paid or released by fiscal 2007year-end.  The Divestiture severanceliability is associated with the retention of approximately 100 key operatingand finance personnel pending successful closing of the Divestiture and theassociated liability is expected to be paid by fiscal 2007 year-end.

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11.       Segment and GeographicInformation

As described in Note 2, “Divestiture”, theCompany entered into definitive agreements with Vishay Intertechnology, Inc. (“Vishay”),to sell its PCS business, which consists of the Non-Aligned Product andCommodity Product segments.  As a result, the Company has included theNon-Aligned Product segment’s financial results in determining income fromdiscontinued operations as of December 31, 2006.  Althoughthe assets and liabilities held for sale include those of both the Non-AlignedProduct and Commodity Product segments, the Commodity Product segmentresults were not included in discontinued operations at this time, as theCompany expects to have significant ongoing involvement based on the cash flowsto be derived from the Commodity Product manufacturing-related and othersupport services to be provided to Vishay following the Divestiture. Associated with the Divestiture, approximately $6 million of product revenuesfor the three months ended December 31, 2006, previously accounted for in theFocus Products group, have been reclassified to the Commodity Product segment,** **reflecting how theChief Operating Decision Maker reviews the segments in light of theDivestiture.

 

Segment results for the continuing operations for the three and sixmonths ended December 31, 2006 and 2005 are as follows (in thousandsexcept percentages):
|                               | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **December 31, 2006**  | ** ** | **December 31, 2005** | ** ** |
| ** **                    | ** ** | **Revenue**                      | ** ** | **Gross   Margin** | ** ** | **Revenue** | ** ** | **Gross  Margin** | ** ** |
|                          |       |                             |       |   |   |   |   |   |   |
| Computing and  Communications |       | $                                | 141,050    |   | 41.1 | % | $ | 92,525 |   | 41.3 | % |
| Energy-Saving  Products       |       | 83,268                           |       | 49.1 |   | 72,572 |   | 48.8 |   |
| Aerospace and  Defense        |       | 39,220                           |       | 52.1 |   | 34,400 |   | 50.0 |   |
| Intellectual  Property        |       | 10,618                           |       | 100.0 |   | 10,073 |   | 100.0 |   |
| Focus Products                |       | 274,156                          |       | 47.4 |   | 209,570 |   | 48.1 |   |
|                          |       |                             |       |   |   |   |   |   |   |
| Commodity  Products           |       | 53,448                           |       | 20.2 |   | 45,200 |   | 19.1 |   |
|                          |       |                             |       |   |   |   |   |   |   |
| Total revenue                 |       | $                                | 327,604    |   | 43.0 | % | $ | 254,770 |   | 43.0 | % |

 

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|                               | ** ** | **Six Months Ended**  | ** ** |
|-------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
| ** **                    | ** ** | **Revenue**                     | ** ** | **Gross   Margin** | ** ** | **Revenue** | ** ** | **Gross   Margin** | ** ** |
|                          |       |                            |       |   |   |   |   |   |   |
| Computing and  Communications |       | $                               | 274,542    |   | 40.7 | % | $ | 179,492 |   | 41.3 | % |
| Energy-Saving  Products       |       | 158,688                         |       | 49.3 |   | 141,833 |   | 50.3 |   |
| Aerospace and  Defense        |       | 77,648                          |       | 51.1 |   | 63,801 |   | 47.1 |   |
| Intellectual  Property        |       | 21,628                          |       | 100.0 |   | 20,514 |   | 100.0 |   |
| Focus Products                |       | 532,506                         |       | 47.2 |   | 405,640 |   | 48.7 |   |
|                          |       |                            |       |   |   |   |   |   |   |
| Commodity  Products           |       | 110,949                         |       | 20.5 |   | 93,149 |   | 20.2 |   |
|                          |       |                            |       |   |   |   |   |   |   |
| Total revenue                 |       | $                               | 643,455    |   | 42.6 | % | $ | 498,789 |   | 43.4 | % |

 

Productrevenues from unaffiliated customers are based on the location in which thesale originated. One distributor accounted for approximately 11 percent of theCompany’s consolidated revenues for the three and six months ended December 31,2006.  No single original equipmentmanufacturer (“OEM”), customer, distributor or subcontract manufactureraccounted for more than ten percent of the Company’s consolidated revenues forthe three or six months ended December 31, 2005.  One distributor accounted for approximately 17percent and 12 percent of the Company’s accounts receivable at December 31,2006 and June 30, 2006, respectively.

The majority of the Company’s products in theFocus Product segments, including those in the C&C, ESP and A&Dsegments, are sold directly to OEM customers, while the majority of theCompany’s products in the CP segment are sold through distribution.  The following summarizes the type ofcustomers who individually accounted for greater than ten percent of thesegment revenue, as a percent of the total segment revenue for the three andsix months ended December 31, 2006:

C&C:          Two distributors accountedfor approximately 35 percent and 37 percent of C&C revenue for the threeand six months ended December 31, 2006, respectively.

ESP:            No single OEM customer,distributor or subcontract manufacturer accounted for more than ten percent ofthe ESP revenue for the three or six months ended December 31, 2006.

A&D:         One distributoraccounted for approximately ten percent of A&D revenue for the three monthsended December 31, 2006 and no single original equipment manufacturer (“OEM”),customer, distributor or subcontract manufacturer accounted for more than tenpercent of A&D segment revenue for the six months ended December 31, 2006.

CP:              Two distributorsaccounted for approximately 23 percent and 21 percent of CP revenue for thethree and six months ended December 31, 2006, respectively.

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Geographic information for the Company on an aggregate basis, for thethree and six months ended December 31, 2006 and 2005, is presented below.  Product revenues from unaffiliated customersare based on the location in which the sale originated, and includes revenuefrom the Commodity Product segment being sold with the Divestiture (inthousands):
|                        | ** ** | **Three Months EndedDecember 31,** | ** ** | **Six Months EndedDecember 31,** | ** ** |
|------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                          | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue                |       |                                              |       |                                            |       |   |   |   |   |
| Asia                   |       | $                                                 | 177,024    |                                            | $          | 134,627 |   | $ | 342,693 |   | $ | 262,277 |   |
| The United  States     |       | 80,114                                            |       | 62,632                                          |       | 159,954 |   | 123,807 |   |
| Europe                 |       | 59,848                                            |       | 47,438                                          |       | 119,180 |   | 92,191 |   |
|                   |       |                                              |       |                                            |       |   |   |   |   |
| Total product revenue  |       | 316,986                                           |       | 244,697                                         |       | 621,827 |   | 478,275 |   |
| Unallocated  royalties |       | 10,618                                            |       | 10,073                                          |       | 21,628 |   | 20,514 |   |
|                   |       |                                              |       |                                            |       |   |   |   |   |
| Total revenue          |       | $                                                 | 327,604    |                                            | $          | 254,770 |   | $ | 643,455 |   | $ | 498,789 |   |

 

The Company includes inlong-lived assets, all long-term assets excluding long-term cash investments,long-term deferred income taxes, goodwill and acquisition-related intangibles(in thousands):
|                                            | ** ** | **December 31,  2006** | ** ** | **June 30,  2006** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Long-Lived  Assets                         |       |                        |       |                    |       |
| The United  States                         |       | $                           | 346,626    |                    | $          | 338,698 |   |
| Asia                                       |       | 39,351                      |       | 34,866                  |       |
| Europe                                     |       | 265,320                     |       | 228,225                 |       |
| Sub-total                                  |       | 651,297                     |       | 601,789                 |       |
|                                       |       |                        |       |                    |       |
| Long-lived  assets, held for sale (Note 2) |       | 69,192                      |       | 66,034                  |       |
| Total long-lived  assets                   |       | $                           | 720,489    |                    | $          | 667,823 |   |

 

12.       Stock-BasedCompensation

The Company issuesnew shares to fulfill the obligations under all of its stock-based compensationawards.  The following table summarizesthe stock option activities for the six months ended December 31, 2006 (inthousands except per share price data):
|                                 | ** ** | **Shares** | ** ** | **Weighted   Average  Option   Exercise  Price Per   Share** | ** ** | **Weighted   Average  Grant Date   Fair  Value Per   Share** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|---------------------------------|------------|------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding,  June 30, 2006     |       | 12,075     |       | $                                                                                | 40.35      |                                                                                  | —     |                                        | $          | 45,981 |   |
| Granted                         |       | 847        |       | $                                                                                | 35.38      |                                                                                  | $          | 13.31                                       |       | — |   |
| Exercised                       |       | (307       | )          | $                                                                                | 22.73      |                                                                                  | —     |                                        | $          | 4,607 |   |
| Expired or canceled             |       | (330       | )          | $                                                                                | 44.69      |                                                                                  | —     |                                        | —     |   |
| Outstanding, December  31, 2006 |       | 12,285     |       | $                                                                                | 40.32      |                                                                                  | —     |                                        | $          | 54,734 |   |
|                                 |            |            |            |                                                                                  |            |                                                                                       |            |                                             |            |  |  |  |

 

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For the six months ended December 31, 2006 and2005 the Company received $6.1 million and $24.5 million, respectively, forstock options exercised.  Total taxbenefit realized for the tax deductions from stock options exercised was $1.4million and $8.4 million for the six months ended December 31, 2006 and 2005,respectively.

The following table summarizes the RestrictedStock Unit (“RSU”) activities for the six months ended December 31, 2006 (inthousands except per share data):
|                                 | ** ** | **Restricted  Stock Units** | ** ** | **Weighted   Average  Grant Date   Fair Value   Per Share** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|---------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding,  June 30, 2006     |       | 23                               |       | $                                                                                         | 49.09      |                                        | $          | 909 |   |
| Vested                          |       | (2                               | )          | $                                                                                         | 35.30      |                                        | $          | 71 |   |
| Expired                         |       | (6                               | )          | $                                                                                         | 36.52      |                                        | —     |   |
| Outstanding, December  31, 2006 |       | 15                               |       | $                                                                                         | 49.07      |                                        | $          | 575 |   |

 

The following table summarizes the stock options and RSUs outstandingat December 31, 2006, and related weighted average price and lifeinformation (in thousands except year and price data):
|                                                            | ** ** | **December 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  Exercise   Price** | ** ** |
| $0.00 to $14.13                                            |       | 398                             |       | 2.30 |   | $ | 11.31 |   | 384 |   | $ | 11.74 |   |
| $15.62 to $25.35                                           |       | 1,242                           |       | 2.69 |   | $ | 20.63 |   | 1,243 |   | $ | 20.63 |   |
| $26.00 to $35.90                                           |       | 2,140                           |       | 4.50 |   | $ | 34.46 |   | 1,286 |   | $ | 33.99 |   |
| $36.39 to $45.87                                           |       | 6,301                           |       | 3.46 |   | $ | 42.70 |   | 5,721 |   | $ | 42.83 |   |
| $46.19 to $54.69                                           |       | 1,326                           |       | 3.60 |   | $ | 50.38 |   | 919 |   | $ | 51.34 |   |
| $55.31 to $63.88                                           |       | 893                             |       | 3.92 |   | $ | 62.29 |   | 893 |   | $ | 62.29 |   |
|                                                       |       | 12,300                          |       | 3.57 |   | $ | 40.27 |   | 10,446 |   | $ | 40.37 |   |

 

Additional information relating to the stock option plans, includingemployee stock options and RSUs, at December 31, 2006 and June 30, 2006 isas follows (in thousands):
|                                                            | ** ** | **December 31,   2006** | ** ** | **June 30,  2006** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------|------------|
| Options  exercisable                                       |       | 10,446                            |       | 10,813                  |       |
| Options  available for grant                               |       | 3,024                             |       | 3,696                   |       |
| Total reserved common  stock shares for stock option plans |       | 15,323                            |       | 15,794                  |       |

 

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Forthe three and six months ended December 31, 2006 and 2005, stock-basedcompensation expense associated with the Company’s stock options and RSUs is asfollows (in thousands):
|                                          | ** ** | **December 31, 2006**    | ** ** |
|------------------------------------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **Three Months   Ended** | ** ** | **Six Months   Ended** | ** ** |
| Stock options:                           |       |                               |       |   |   |
| Selling and administrative expense       |       | $                                  | 808        |   | $ | 2,007 |   |
| Research and development expense         |       | 975                                |       | 1,504 |   |
| Cost of sales                            |       | 196                                |       | 397 |   |
| Total                                    |       | 1,979                              |       | 3,908 |   |
|                                     |       |                               |       |   |   |
| RSUs:                                    |       |                               |       |   |   |
| Selling and administrative expense       |       | 38                                 |       | 82 |   |
| Research and development expense         |       | 52                                 |       | 104 |   |
| Cost of sales                            |       | 8                                  |       | 16 |   |
| Total                                    |       | 98                                 |       | 202 |   |
|                                     |       |                               |       |   |   |
| Total  stock-based compensation expense: |       |                               |       |   |   |
| Selling and administrative expense       |       | 846                                |       | 2,089 |   |
| Research and development expense         |       | 1,027                              |       | 1,608 |   |
| Cost of sales                            |       | 204                                |       | 413 |   |
| Total                                    |       | $                                  | 2,077      |   | $ | 4,110 |   |

 
|                                          | ** ** | **December 31, 2005**    | ** ** |
|------------------------------------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **Three Months   Ended** | ** ** | **Six Months   Ended** | ** ** |
| Stock options:                           |       |                               |       |   |   |
| Selling and administrative expense       |       | $                                  | 619        |   | $ | 938 |   |
| Research and development expense         |       | 231                                |       | 365 |   |
| Cost of sales                            |       | 61                                 |       | 99 |   |
| Total                                    |       | 911                                |       | 1,402 |   |
|                                     |       |                               |       |   |   |
| RSUs:                                    |       |                               |       |   |   |
| Selling and administrative expense       |       | 61                                 |       | 116 |   |
| Research and development expense         |       | 52                                 |       | 109 |   |
| Cost of sales                            |       | 8                                  |       | 18 |   |
| Total                                    |       | 121                                |       | 243 |   |
|                                     |       |                               |       |   |   |
| Total  stock-based compensation expense: |       |                               |       |   |   |
| Selling and administrative expense       |       | 680                                |       | 1,054 |   |
| Research and development expense         |       | 283                                |       | 474 |   |
| Cost of sales                            |       | 69                                 |       | 117 |   |
| Total                                    |       | $                                  | 1,032      |   | $ | 1,645 |   |

 

Thetotal unrecognized compensation expense for outstanding stock options and RSUswas $22.4 million as of December 31, 2006, and will be recognized, in general,over three years.  The weighted averagenumber of years to recognize the compensation expense is 1.3 years.

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Thefair value of the options associated with the above compensation expense forthe three and six months ended December 31, 2006 and 2005, was determined atthe date of the grant using the Black-Scholes option pricing model withthe following weighted average assumptions:
|                         | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Expected life           |       | 3.5years                    |       | 3.5years                    |       |
| Risk free interest rate |       | 4.7                         | %          | 3.9                         | %          |
| Volatility              |       | 44.0                        | %          | 30.0                        | %          |
| Dividend yield          |       | 0.0                         | %          | 0.0                         | %          |

 

13.       Environmental Matters

Federal, state, foreign and local laws andregulations impose various restrictions and controls on the storage, use anddischarge of certain materials, chemicals and gases used in semiconductormanufacturing processes and on the operation of our facilities and equipment.The Company believes it uses reasonable efforts to maintain a system ofcompliance and controls for these laws and regulations. Despite the Company’sefforts and controls, from time to time, issues may arise with respect to thesematters, including the possibility of administrative proceedings for potentialnon-compliance where penalties might be assessed. The Company does not believethat compliance with such laws and regulations as now in effect will have amaterial adverse effect on the Company’s results of operations, financialposition or cash flows.

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

The Company and Rachelle Laboratories, Inc. (“Rachelle”), a formeroperating subsidiary of the Company that discontinued operation in 1986, wereeach named a potentially responsible party (“PRP”) in connection with theinvestigation by the United States Environmental Protection Agency (“EPA”) ofthe disposal of allegedly hazardous substances at a major superfund site inMonterey Park, California (“OII Site”). Certain PRPs who settled certain claimswith the EPA under consent decrees filed suit in Federal Court in May 1992against a number of other PRPs, including the Company, for cost recovery andcontribution under the provisions of the Comprehensive Environmental Response,Compensation and Liability Act (“CERCLA”). IR has settled all outstandingclaims that have arisen against it out of the OII Site.  No claims against Rachelle have beensettled.  The Company has taken theposition that none of the wastes generated by Rachelle were hazardous.

Counsel for Rachelle received a letter dated August 2001 from the U.S.Department of Justice, directed to all or substantially all PRPs for the OIISite, offering to settle claims against such parties for all work performed throughand including the final remedy for the OII Site.  The offer required a payment from Rachelle inthe amount

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of approximately $9.3 million in order to take advantage of thesettlement.  Rachelle did not accept theoffer.  In November 2006, contractors forthe EPA called Rachelle’s counsel requesting Rachelle’s updated contactinformation.

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

The Company received a letter in June 2001from a law firm representing UDT Sensors, Inc. relating to environmentalcontamination (chlorinated solvents such as trichlorethene) assertedly found inUDT’s properties in Hawthorne, California. The letter alleges that the Company operated a manufacturing business atthat location in the 1970’s and/or 1980’s and that it may have liability inconnection with the claimed contamination.

The Company has made no accrual for anypotential losses since there has been no assertion of specific facts on whichto form the basis for determination of liability.

14.       Litigation

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

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remand a federal court juryin Los Angeles, California, held on September 15, 2005, that IXYS elongatedoctagonal MOSFETs and IGBTs infringed on the 4,959,699 patent but did notinfringe on the 5,008,725 and 5,130,767 patents. On October 6, 2005, the juryawarded the Company $6.2 million in damages. Based on the jury’s verdict, on February 14, 2006, the District Courtentered its final judgment (including permanent injunctions prohibiting IXYSfrom further infringing sales for the remaining life of the 4,959,699 patent)and found that the Company is entitled to $6.2 million in compensatory damagesfor infringement through September 30, 2005, plus an additional 6.5 percent ofinfringing sales after September 30, 2005. On July 14, 2006, the Federal Circuit entered an order vacating thatjudgment and remanded the IR v. IXYS action so that the District Court couldconsider whether to reissue a permanent injunction in light of the SupremeCourt’s decision in eBay Inc. v. MercExchange, L.L.C.,    U.S.   ,126 S.Ct. 1837, 164 L.Ed.2d 641 (2006). The Company then requested that the District Court re-enter the finaljudgment (and permanent injunction).  OnSeptember 14, 2006, the District Court granted the Company’s motion andre-entered the final judgment.

On January 17, 2007, theFederal Circuit denied a motion by IXYS to stay the permanent injunctionpending appeal, stating that IXYS had failed to show likelihood of success onthe merits of any appeal. Accordingly, the permanent injunction will remain ineffect until the ’699 patent expires in September 2007, unless it is firstvacated by the Federal Circuit’s decision on the merits of the appeal. Althoughbriefing on the appeal has not yet begun, the Company expects to oppose IXYS’sappeal both on the merits and on jurisdictional grounds based on IXYS’s failureto timely file its notice of appeal.

15.       Income Taxes

The Company’s effective tax provision related tocontinuing operations was 19.4 percent and 26.3 percent for the three monthsended December 31, 2006 and 2005, respectively, and 23.1 percent and 26.3percent for the six months ended December 31, 2006 and 2005, respectively.  The Company’s effective tax rates were lowerthan the U.S. federal statutory tax rate of 35 percent, as a result of lowerstatutory tax rates in certain foreign jurisdictions, the benefit of foreigntax credits and research and development credits, partially offset by statetaxes and certain foreign losses without foreign tax benefit.  For thethree and six months ended December 31, 2006, the Company recognized $4.3million of retroactive research and development tax benefit for the January2006 to September 2006 period, as a result of Congress reinstating the researchand development tax credit retroactive to the beginning of January 2006.

The Company’s effective tax provision for thethree and six months ended December 31, 2006 excluded $26.5 million of taxbenefit for the recognition of deferred tax assets tied to the difference inbook and tax basis of certain subsidiaries being sold as part of theDivestiture (see Note 2).  The $26.5 million of tax benefit has beenrecognized as part of income from discontinued operations for the three and sixmonths ended December 31, 2006.

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

 

The following discussionof our financial condition and results of operations should be read togetherwith the consolidated financial statements and notes to consolidated financialstatements included elsewhere in this Form 10-Q.  Except for historic information containedherein, the matters addressed in this Item 2 constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  Forward-looking statements maybe identified by the use of terms such as “anticipate,” “believe,” “expect,”“intend,” “project,” “will,” and similar expressions.  Such forward-looking statements are subjectto a variety of risks and uncertainties, including those discussed under theheading “Statement of Caution Under the Private Securities Litigation ReformAct of 1995”, in Part II, Item 1A, “Risk Factors”, and elsewhere in thisQuarterly Report on Form 10-Q, that could cause actual results to differmaterially from those anticipated by the Company.  We undertake no obligation to update theseforward-looking statements to reflect events or circumstances after the date ofthis report or to reflect actual outcomes.

**Overviewof Results of Operations for the Three Months Ended December 31, 2006**

We have previously reported in the following segments:  the Computing and Communications (“C&C”),Energy-Saving Products (“ESP”), Aerospace and Defense (“A&D”) andIntellectual Property (“IP”) segments also referred to as our Focus-Productsgroup; and the Commodity Product (“CP”) and the Non-Aligned Product segments,which are included in the Power Control Systems (“PCS”) business expected to besold as further described below.

On November 8,2006, we entered into definitive agreements with Vishay Intertechnology, Inc.(“Vishay”), to sell our Power Control Systems (“PCS”) business (the“Divestiture”).  Product lines included in the sale are certain discreteplanar MOSFETs, discrete diodes and rectifiers, discrete thyristors, multi-chipmodules not including intergrated circuits and certain other specifiedproducts.  The PCS business is being sold for approximately $290 millionin cash, subject to certain adjustments based on the overall level of workingcapital and the level of cash in the subsidiaries being sold.  On January24, 2007, the waiting period with respect to the sale under the Hart-Scott-RodinoAntitrust Improvements Act of 1976 expired, and we have agreed with Vishay to aclosing by April 1, 2007, which is subject to customary closing conditions (SeeNote 2, “Divestiture’’).

As part of the Divestiture, we will beinvolved in the transition of certain of the divested business and assets withVishay, including providing Commodity Product manufacturing-related and othersupport services for up to three years.  As a result of the Divestiture,we have reported the Non-Aligned Product segment’s financial results asdiscontinued operations.  Although the assets and liabilities held for sale includethose of both the Non-Aligned Product and Commodity Product segments, the CommodityProduct segment results were not included in discontinued operations at thistime, as we expect to have significant ongoing involvement based on the cashflows to be derived from the transitional services to be provided to Vishay aspreviously described.  Our prior period financial statements have beenrestated to conform to current period presentation. The reclassifications hadno impact on our total assets, total liabilities, stockholders’ equity, cashflows or total consolidated net income reported.

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When the PCS Divestiture is completed, it is our goal that within the nextcouple of years, the remaining revenues from our Focus Products would growfaster and the remaining business will be more profitable than our business asa whole prior to the Divestiture.  We donot believe that the completion of the PCS Divestiture will substantially alterthe customer base that we serve or the competition that we face currently.However, to achieve our goals, following a successful completion of the PCSDivestiture, we plan to more fully develop our Focus Product segments byrealigning our sales, distribution and product development functions to abusiness based solely on our Focus Products. We also plan to configure our manufacturing and support infrastructureto address the initially lower revenue levels following the PCS Divestiture,while managing the impact of the transition services to be provided to Vishayin the PCS Divestiture.

For the three months ended December 31, 2006, revenue was $327.6million, compared to $254.8 million for the three months ended December 31,2005.  Revenue for the three months ended December 31, 2006increased by 28.6 percent compared to the prior year, reflecting growth inComputing and Communications, Energy-Saving Products, Aerospace and Defense andCommodity Products segments, which increased 52.4 percent, 14.7 percent, 14.0percent, and 18.2 percent, respectively, from the three months ended December31, 2005.

Focus Productrevenue was $274.2 million (83.7 percent of revenue) for the three months endedDecember 31, 2006, compared to $209.6 million (82.3 percent of revenue) for thethree months ended December 31, 2005. Commodity Product revenue was $53.4 million (16.3 percent of revenue)for the three months ended December 31, 2006, compared to $45.2 million (17.7percent of revenue) for the three months ended December 31, 2005.

Revenue as apercentage of total product revenue, based on sales location, was approximately25 percent, 56 percent and 19 percent for United States, Asia and Europe,respectively, for the three months ended December 31, 2006, and 26 percent, 55percent and 19 percent for United States, Asia and Europe, respectively, forthe three months ended December 31, 2005.

For the three months ended December 31, 2006 and 2005, gross profitmargin was 43.0 percent.  Gross profitmargin for our Focus Products was 47.4 percent for the three months endedDecember 31, 2006, compared to 48.1 percent for the three months ended December31, 2005.  The gross profit margindecline primarily reflected product mix. Gross profit margin for our CommodityProducts was 20.2 percent for the three months ended December 31, 2006,compared to 19.1 percent for the three months ended December 31, 2005. Aspreviously discussed, we have entered into definitive agreements with Vishay tosell our PCS business and will be providing Commodity Productmanufacturing-related and other support for up to three years.  We anticipate that the gross profit marginfrom these transitional services will be lower than our Focus Products.

Forthe three months ended December 31, 2006, selling and administrative expensewas $51.4 million (15.7 percent of revenue) compared to $43.9 million (17.2percent of revenue) for the three months ended December 31, 2005, reflectingvariable costs paid on a higher revenue base such as sales commissions, profitsharing, stock option and other employee benefit expenses.

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Forthe three months ended December 31, 2006, research and development expense was$34.0 million (10.4 percent of revenue) compared to $25.7 million (10.1 percentof revenue) for the three months ended December 31, 2005, reflecting ourcontinued commitment to developing our power management ICs and newarchitectures for the next-generation applications, including new gamestations, digital televisions, high-performance servers, hybrid vehicles andenergy-efficient appliances.

During fiscal 2003 secondquarter ended December 31, 2002, we announced certain restructuringinitiatives. As of December 31, 2006, charges associated with these initiativeswere completed and we expect that the associated severance liability atDecember 31, 2006 will be paid or released as appropriate by fiscal 2007year-end.

Associated with theDivestiture as previously described, we plan to realign our sales, distributionand product development functions to a business based solely on our FocusProducts.  We also plan to configure ourmanufacturing and support infrastructure to address the initially lower revenuelevels following the Divestiture.  Weexpect that there may be impairment of assets, severance and otherrestructuring-related charges associated with the Divestiture and subsequentreorganization, which will be recorded as incurred.  We estimate that total severance-relatedcharges will be approximately $10 million, of which approximately $5.3 millionhas been recognized over the retention period as of December 31, 2006, inaccordance with SFAS No. 146.   We arecurrently evaluating other potential charges associated with the Divestiturepending its closure.

For the three months endedDecember 31, 2006, we have recorded $2.0 million in total restructuring-relatedcharges of which $1.3 million was related to the December 2002 restructuringinitiatives and $0.7 million was associated with the Divestiture including $0.4million included in discontinued operations. The $2.0 million consisted of $1.7 million of severance-related costsand $0.3 million facility move-related costs.

InDecember 2006, Congress reinstated the research and development tax creditretroactive to the beginning of January 2006. As a result, we recognized $4.3 million of retroactive research anddevelopment tax credit, which lowered our effective tax rate from 29.5 percentto 19.4 percent for the three months ended December 31, 2006.  We anticipate that our effective tax rate forthe remaining fiscal 2007 will be approximately 27.0 percent, plus or minushalf a percent.  In addition, werecognized $26.5 million of deferred tax assets tied to the difference in bookand tax basis of certain subsidiaries being sold as part of the Divestiture,which is included in income from discontinued operations for the three and sixmonths ended December 31, 2006.

We spent $35.6 million incapital expenditures, of which $14.9 million was at our Newport, Walesfacility, during the three months ended December 31, 2006.  We areoperating at over 90 percent of our worldwide in-house wafer fabrication andassembly manufacturing capacities, without considering subcontract or foundrycapacity.  As of December 31, 2006, wehave completed the second phase of our capacity expansion, which providedapproximately $300 million in annual revenue output potential. In October 2006,we announced a new foundry agreement with Tower Semiconductor for capacitycapable of addressing many of our Focus Products.  Including the Toweragreement,  we expect to addanother $150 million in revenue potential to be completed by June 2007.

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Operatingactivities generated cash flow of $71.6 million for the three months endedDecember 31, 2006.  Our cash, cashequivalents and cash investments totaled $1.1 billion at December 31,2006.   On November 6, 2006, we enteredinto a new five-year multi-currency revolving credit facility with a syndicateof lenders including JP Morgan Chase Bank, Bank of America, N.A., HSBC BankUSA, and Deutsche Bank AG, for $150 million, with an option to increase thefacility limit to $250 million.

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

**Results of Operations for the Three and Six MonthsEnded December 31, 2006 Compared with the Three and Six Months Ended December31, 2005**

The following table sets forth certain items as a percentage of revenue(in millions except percentages):
| ** **                                                 | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue                                                    |       | $                                                   | 327.6      |                                              | 100.0      | % | $ | 254.8 |   | 100.0 | % | $ | 643.4 |   | 100.0 | % | $ | 498.8 |   | 100.0 | % |
| Cost of sales                                              |       | 186.9                                               |       | 57.0                                              |       | 145.2 |   | 57.0 |   | 369.3 |   | 57.4 |   | 282.5 |   | 56.6 |   |
|                                                       |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                               |       | 140.7                                               |       | 43.0                                              |       | 109.6 |   | 43.0 |   | 274.1 |   | 42.6 |   | 216.3 |   | 43.4 |   |
| Selling and administrative expense                         |       | 51.4                                                |       | 15.7                                              |       | 43.9 |   | 17.2 |   | 102.8 |   | 16.0 |   | 86.9 |   | 17.4 |   |
| Research and development expense                           |       | 34.0                                                |       | 10.4                                              |       | 25.7 |   | 10.1 |   | 64.8 |   | 10.0 |   | 49.2 |   | 9.9 |   |
| Amortization of acquisition-related intangible  assets     |       | 0.6                                                 |       | 0.2                                               |       | 1.2 |   | 0.5 |   | 1.3 |   | 0.2 |   | 2.4 |   | 0.5 |   |
| Impairment of assets, restructuring and severance  charges |       | 1.6                                                 |       | 0.5                                               |       | 0.7 |   | 0.3 |   | 5.7 |   | 0.9 |   | 3.0 |   | 0.6 |   |
| Other (income) expense, net                                |       | (0.5                                                | )          | (0.2                                              | )          | 1.1 |   | 0.4 |   | 0.4 |   | 0.1 |   | 1.2 |   | 0.2 |   |
| Interest income, net                                       |       | (1.8                                                | )          | (0.6                                              | )          | (0.8 | ) | (0.3 | ) | (4.3 | ) | (0.7 | ) | (2.3 | ) | (0.4 | ) |
| Income from continuing operations, before income  taxes    |       | 55.4                                                |       | 17.0                                              |       | 37.8 |   | 14.8 |   | 103.4 |   | 16.1 |   | 75.9 |   | 15.2 |   |
| Provision for income taxes                                 |       | 10.8                                                |       | 3.3                                               |       | 9.9 |   | 3.9 |   | 23.8 |   | 3.7 |   | 20.0 |   | 4.0 |   |
| Income from continuing operations                          |       | 44.6                                                |       | 13.7                                              |       | 27.9 |   | 10.9 |   | 79.6 |   | 12.4 |   | 55.9 |   | 11.2 |   |
| Income (loss) from discontinued operations, net of  tax    |       | 27.3                                                |       | 8.3                                               |       | (3.6 | ) | (1.4 | ) | 26.4 |   | 4.1 |   | (5.4 | ) | (1.1 | ) |
|                                                       |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                 |       | $                                                   | 71.9       |                                              | 22.0       | % | $ | 24.3 |   | 9.5 | % | $ | 106.0 |   | 16.5 | % | $ | 50.5 |   | 10.1 | % |

 

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Revenuesand Gross Margin

For the three months ended December 31, 2006, revenue increased by 28.6percent from the three months ended December 31, 2005.   For the six months ended December 31, 2006,revenue increased by 29.0 percent from the six months ended December 31,2005.  For the three months endedDecember 31, 2006, Focus Product revenue increased by 30.8 percent from thethree months ended December 31, 2005. Focus Product revenue for the threemonths ended December 31, 2006 was $274.2 million (83.7 percent of revenue),compared to $209.6 million (82.3 percent of revenue) for the three months endedDecember 31, 2005.  For the six monthsended December 31, 2006, Focus Product revenue increased by 31.2 percent fromthe six months ended December 31, 2005. Focus Product revenue for the six months ended December 31, 2006 was$532.5 million (82.8 percent of revenue), compared to $405.6 million (81.3percent of revenue) for the six months ended December 31, 2005.  Revenue for the three and six months endedDecember 31, 2006 increased compared to the prior year periords, reflectinggrowth in the Computing and Communication, Energy-Saving Product, Aerospace andDefense and Commodity Product segments, which increased 52.4 percent, 14.7percent, 14.0 percent, and 18.2 percent, respectively, for the three monthsended December 31, 2006, and 53.0 percent, 11.9 percent, 21.7 percent, and 19.1percent, respectively, for the six months ended December 31, 2006.

Commodity Product revenue was $53.4 million (16.3 percent of revenue)and $45.2 million (17.7 percent of revenue) for the three months ended December31, 2006 and 2005, respectively, and $110.9 million (17.2 percent of revenue)and $93.1 million (18.7 percent of revenue) for the six months ended December31, 2006 and 2005, respectively.  Revenueincreased reflecting improved market conditions.

Revenue as apercentage of total product revenue, based on sales location, was approximately25 percent, 56 percent and 19 percent for United States, Asia and Europe,respectively, for the three months ended December 31, 2006, and 26 percent, 55percent and 19 percent for United States, Asia and Europe, respectively, forthe three months ended December 31, 2005. Revenue as a percentage of total product revenue based on saleslocation was approximately 26 percent, 55 percent and 19 percent for the UnitedStates, Asia and Europe, respectively, for the six months ended December 31,2006 and 2005.

Gross profit margin was 43.0 percent for the three months endedDecember 31, 2006 and 2005, and 42.6 percent and 43.4 percent for the sixmonths ended December 31, 2006 and 2005, respectively.  Gross profit margin for our Focus Productswas 47.4 percent and 48.1 percent for the three months ended December 31,2006 and 2005, respectively, and 47.2 percent and 48.7 percent for the sixmonths ended December 31, 2006 and 2005, respectively. Gross margindeclined slightly over prior year reflecting product mix.  Gross profit margin for our CommodityProducts was 20.2 percent and 19.1 percent for the three months ended December31, 2006 and 2005, respectively, 20.5 percent and 20.2 percent for the six monthsended December 31, 2006 and 2005, respectively, reflecting improved marketconditions. As previously discussed, we have entered into definitive agreementswith Vishay to sell our PCS business and will be providing Commodity Productmanufacturing-related and other support services for up to three yearsfollowing the close of the sale.  Weanticipate that the gross profit margin from these transitional services willbe lower than our Focus Products.

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Revenue and gross marginby business segments within our continuing operations for the three and sixmonths ended December 31, 2006, are as follows (in thousands exceptpercentages):
| ** **                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **December 31, 2006**  | ** ** | **December 31, 2005** | ** ** |
| **Business Segment**    | ** ** | **Revenue**                      | ** ** | **Percentage  of Total  Revenue** | ** ** | **Gross  Margin** | ** ** | **Revenue** | ** ** | **Percentage  of Total  Revenue** | ** ** | **Gross  Margin** | ** ** |
| Computing and Communications |       | $                                | 141,050    |   | 43.1 | % | 41.1 | % | $ | 92,525 |   | 36.3 | % | 41.3 | % |
| Energy-Saving Products       |       | 83,268                           |       | 25.4 |   | 49.1 |   | 72,572 |   | 28.5 |   | 48.8 |   |
| Aerospace and Defense        |       | 39,220                           |       | 12.0 |   | 52.1 |   | 34,400 |   | 13.5 |   | 50.0 |   |
| Intellectual Property        |       | 10,618                           |       | 3.2 |   | 100.0 |   | 10,073 |   | 4.0 |   | 100.0 |   |
|                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Focus Products               |       | 274,156                          |       | 83.7 |   | 47.4 |   | 209,570 |   | 82.3 |   | 48.1 |   |
| Commodity Products           |       | 53,448                           |       | 16.3 |   | 20.2 |   | 45,200 |   | 17.7 |   | 19.1 |   |
|                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Total revenue                |       | $                                | 327,604    |   | 100.0 | % | 43.0 | % | $ | 254,770 |   | 100.0 | % | 43.0 | % |

 
| ** **                   | ** ** | **Six Months Ended**  | ** ** |
|------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
| **Business Segment**    | ** ** | **Revenue**                     | ** ** | **Percentage  of Total  Revenue** | ** ** | **Gross  Margin** | ** ** | **Revenue** | ** ** | **Percentage  of Total  Revenue** | ** ** | **Gross  Margin** | ** ** |
| Computing and Communications |       | $                               | 274,542    |   | 42.7 | % | 40.7 | % | $ | 179,492 |   | 36.0 | % | 41.3 | % |
| Energy-Saving Products       |       | 158,688                         |       | 24.7 |   | 49.3 |   | 141,833 |   | 28.4 |   | 51.3 |   |
| Aerospace and Defense        |       | 77,648                          |       | 12.1 |   | 51.1 |   | 63,801 |   | 12.8 |   | 47.1 |   |
| Intellectual Property        |       | 21,628                          |       | 3.3 |   | 100.0 |   | 20,514 |   | 4.1 |   | 100.0 |   |
|                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Focus Products               |       | 532,506                         |       | 82.8 |   | 47.2 |   | 405,640 |   | 81.3 |   | 48.7 |   |
| Commodity Products           |       | 110,949                         |       | 17.2 |   | 20.5 |   | 93,149 |   | 18.7 |   | 20.2 |   |
|                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Total revenue                |       | $                               | 643,455    |   | 100.0 | % | 42.6 | % | $ | 498,789 |   | 100.0 | % | 43.4 | % |

 

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

OurComputing and Communication segment is comprised of our Power Management ICs,Advanced Circuit Devices, including iPowirTM multi-chipmodules and DirectFETTM solutions, and Power Components (primarilyMOSFET Power Components) that address servers and high-end desktops, notebooks,communications networking, and digitally-oriented consumer products like gameconsoles.  Our C&C products are alsoused in digital television, liquid crystal displays (“LCDs”), portable handhelddevices and cellular phones.

C&Crevenue for the three months ended December 31, 2006, increased by $48.5million (52.4 percent), compared to the three months ended December 31,2005.  C&C revenue for the six monthsended December 31, 2006, increased by $95.1 million (53.0 percent) compared tothe six months ended December 31, 2005. The revenue increase reflected strength in the latest generation game stations from the toptwo manufacturers

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and new business relatedto Microsoft’s Vista introduction at the notebook and desktop levels, as wellas, strength in new families of Intel and AMD-based servers.

Grossmargin for C&C was 41.1 percent and 41.3 percent for the three months endedDecember 31, 2006 and 2005, respectively, and 40.7 percent and 41.3 percent forthe six months ended December 31, 2006 and 2005, respectively.  Gross margin declined primarily reflectingadverse changes in product mix and costs associated with the ramp-up of newproducts.

*Energy-Saving Products (“ESP”)*

OurEnergy-Saving Product segment is comprised of our Power Management ICs,Advanced Circuit Devices and Power Components (primarily HEXFET and IGBT PowerComponents) 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).

ESPrevenue for the three months ended December 31, 2006, increased by $10.7 million(14.7 percent) compared to the three months ended December 31, 2005.  ESP revenue for the six months ended December31, 2006, increased by $16.9 million (11.9 percent) compared to the six monthsended December 31, 2005. The revenue increase reflected strong demand for flatpanel televisions and energy-efficient appliances.

Grossmargin for ESP was 49.1 percent for the three months ended December 31, 2006,compared to 48.8 percent for the three months ended December 31, 2005,primarily reflecting a more favorable product mix.  Gross margin for the six months endedDecember 31, 2006 and 2005 was 49.3 percent and 50.3 percent, respectively.

*Aerospace and Defense (“A&D”)*

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

A&D revenue for the three months ended December 31, 2006, increasedby $4.8 million (14.0 percent) from the three months ended December 31,2005.  Revenue for the six months endedDecember 31, 2006, increased by $13.8 million (21.7 percent) from the sixmonths ended December 31, 2005.  TheA&D revenue increase primarily reflected new design wins for commercialsatellites.

Grossmargin for the A&D segment increased to 52.1 percent for the three monthsended December 31, 2006, from 50.0 percent in the three months ended December31, 2005, and to 51.1 percent for the six months ended December 31, 2006, from47.1 percent for the six months ended December 31, 2005.  The gross margin improvement

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reflectedprimarily a more favorable product mix and manufacturing efficiencies andrestructuring cost savings.

*Intellectual Property (“IP”)*

**The Intellectual Property segment reports ourroyalty income from licensing our intellectual property to third parties, whichmay include claims settlement from successful defense of our licenses.  Our licensed MOSFET patents expire between2005 and 2010, with the broadest remaining 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.**

**IP revenue was $10.6 million and $10.1 million forthe three months ended December 31, 2006 and 2005, respectively, and $21.6million and $20.5 million for the six months ended December 31, 2006 and 2005,respectively.  We expect that with theexpiration of our key MOSFET patents in the calendar years 2007 and 2008, ourIP revenue will be reduced substantially and our gross profit will be adverselyimpacted accordingly.  We are continuingour strategy of generating new patents and licensing agreements to supplementour IP revenue.**

*Commodity Products (“CP”)*

TheCommodity Product segment is comprised primarily of older-generation PowerComponents that have widespread use throughout the power management productindustry, but are typically commodity in nature and sold with margins generallybelow our strategic margins targets.

Forthe three months ended December 31, 2006, CP revenue was $53.4 million, up 18.2percent from $45.2 million for the three months ended December 31, 2005.  For the six months ended December 31, 2006,CP revenue was $110.9 million, up 19.1 percent from $93.1 million for the sixmonths ended December 31, 2005.  TheCommodity Product segment is being sold as part of the Divestiture, and as partof the Divestiture, we will be providing Commodity Productmanufacturing-related and other support services for up to three years.  Althoughthe assets and liabilities classified as held for sale include both theNon-Aligned Product and Commodity Product segments, the Commodity Product segment results werenot included in discontinued operations at this time, as we expect to havesignificant ongoing involvement based on the cash flows to be derived from thetransitional services to be provided to Vishay.

Gross margin for CP was 20.2percent and 19.1 percent for the three months ended December 31, 2006 and 2005,respectively, and 20.5 percent and 20.2 percent for the six months endedDecember 31, 2006 and 2005, respectively. We anticipate that the gross profit margin from the Commodity Productmanufacturing-related and other support services to be provided to Vishay followingclosing of the Divestiture will be lower than our Focus Products, and we expectoverall revenues from such services to be significantly less than historic CPsegment revenues.

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*Discontinued Operations*

**Discontinued operations are comprised of our Non-Aligned Productsegment.  Product lines included in thissegment include certain modules, rectifiers, diodes and thyristors used in theautomotive, industrial, welding and motor control applications.**

Sellingand Administrative Expense

Sellingand administrative expense was $51.4 million (15.7 percent of revenue) and$43.9 million (17.2 percent of revenue) for the three months ended December 31,2006 and 2005, respectively, and $102.8 million (16.0 percent of revenue) and$86.9 million (17.4 percent of revenue) for the six months ended December 31,2006 and 2005, respectively.  Selling andadministrative expense increased primarily reflecting variable costs paid on ahigher revenue base such as sales commissions, and profit sharing, stock optionand other employee benefit expenses.

Research and Development Expenses

Research anddevelopment expense was $34.0 million (10.4 percent of revenue) and $25.7million (10.0 percent of revenue) for the three months endedDecember 31, 2006 and 2005, respectively, and $64.8 million (10.0 percent of revenue) and $49.2million (9.9 percent of revenue) for the six months ended December 31, 2006 and2005, respectively.  We continue toconcentrate our research and development activities on our Focus Products,which includes developing our power management ICs and new architectures forthe next-generation applications, such as new game stations, digitaltelevisions, high-performance servers, hybrid vehicles and energy-efficientappliances.

Impairment ofAssets, Restructuring and Severance

During fiscal 2003 secondquarter ended December 31, 2002, we announced certain restructuringinitiatives. Charges associated with these initiatives were completed as ofDecember 31, 2006.  Of such charges,primarily accrued severance liability has not been paid or released as ofDecember 31, 2006. The Company anticipates that the remaining severanceliability will be paid or released as appropriate by fiscal year end June 30,2007.

As discussed in Note 2,“Divestiture” of Notes to Unaudited Consolidated Financial Statements, onNovember 8, 2006, we entered into definitive agreements with VishayIntertechnology, Inc. to sell our Power Control Systems business consisting ofour Non-Aligned Product and Commodity Product segments (the“Divestiture”).  Associated with theDivestiture, we plan to realign our sales, distribution and product developmentfunctions to a business based solely on our Focus Products.  We also plan to configure our manufacturingand support infrastructure to address the initially lower revenue levelsfollowing the Divestiture.  We expectthat there may be impairment of assets, severance and otherrestructuring-related charges associated with the Divestiture and subsequentreorganization, which will be recorded as incurred.  We have estimated that total severance-relatedcharges will be approximately $10 million, of which approximately $5.3 millionhas been recognized over the retention period as of December 31, 2006, inaccordance with SFAS No. 146.   We arecurrently evaluating other potential charges associated with the Divestiturepending its closure.

Forthe three months ended December 31, 2006, we recorded $2.0 million in totalrestructuring-related charges of which $1.3 million was related to the December2002

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restructuring initiatives and $0.7million was associated with the Divestiture including $0.4 million reported indiscontinued operations.  The $2.0million charge consisted of $1.7 million for severance-related costs and $0.3million for facility move-related costs. For the six months ended December 31, 2006, we recorded $7.2 million ofrestructuring-related charges of which $1.9 million was related to the December2002 restructuring initiatives and $5.3 million was associated with theDivestiture including $1.4 million reported in discontinued operations.  The $7.2 million charge consisted of $6.3million of severance-related costs and $0.9 million for facility move-relatedcosts.

For the three months ended December 31,2005, we recorded $3.1 million in December 2002 restructuring charges including$2.3 million reported in discontinued operations.  The $3.1 million charge consisted of $2.1million of facility move-related costs, contract termination and assetimpairment charges and $1.0 million in severance-related costs.  For the six months ended December 31, 2005,we recorded $7.4 million in December 2002 restructuring charges including $4.3million reported in discontinued operations. The $7.4 million charge consisted of $5.1 million for facilitymove-related costs, contract termination and asset impairment charges, and $2.3million for severance costs.

As of December 31, 2006,charges associated with the December 2002 restructuring activities werecompleted. Total charges were $279.1 million of which $108 million were cashcharges. These charges consisted of $219.2 million for asset impairment, plantclosure and other charges, $6.0 million of raw material and work-in-processinventory, and $53.9 million for severance-related costs.   Components of the $219.2 million assetimpairment, plant closure and other charges included the following items:

·                  As we emphasized more advanced generationplanar products, we expected the future revenue stream from our less advancedfacilities in Temecula, California to decrease significantly.  These facilities had a net book value of$138.3 million and were written down by $77.7 million.  Certain equipment at this facility is beingsold with the Divestiture.  We expect tocontinue to use these facilities until approximately March 2008, to supportcertain transitional service level agreements associated with the Divestiture,and the remaining basis will be depreciated over units of production over thisperiod.

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

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

·                  We restructured our manufacturing activities inEurope.  Based on a review of ourSwansea, Wales facility, a general-purpose module facility, we determined thatthis facility would be better suited to focus only on automotiveapplications.  The general-purpose moduleassets at this facility, with a net book value of $13.6 million, were

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written down by $8.2 million.  In addition, we completed the move of ourmanufacturing activities from its automotive facility in Krefeld, Germany toour Swansea, Wales and Tijuana, Mexico facilities as of June 30, 2005. We alsomoved the production from our Venaria, Italy facility to our Borgaro, Italy andMumbai, India facilities, which was completed as of December 31, 2003.  We stopped manufacturing products at ourOxted, England facility as of September 30, 2003.  The Swansea, Wales; Krefeld, Germany;Borgaro, Italy and Mumbai, India facilities are being sold with theDivestiture.

·                  We eliminated the manufacturing of ournon-space military products in our Santa Clara, California facility as of July31, 2004. Currently, subcontractors handle our non-space qualified productspreviously manufactured in this facility. We also transitioned the assembly andtest of non-space power components from our Leominster, Massachusetts facilityto our Tijuana, Mexico facility as of December 31, 2005.  Associated with these reductions inmanufacturing activities, certain assets with a net book value of $4.0 millionwere written down by $2.1 million.

·                  We incurred $60.1 million in othermiscellaneous items since December 2002, including $50.9 million in facilitymove-related costs and other impaired asset charges and $9.2 million incontract termination and settlement costs.

As a result ofthe restructuring initiatives, certain raw material and work-in-processinventories were impaired, including products that could not be completed inother facilities, materials that were not compatible with the processes used inthe alternative facilities, and materials such as gases and chemicals thatcould not readily be transferred. Based on these factors we wrote down theseinventories with a carrying value of $98.2 million, by $6.0 million to theirnet realizable value.  As of September 30, 2006, we had disposed of all of theinventory.

As of December 31, 2006, we have recorded cumulatively $59.2 million inseverance-related charges, including $8.5 million in pension termination costsat our manufacturing facility in Oxted, England, and $5.3 million ofseverance-related costs associated with the Divestiture.  Approximately 2,700 administrative, operatingand manufacturing positions are anticipated to be affected, includingapproximately 1,300 persons associated with the PCS business.

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Our restructuring activities are expected to resultin severance charges, including the estimated amount related to theDivestiture, of approximately $64 million through calendar year-end 2007.  Below is a table of expected total severancecharges since December 2002 by major activity and location:
| **Location**                                                                                                                                                      | ** ** | **Activity**                                                           | ** ** | **Amount** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------|
| El Segundo,  California                                                                                                                                           |       | Close  manufacturing facilities                                        |       | $          | 10 million |
|                                                                                                                                                              |       |                                                                   |       |       |
| Santa Clara,  California and Leominster, Massachusetts                                                                                                            |       | Eliminate  certain manufacturing activities                            |       | 4 million  |
| Oxted, England                                                                                                                                                    |       | Close  manufacturing facility                                          |       | 13 million |
| Veneria, Italy                                                                                                                                                    |       | Move manufacturing to India and discontinue certain  products          |       | 11 million |
| Mumbai, India; Borgaro, Italy; Xian, China; Krefeld,  Germany; Swansea, Wales; Halifax, Canada; Temecula, California; Tijuana,  Mexico; and El Segundo, Caliornia |       | Power Control  systems divestiture                                     |       | 10 million |
| Company-wide                                                                                                                                                      |       | Realign business procuesses, manufacturing and  support infrastructure |       | 16 million |
| Total                                                                                                                                                             |       |                                                                   |       | $          | 64 million |

 

The following table summarizes ourseverance accrual related to the June 2001 restructuring, the December 2002restructuring, and the Divestiture for the six months ended December 31, 2006(in thousands):
| ** **                                                                                          | ** ** | **June  2001  Restructuring**                                                                                                                                                                                                                                               | ** ** | **December  2002  Restructuring**                                                                                                                                                      | ** ** | **The  Divestiture**                                                                                                                                                                                                                                                        | ** ** | **Total  Severance  Liability**                                                                                                                                                        | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Accrued severance, June  30, 2006                                                                   |       | $                                        235                                  |       | $                               6,538 |       | $                                             — | ** ** | $                               6,773 |       |
| Costs incurred or  charged to “impairment of assets, restructuring and severance charges” |       | (211                                                                                                                                                                                                                                                                        | )          | 1,244                                                                                                                                                                                  |       | 5,254                                                                                                                                                                                                                                                                       | ** ** | 6,287                                                                                                                                                                                  |       |
| Costs paid                                                                                          |       | (24                                                                                                                                                                                                                                                                         | )          | (5,109                                                                                                                                                                                 | )          | —                                                                                                                                                                                                                                                                      | ** ** | (4,672                                                                                                                                                                                 | )          |
| Accrued severance,  December 31, 2006                                                               |       | $                                             — |       | $                               2,673 |       | $                               5,254                                                                                      | ** ** | $                               7,927 |       |

 

The June 2001 severance liability is primarily related to certain legalaccruals associated with the termination of 29 administrative and operatingpersonnel.  The liability was paid orreleased during the six months ended December 31, 2006.  The December 2002 Restructuring severanceliability is primarily related to severance-related costs of approximately 130manufacturing personnel at the El Segundo, California facility and theassociated liability is expected to be paid or released by fiscal 2007year-end.  The Divestiture severanceliability is associated with the retention of approximately 100 key operatingand finance personnel pending successful closing of the Divestiture.  The associated liability is expected to bepaid by fiscal year-end 2007.

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OtherIncome and Expenses

Other (income) expense was($0.5) million and $1.0 million for the three months ended December 31, 2006and 2005, respectively, and $0.3 million and $1.2 million for the six monthsended December 31, 2006 and 2005, respectively. Other (income) expense includes the impact of foreign currencyfluctuations, dividend income from our equity investments, and litigation andclaims settlement costs.

InterestIncome and Expenses

Interest incomewas $12.7 million and $7.8 million for the three months ended December 31, 2006and 2005, respectively, and $25.3 million and $14.9 million for the six monthsended December 31, 2006 and 2005, respectively, reflecting higher prevailing interestrates on higher average cash and cash investment balances in the current year.

Interest expense was $10.9 million and $7.0 million for the threemonths ended December 31, 2006 and 2005, respectively, and $20.9 million and$12.6 million for the six months ended December 31, 2006 and 2005,respectively,primarilyreflecting a higher effective interest rate payable on our $550 millionconvertible subordinated notes outstanding, partially offset by higher incomefrom the mark-to-market adjustments on our interest rate swaps.

IncomeTaxes

Our effective tax provision related tocontinuing operations was 19.4 percent and 26.3 percent for the three monthsended December 31, 2006 and 2005, respectively, and 23.1 percent and 26.3percent for the six months ended December 31, 2006 and 2005, respectively.  Our effective tax rates were lower than theU.S. federal statutory tax rates of 35 percent, as a result of lower statutorytax rates in certain foreign jurisdictions, the benefit of foreign tax creditsand research and development credits, partially offset by state taxes andcertain foreign losses without foreign tax benefit.  For the three and sixmonths ended December 31, 2006, we recognized $4.3 million of retroactiveresearch and development tax benefit for the January 2006 to September 2006period, as a result of Congress reinstating the research and development taxcredit retroactive to the beginning of January 2006.  We anticipate that our effective tax rate forthe remaining fiscal 2007 will be approximately 27.0 percent, plus or minushalf a percent.

Our effective tax provision for the three andsix months ended December 31, 2006 excluded $26.5 million of tax benefit forthe recognition of deferred tax assets tied to the difference in book and taxbasis of certain subsidiaries being sold as part of the Divestiture aspreviously described (see Note 2).  The $26.5 million of tax benefit hasbeen recognized as part of income from discontinued operations for the threeand six months ended December 31, 2006.

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**Liquidity and Capital Resources**

At December 31, 2006, we had cash and cash equivalent balances of $459.3million and cash investments in marketable debt securities of $633.6 million.  We also had $159.6 million in unused creditfacilities.  Our investment portfolioconsisted of available-for-sale fixed-income, principally investment-gradesecurities as of December 31, 2006.

For the six monthsended December 31, 2006, cashprovided by operating activities was $82.8 million compared to $48.4 million inthe six months ended December 31,2005.  Depreciation and amortizationadjusted cash flows from operations by $39.6 million.  Changes in operating assets and liabilitiesdecreased cash by $46.0 million during the six months ended December 31, 2006.  The increase in working capital reflected anincrease in our accounts and other receivables as a result of lengtheningpayment terms in certain foreign regions based on the business practices thereand in general, timing of collections, and higher inventory balances due toincreases in raw material and work-in-process inventory to support our newgeneration of products.

For the six months ended December 31,2006, cash used in investing activities was $9.6 million.  We purchased $208.7 million and sold $190.5million of cash investments.  We invested $70.4 million in capitalexpenditures, of which approximatelyone-third was utilized at the Newport, Wales facility.  Purchase order commitments for capitalexpenditures were $13.2 million as of December 31, 2006.  We intend to fund capital expenditures andworking capital requirements through cash and cash equivalents on hand,anticipated cash flows from operations and available credit facilities.

Financing activities for the six months ended December 31, 2006generated $7.0 million.  Proceeds fromthe exercise of employee stock options and the stock participation plancontributed $6.1 million.

As of December 31, 2006, we had revolving, equipment and foreign creditfacilities of $171.0 million, against which $11.3 million had been used.  On November 6, 2006, following the expiration of our BNP Facility asdiscussed in Note 5, we entered into a new five-year multi-currency revolvingcredit facility with a syndicate of lenders including of JP Morgan Chase Bank,Bank of America, N.A., HSBC Bank USA, and Deutsche Bank AG.  The new facility provides a credit line of$150 million, with an option to increase the facility limit to $250 million.

Our $550 million convertible subordinated notesare due in July 2007.  We anticipate thatthis subordinated debt will be refinanced through public or private offeringsof debt or equity, or be paid down with our cash and cash investments.  We do not have any off balance sheet arrangements as of December 31,2006.

We expect to close the sale of our PCS business forapproximately $290 million subject to certain adjustments based on the overalllevel of working capital and the level of cash in the subsidiaries being soldby April 1, 2007.  We intend to use theproceeds from the sale to fund various transactions, which may include therepayment of our $550 million convertible notes, acquisitions, and generaloperating requirements.

We believe that our current cash and cash investmentbalances, cash flows from operations and borrowing capacity, including unusedamounts under our credit facility, will be sufficient to meet our operations inthe next twelve months.  Although webelieve that

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our current financial resources will be sufficient fornormal operating activities, we may also consider the use of funds from otherexternal sources, including, but not limited to, public or private offerings ofdebt or equity.

**Recent Accounting Pronouncements**

In July 2006, the FASBissued Interpretation No. 48, “*A*ccountingfor Uncertainty in Income Taxes – an Interpretation of FASB StatementNo. 109” (“FIN No. 48”).  FIN No. 48clarifies the accounting for income taxes by prescribing the minimumrecognition threshold an uncertain tax position is required to meet beforebeing recognized in the financial statements. This Interpretation requires that the impact of a tax position berecognized if it is more likely than not of being sustained in an audit, basedon the technical merits of the position. FIN No. 48 also provides guidance on de-recognition, measurement,classification, interest and penalties, accounting in interim periods,disclosure and transition.  In addition,FIN No. 48 excludes income taxes from the scope of SFAS No. 5, “Accounting forContingencies”.  FIN No. 48 is effectivebeginning with our fiscal first quarter ended September 30, 2007 of fiscal year2008.  We are currently evaluating the impact of FIN No. 48.

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

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R” (“SFAS No. 158”).  SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income.  SFAS No. 158 also requires an employer to measure the funded status of a plan at the date of its year-end statement of financial position.  SFAS 158 will be effective for us beginning in the first quarter of fiscal year 2008 ending September 30, 2007.  We do not believe that the adoption of SFAS No. 158 will have a material impact on our consolidated financial statements.

In September 2006, the SEC issued Staff Accounting BulletinNo. 108, Section N to Topic 1, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements*”*(“SAB No. 108”).  SAB No. 108 requiresthe evaluation of prior-year misstatements using both the balance sheetapproach and the income statement approach.  In the initial year of adoption, should eitherapproach result in quantifying an error that is material in light ofquantitative and qualitative factors, SAB No. 108 guidance allows for aone-time cumulative-effect adjustment to beginning retained earnings.  In years subsequent to adoption, previouslyundetected misstatements deemed material shall result in the restatement ofpreviously issued financial statements in accordance with SFAS No. 154, “Accounting Changes and Error Corrections,a replacement of APB Opinion No. 20,Accounting Changes, andStatement No. 3, ReportingAccounting Changes in Interim Financial Statements”. SAB No. 108 iseffective for us beginning in the fiscal quarter ending September 30, 2006.

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The adoption of SAB No. 108 did not have an impact on our condensed consolidatedstatement of operations and financial condition.

In September 2006, the FASB issued Staff Position (FSP) AIG AIR-1, “Accountingfor Planned Major Maintenance Activities” (“FSP AUG AIR-1”).  FSP AUG AIR-1 addresses the accounting forplanned major maintenance activities. Specifically, the FSP prohibits the practice of the accrue-in-advancemethod of accounting for planned major maintenance activities.  FSP AUG AIR-1 is effective for us beginningin our fiscal year 2008 in July 2007.  Wedo not believe the adoption of FSP AUG AIR-1 will have an impact on ourcondensed consolidated statement of operations and financial condition.

**CriticalAccounting Estimates**

The consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States which require us to make estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the consolidatedfinancial statements and revenues and expenses during the periods reported.  Actual results could differ from thoseestimates.  Information with respect toour critical accounting policies which we believe could have the mostsignificant effect on our reported results and require subjective or complexjudgments is contained in Item 2, Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, of our Annual Report onForm 10-K for the fiscal year ended June 30, 2006.  We believe that at December 31, 2006, therehas been no material change to this information.

**Statement of Caution Under thePrivate Securities Litigation Reform Act of 1995**

This Quarterly Report onForm 10-Q includes some statements and other information that are nothistorical facts but are “forward-looking statements” as that term is definedin the Private Securities Litigation Reform Act of 1995.  The materials presented can be identified bythe use of forward-looking terminology such as “anticipate,” “believe,” “estimate,”“expect,” “may,” “should,” “view,” or “will” or the negative or othervariations thereof.  We caution that suchstatements are subject to a number of uncertainties, and actual results maydiffer materially.  Factors that couldaffect our actual results include those set forth below and set forth underPart II, Item 1A, “Risk Factors” and other uncertainties disclosed in ourreports filed from time to time with the Securities and ExchangeCommission.  From time to time we mayupdate or modify the risk factors set forth below from that set forth in ourAnnual Report on Form 10-K for fiscal year ended June 30, 2006, filed onSeptember 15, 2006. However, unless required by law, we undertake no obligationto publicly update or revise any forward looking statements, to reflect newinformation, future events or otherwise.

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***Changes in end-market demand or downturnsin the highly cyclical semiconductor industry could affect our operatingresults and the value of our business.***

We mayexperience significant changes in our profitability as a result of variationsin sales, changes in product mix sought by customers, seasonality, pricecompetition for orders and the costs associated with the introduction of newproducts and start-up of new facilities and additional capacity lines.  The markets for our products depend oncontinued demand with the product technological platforms and in the mix weplan for and produce in the information technology, consumer, industrial,aerospace and defense and automotive markets. Changes in the demand mix, needed technologies and these end markets mayadversely affect our ability to match our products, inventory and capacity tomeet customer demand and could adversely affect our operating results andfinancial condition.

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

***Consumer and/or corporate spending for theend-market applications which incorporate our products may be reduced due toincreased oil prices or otherwise.***

Our revenue and gross margin guidance is dependenton a certain level of consumer and/or corporate spending for the specific mixof products we produce and have the capacity to produce.  If our projections of these expenditures failto materialize, 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 customer orders thatis subject to cancellation, reduction or delay in delivery schedules, which mayresult in lower than expected revenue.***

With certain exceptions related to products withinour Aerospace and Defense and Non-Aligned Product segments, we manufactureprimarily pursuant to purchase orders for current delivery or to forecast,rather than pursuant to long-term supply contracts.  The semiconductor industry is subject torapid changes in customer outlooks or unexpected build ups of inventory in thesupply channel as a result of shifts in end-market demand generally or in themix of that demand.  Accordingly, many ofthese purchase orders or forecasts may be revised or canceled 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.  Ourinability to sell products after we devote significant resources to build themcould have a material adverse effect on our

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levels of inventory (the value of our inventory),our revenue and our operating results generally.

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

At the end of fiscal quarter ended December 31, 2006, we reported net inventories of $174.2 million.  We build and maintain inventory in order tomeet our historic and projected needs, but cannot guarantee that the inventorywe build will be adequate or the right mix of products to meet marketdemand.  If we do not project and buildthe proper mix and amount of inventory, our revenue and gross margin may beadversely affected.  Additionally, if weproduce or have produced inventory that does not meet current or future demand,we may determine at some point that certain of the inventory may only be soldat a discount or 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 basedon price, product performance, technology platform, product availability,quality, reliability and customer service.  Price pressures often emerge as competitorsattempt to gain a greater market share by lowering prices or by offering a moredesirable technological solution. Pricing and other competitive pressures can adversely affect our revenueand gross margin, and hence, our profitability. We also compete in various markets with companies of various sizes, manyof which are larger and have greater financial and other resources than wehave, and thus they may be better able to withstand adverse economic or marketconditions.  In addition, companies notcurrently in direct competition with us may introduce competing products in thefuture.

***Failure to timely complete our expansionplans for our wafer fabrication facility could adversely affect our revenuegrowth and ability to achieve our margin targets.***

We arecurrently at over 90 percent of our worldwide in-house wafer fabrication andassembly manufacturing capacities, without considering subcontract or foundrycapacity.  As of December 31, 2006, we have completed the second phase of ourcapacity expansion, which provided approximately $300 million in annual revenueoutput potential.  In October 2006, weannounced a new foundry agreement with Tower Semiconductor for capacity capableof addressing many of our Focus Products.  Including the Tower agreement, weexpect to add another $150 million in revenue potential to be completed by June2007.  Ifwe fail to timely execute on our plans in advance of demand for our products,or fail in our ability to obtain additional capacity, our revenues could beadversely affected which may prevent us from achieving our margin targets.  We cannot assure you that we will completeour plans timely, that the ramp-up of the expanded facilities will occureffectively and without error or delay, or that sufficient third party sourceswould be available to satisfy our ability to meet customer demand.  Even if we fully execute and implement ourplans, we cannot guarantee that we will have 

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sufficientworldwide wafer fabrication and assembly manufacturing capacities to meetdemand and there may be other unforeseen factors that could adversely impactour operating results.

***Delays in initiation of production at new facilities,implementing new production techniques or resolving problems associated withtechnical equipment malfunctions could adversely affect our manufacturingefficiencies.***

Our manufacturing efficiencyhas been and will be an important factor in our future profitability, and wemay not be able to maintain or increase our manufacturing efficiency.  Our manufacturing and testing processes arecomplex, require advanced and costly equipment and are continually beingmodified in our efforts to improve yields and product performance.  Difficulties in the manufacturing process canlower yields.  Technical or otherproblems could lead to production delays, order cancellations and lostrevenue.  In addition, any problems inachieving acceptable yields, construction delays, or other problems inupgrading or expanding existing facilities, building new facilities, problemsin bringing other new manufacturing capacity to full production or changing ourprocess technologies, could also result in capacity constraints, productiondelays and a loss of future revenue and customers.  Our operating results also could be adverselyaffected by any increase in fixed costs and operating expenses related toincreases in production capacity if net sales in the appropriate mix do notincrease proportionately, or in the event of a decline in demand for some orall of our products.

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

Ourfuture financial performance and success are largely dependent on our abilityto implement our business strategy successfully of transforming our business toone led by our Focus Products and succeeding on our plans to restructure ourcompany.  We cannot assure you that wewill continue to successfully implement our business strategy or thatimplementing our strategy will sustain or improve our results of operations.

***Our products may be found to bedefective and, as a result, product claims may be asserted against us, whichmay harm our business and our reputation with our customers and significantlyadversely affect our results and financial condition.***

Our products are typicallysold at prices that are significantly lower than the cost of the equipment orother goods in which they are incorporated. Although we maintain rigorous quality control systems, we have shippedlarge quantities of semiconductor devices to a wide range of customers aroundthe world, in a variety of high profile and critical applications, and continueto do so.  In the ordinary course of ourbusiness we receive warranty claims for some of these products that aredefective, or that do not perform to published specifications.  Since a defect or failure in our productscould give rise to failures in the end products that incorporate them (andconsequential claims for damages against our customers from their customersdepending on applicable law and contract), we often need to defend againstclaims for damages that are disproportionate to the revenue and profit wereceive from the products involved.  Inaddition, our ability to reduce such liabilities may be limited by the laws orthe customary business practices of the countries where we do business.  Even in cases where we do not believe we havelegal liability for such claims, we may choose to pay for them to retain acustomer’s business or goodwill or to settle claims to avoid protractedlitigation.  Our results of operationsand business would be adversely affected as a result of a significant allegedquality or performance issues in our products, if we are required or choose topay for the damages that result.  Inaddition, in our Aerospace and Defense segment, we are sometimes subject togovernment procurement regulations and other laws that could result in costlyinvestigations and other legal proceedings as a consequence of allegedly defectiveproducts or other actions.  Although wecurrently have product liability and other types of insurance, we have certaindeductibles and exclusions to such policies and may not have sufficientinsurance coverage.  We also may not havesufficient resources to satisfy all possible product liability or other typesof product claims.  In addition, anyperception that our products are defective would likely result in reduced salesof our products, loss of customers and harm to our business and reputation.

***While we attempt to monitor thecredit worthiness of our customers, we may from time to time be at risk due tothe adverse financial condition of one or more customers.***

We have established procedures for the review andmonitoring of the credit worthiness of our customers and/or significant amountsowing from customers.  However, from timeto time, we may find that despite our efforts one or more of our customersbecome insolvent or face bankruptcy proceedings (Delphi, one of our largestcustomers, is 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 to sell ourproducts or services to such customers at the same levels or at all.

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***If some originalequipment manufacturers (“OEMs”) do not design our products into theirequipment, a portion of our revenue may be adversely affected.***

A “design win” or program award from a customer doesnot guarantee that the design or program win will become future sales to thatcustomer.  For example, in our Computingand Communications segment, we have announced new design or program wins innext generation game stations, and our other segments have had other design orprogram wins.  We also are unable toguarantee that we will be able to convert design or program wins into sales forthe life of any particular program, or at all, or that the revenue from suchwins would be significant.  We alsocannot guarantee that we will achieve the same level of design or program winsas we have in the past, or at all. Without design or program wins from OEMs, we would only be able to sellour products to these OEMs 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.  Achieving a design or program win with acustomer does not ensure that we will receive significant revenue from thatcustomer and we may be unable to convert design or program wins into actualsales.

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

Our revenue and gross margin guidance is dependenton a certain level of corporate investment and expenditures in the InformationTechnology sector and in Information 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 wemay not be 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 changingtechnologies and industry standards, along with frequent new productintroductions, characterize the semiconductor industry.  As a result, we must devote significantresources 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 cannotassure you that we will successfully identify new product opportunities anddevelop and bring new products to market in a timely and cost-effective manner,or that products or technologies developed by others will not render ourproducts or technologies obsolete or noncompetitive.  A fundamental shift in technologies in ourproduct markets could have a material adverse effect on our competitiveposition within the industry.  Inaddition, to remain competitive, we must continue to reduce die sizes andimprove manufacturing yields.  We cannotassure you that we can accomplish these goals.

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

Ourfuture success and competitive position may depend in part upon our ability toobtain or maintain certain proprietary technologies used in our principalproducts, which is achieved in part by defending and maintaining the validityof our patents and defending claims by our competitors of intellectual propertyinfringement.  We license certain patentsowned by others.  We have also beennotified that certain of our products may infringe the patents of third parties. Although licenses are generally offeredin such situations, we cannot eliminate the risk of litigation alleging patentinfringement.  We are currently adefendant in intellectual property claims and we could become subject to otherlawsuits in which it is alleged that we have infringed upon the intellectualproperty 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 such infringements exist, arise or areclaimed in the future, we may be exposed to substantial liability for damagesand may need to obtain licenses from the patent owners, discontinue or changeour processes or products or expend significant resources to develop or acquirenon-infringing technologies.  We cannotassure you that we would be successful in such efforts or that such licenseswould be available under reasonable terms.  Our failure to develop or acquirenon-infringing technologies or to obtain licenses on acceptable terms or theoccurrence of related litigation itself could have a material adverse effect onour operating results and financial condition.

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

Weexpect revenue from foreign markets to continue to represent a significantportion of total revenue.  We maintain orcontract with significant operations in foreign countries.  Among others, the following risks areinherent in doing business internationally:

i.      changes in, or impositionsof, legislative or regulatory requirements, including tax laws in the UnitedStates and in the countries in which we manufacture or sell our products;

ii.     trade restrictions;

iii.    transportation delays;

iv.    work stoppages;

v.     economic and politicalinstability;

vi.    and foreign currency fluctuations.

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

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

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

Ourmanufacturing efficiency will be an important factor in our futureprofitability, and we cannot assure you that we will be able to maintain orincrease our manufacturing efficiency to the same extent as our competitors.  Our manufacturing processes are highlycomplex, require advanced and costly equipment and are continuously beingmodified in an effort to improve yields and product performance.  Impurities, defects or other difficulties inthe manufacturing 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 have experienced delaysin product deliveries and reduced yields.  We may experience manufacturing problems inachieving acceptable yields or experience product delivery delays in the futureas a result of, among other things, capacity constraints, construction delays,upgrading or expanding existing facilities or changing our processtechnologies, any of which could result in a loss of future revenue.  Our operating results could also be adverselyaffected by the increase in fixed costs and operating expenses related toincreases in production capacity if revenue does not increase proportionately.

We arecontinuing to ramp up our Newport, Wales facility for new production.  We have experienced some delays and/ortechnical problems in moving our various facilities.

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Continueddelays and/or technical problems in completing the remaining transfers couldlead to increased costs, reduced yields, delays in product deliveries, ordercancellations and/or lost revenue.

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

Ourmanufacturing operations depend upon obtaining adequate supplies of materials,parts and equipment, including silicon, mold compounds and leadframes, on atimely basis from third parties.  Ourresults of operations could be adversely affected if we were unable to obtainadequate supplies of materials, parts and equipment in a timely manner from ourthird party suppliers or if the costs of materials, parts or equipment increasesignificantly.  From time to time,suppliers may extend lead times, limit supplies or increase prices due tocapacity constraints or other factors.  Wehave a limited number of suppliers for some materials, parts and equipment, andany interruption could materially impair 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.  We do not have any long-term assemblyagreements with these subcontractors.  Asa result, we do not have immediate control over our product delivery schedulesor product quality.  Due to the amount oftime often required to qualify assemblers and testers and the high cost ofqualifying multiple parties for the same products, we could experience delaysin the shipment of our products if we are forced to find alternative thirdparties to assemble or test them.  Anyproduct delivery delays in the future could have a material adverse effect onour operating results and financial condition.  Our operations and ability to satisfy customerobligations could be adversely affected if our relationships with thesesubcontractors were disrupted or terminated.

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

We sellproducts primarily pursuant to purchase orders for current delivery or toforecast, rather than pursuant to long-term supply contracts.  Many of these purchase orders or forecasts maybe revised or canceled without penalty.  Asa result, we must commit resources to the manufacturing of products without anyadvance purchase commitments from customers.  Our inability to sell products after we devotesignificant resources to them could have a material adverse effect on ourlevels of inventory and our business, financial condition and results ofoperations.

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

Historically,a significant portion of our revenue has come from a relatively small number ofcustomers and distributors.  The loss orfinancial failure of any significant customer or distributor, any reduction inorders by any of our significant customers or distributors, or the cancellationof a significant order, could materially and adversely affect our business.

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

Ourfuture success depends, in part, upon our ability to attract and retain highlyqualified technical, sales, marketing and managerial personnel.  Personnel with the necessary semiconductorexpertise are scarce and competition for personnel with these skills isintense.  We cannot assure you that wewill be able to retain existing key technical, sales, marketing and managerialemployees or that we will be successful in attracting, assimilating orretaining other highly qualified technical, sales, marketing and managerialpersonnel in the future.  If we areunable to retain existing key employees or are unsuccessful in attracting newhighly qualified employees, our business, financial condition and results ofoperations could be materially and adversely affected.

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

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

***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 fluctuations thatcould adversely affect the market price of our common stock without regard toour operating performance.  In addition,we believe that factors such as quarterly fluctuations in financial results,earnings below analysts’ estimates and financial performance and otheractivities of other publicly traded companies in the semiconductor industrycould cause the price of our common stock to fluctuate substantially.  In addition, in recent periods, our common stock,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 similarfluctuations in the future could adversely affect the market price of ourcommon stock.

***Our investments in certain securitiesexpose us to market risks.***

We invest excess cash in marketable securitiesconsisting primarily of commercial paper, corporate notes, corporate bonds andgovernmental securities.  We also hold as strategic investments the commonstock of certain publicly-traded companies. The value of these investments is subject to market fluctuations, whichif adverse, could have a material adverseeffect on our operating results and financial condition.

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

Effective internal controls are necessary for us to produce reliablefinancial reports and are important in our effort to prevent financial fraud.  We are required to periodically evaluate theeffectiveness of the design and operation of our internal controls.  These evaluations may result in the conclusionthat enhancements, modifications or changes to our internal controls arenecessary or desirable.  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 and underlyingassumptions will not be subject to revision.  There are also inherent limitations on theeffectiveness of internal controls and financial reporting practices, includingcollusion, management override, and failure of human judgment.  Because of this, control procedures andfinancial reporting practices are designed to reduce rather than eliminatebusiness risks.  If we fail to maintainan effective system of internal control over financial reporting or if and forso long as management or our independent registered public accounting firm wereto discover material weaknesses in our internal control over financialreporting (or if our system of controls and audits result in a change ofpractices or new information or conclusions about our financial reporting) likethe disclosed material weakness, we may be unable to produce reliable financialreports or prevent fraud and it could harm our financial condition and resultsof operations and result in loss of investor confidence and a decline in ourstock price.

***Large potential environmental liabilities,including those relating to a former operating subsidiary, may adversely impactour 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, and on the operation of our facilitiesand equipment.  We believe we usereasonable efforts to maintain a system of compliance and controls for theselaws and regulations.  However, we cannot provide absolute assurance thatthese controls will always be effective or that issues with respect to thesematters will not from time to time occur. There are also inherent limitations on the effectiveness of controlsincluding the failure of human judgment.

Undersome laws and regulations, we could be held financially responsible forremedial measures if our properties are contaminated or if we send waste to alandfill or recycling facility that becomes contaminated, even if we did notcause the contamination.  Under otherlaws, we may be subject to fines and penalties if facilities or equipment arenot operated in technical compliance with permit conditions or if requiredreports are not timely filed with applicable agencies.  Also, we may be subject to common law claimsif we release substances that damage or harm third parties.  Further, we 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.  Additionally, as we preparefor the contemplated Divestiture of certain of our facilities, such facilitiesmay undergo further environmental review and investigation which may lead topreviously unknown environmental liabilities. Any present or prior failure to

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complywith environmental laws or regulations could subject us to serious liabilitiesand could have a material adverse effect on our operating results and financialcondition.

***Some of our facilities are located nearmajor 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.  Wecould be materially and adversely affected in the event of a major earthquake.  Although we maintain earthquake insurance, wecan give you no assurance that we have obtained or will maintain sufficientinsurance coverage.

***There can be no assurance that we will havesufficient capital resources to make necessary investments in manufacturingtechnology and equipment.***

Thesemiconductor industry is capital intensive.  Semiconductor manufacturing requires aconstant upgrading of process technology to remain competitive, as new andenhanced semiconductor processes are developed which permit smaller, moreefficient and more powerful semiconductor devices.  We maintain certain of our own manufacturing,assembly and test facilities, which have required and will continue to requiresignificant investments in manufacturing technology and equipment.  We are also attempting to add the appropriatelevel and mix of capacity to meet our customers’ future demand.  There can be no assurance that we will havesufficient capital resources to make necessary investments in manufacturingtechnology and equipment.  Although webelieve that anticipated cash flows from operations, existing cash reserves andother equity or debt financings that we may obtain will be sufficient to satisfyour future capital expenditure requirements, there can be no assurance thatthis will be the case or that alternative sources of capital will be availableto us on favorable terms or at all.

***The maturity of our outstanding ConvertibleSubordinated Notes due in July 2007 may expose us to risks.***

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

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

We havemade 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 taxassets is based on the belief that it is more likely than not that we willgenerate sufficient future taxable income in certain jurisdictions to realizethese deferred tax assets, after considering all available positive andnegative evidence.  If our assumptions and estimates change inthe future given unforeseen changes in market conditions, tax laws or otherfactors, then the valuation allowances established may be increased, resultingin increased income tax expense. Conversely, if we are ultimately able to use all or a portion of thedeferred tax assets for which a valuation allowance

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has been established, thenthe related portion of the valuation allowance will be released to income as acredit to income tax expense.

***Our Aerospace and Defense segment issubject to governmental regulation that exposes us to additional risks.***

OurAerospace and Defense segment manufactures and sells certain products that aresubject to US export control laws and regulations.  The Aerospace and Defense segment alsomanufactures and sells products that are sold directly or indirectly to the USgovernment and may subject us to certain government procurement regulations,investigations or review.  While wemaintain a system of control of such products and compliance with such laws andregulations, we cannotprovide absolute assurance that these controls will always be effective.  There are also inherent limitations on theeffectiveness of controls including the failure of human judgment.  If we fail to maintain an effective system ofcontrol or are otherwise found non-compliant with applicable laws andregulations, violations could lead to governmental investigations, fines,penalties and limitations on our ability to export product, all of which couldhave a material affect on our results.

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

As iscommon with corporations of our size, we are from time to time under audit byvarious taxing authorities.  It is oftendifficult to predict the final outcome or the timing of resolution of anyparticular tax matter.  We have providedcertain tax reserves which have been included in the determination of ourfinancial results.  However, unpredictedunfavorable settlements may require additional use of cash and negativelyimpact our financial position or results of operations.

***Terrorist attacks, such as those that tookplace on September 11, 2001, or threats or occurrences of other terroristactivities whether in the United States or internationally may affect themarkets in which our common stock trades, the markets in which we operate andour profitability.***

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

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

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

We areexposed to various risks, including fluctuations in interest and foreigncurrency rates.  In the normal course ofbusiness, we also face risks that are either non-financial or non-quantifiable. Such risks principally include countryrisk, credit risk and legal risk and are not discussed or quantified in thefollowing analyses, as well as risks set forth under the heading “Statement ofCaution Under the Private Securities Litigation Reform Act of 1995”and Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in ourAnnual Report on Form 10-K for the fiscal year ended June 30, 2006.

*Interest Rate Risk*

Ourfinancial assets and liabilities subject to interest rate risk are cashinvestments, convertible debt, credit facilities and interest rate swaps.  Our primary objective is to preserve principalwhile maximizing yield without significantly increasing risk.  At December 31, 2006, we evaluated the effectthat near-term changes in interest rates would have had on these transactions.  A change of as much as ten percent in theLondon InterBank Offered Rate (“LIBOR”) would have had a favorable impact ofapproximately $0.6 million and $1.2 million on net interest income/expense forthe three and six months ended December 31, 2006, respectively, since theinterest income on our cash and cash investments would have outweighedadditional interest expense on our outstanding debt.

In December 2001, we entered into an interest rateswap transaction (the “December 2001 Transaction”) with an investment bank, 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 Note 9, “Bank Loans and Long-Term Debt”).  In April 2004, we entered into an interestrate swap transaction (the “April 2004 Transaction”) with the Bank to modifythe effective interest payable with respect to the remaining $137.5 million ofthe Debt.  We will receive from the Bankfixed payments equal to 4.25 percent of the notional amount, payable on January15 and July 15.  In exchange, we will payto the Bank floating rate payments based upon the London InterBank Offered Rate(“LIBOR”) multiplied by the notional amount. At the inception of the swap transactions, interest rates were lowerthan that of the Debt and we believed that interest rates would remain lowerfor an extended period of time.  Thevariable interest rate paid since the inception of the swaps has averaged 3.34percent, compared to a coupon of 4.25 percent on the Debt.  During the three months ended December 31,2006, the LIBOR was 5.37 percent, and including certain spread andmark-to-market adjustments associated with the interest swaps, this arrangementincreased (decreased) interest expense by $2.5 million and $0.8 million, forthe three months ended December 31, 2006 and 2005, respectively, and $4.1million and ($0.1) million for the six months ended December 31, 2006 and 2005,respectively.

Accounted for as fair value hedges under SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities”, the mark-to-marketadjustments of the December 2001 and April 2004 Transactions were offset by themark-to-market adjustments on the Debt, resulting in no material impact toearnings.  The market value of the swapswas a liability of $6.3 million and $11.6 million at December 31, 2006 and June30, 2006, respectively.

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TheDecember 2001 Transaction and the April 2004 Transaction qualify as fair valuehedges under SFAS No. 133.  To testeffectiveness of the hedge, regression analysis is performed quarterly comparingthe change in fair value of the Transactions and the Debt.  The fair values of the Transactions and theDebt are calculated quarterly as the present value of the contractual cashflows to the expected maturity date, where the expected maturity date is basedon probability-weighted analysis of interest rates relating to the five-yearLIBOR curve and our stock prices.  Forthe three and six months ended December 31, 2006 and 2005, the hedges werehighly effective and the ineffective portion did not have a material impact onearnings.

In April 2002, weentered into an interest rate contract (the “Contract”) with the investmentbank, Lehman Brothers (“Lehman”), to reduce the variable interest rate risk ofthe December 2001 Transaction.  Thenotional amount of the Contract is $412.0 million, representing approximately75 percent of the Debt.  Under the termsof the Contract, we have the option to receive a payout from Lehman coveringour exposure to LIBOR fluctuations between 5.5 percent and 7.5 percent for any fourdesignated quarters.  The market value ofthe Contract at December 31, 2006 and June 30, 2006, was $0.1 million and $0.6million, respectively, and was included in other long-term assets.  Mark-to-market gains (losses) of $0.03million and ($0.05) million for the three months ended December 31, 2006 and2005, respectively and ($0.5) and $0.1 million for the six months endedDecember 31, 2006 and 2005, respectively, were charged to interest expense.

*Foreign Currency Risk*

We conduct business on a global basisin several foreign currencies and have currency exposure related primarily tothe British Pound Sterling, the Euro and the Japanese Yen.  Considering our foreign currency risks, wehave the greatest exposure to the Japanese Yen, since we have significantYen-based revenue without the Yen-based manufacturing costs.  The risk of our revenues in the Europeancurrencies is partially offset by the cost of manufacturing goods in theEuropean currencies.

We have established aforeign-currency hedging program using foreign exchange forward contracts,including the Forward Contract described below, to hedge certain foreigncurrency transaction exposures.  Toprotect against reductions in value and volatility of future cash flows causedby changes in currency exchange rates, we have established revenue, expense andbalance sheet hedging programs.  Currencyforward contracts and local Yen and Euro borrowings are used in these hedgingprograms.  Our hedging programs reduce,but do not always eliminate, the impact of currency exchange rate movements.  We considered an adverse near-term change inexchange rates of ten percent for the British Pound Sterling, the Euro and theJapanese Yen.  Such a change, aftertaking into account our derivative financial instruments and offsettingpositions, would have resulted in an annualized adverse impact on income beforetaxes of less than $1 million for the three and six months ended December31, 2006 and 2005**.**

InMay 2006, we entered into a five-year foreign exchange forward contract withBNP Paribas (the “Forward Contract”) for the purpose of reducing the effect ofexchange rate fluctuations on forecasted intercompany purchases by our Japansubsidiary.  We have designated theForward Contract as a cash flow hedge. Under the terms of the Forward Contract, we are required to exchange507.5 million Yen for $5.0 million on a quarterly basis starting in June 2006and expiring in March 2011.  At December31, 2006, 17

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quarterlypayments of 507.5 million Yen remained to be swapped at a forward exchange rateof 101.5 Yen per U.S. dollar.  The marketvalue of the Forward Contract was $5.3 million and $1.2 million at December 31,2006 and June 30, 2006, respectively, and was included in other long-termassets.  Mark-to-market gains, includedin other comprehensive income, net of tax, were $1.0 million and $3.5 millionfor the three and six months ended December 31, 2006, respectively.  Based on effectiveness tests comparingforecasted transactions through the May 2006 Forward Contract expiration dateto its cash flow requirements, we do not expect to incur a material charge toincome during the next twelve months as a result of the Forward Contract.

We had approximately $113.1million and $103.1 million in notional amounts of forward contracts notdesignated as accounting hedges under SFAS No. 133 at December 31, 2006 and June 30,2006, respectively.  Net realized andunrealized foreign-currency gains recognized in earnings were $1.5 million and$1.4 million for the three and six months ended December 31, 2006 respectively,and less than $1.0 million for the three and six months ended December 31,2005.

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**ITEM 4. ****                 CONTROLSAND PROCEDURES**

(a)         Evaluationof disclosure controls and procedures

Theterm “disclosure controls and procedures” refers to the controls and otherprocedures of a company that are designed to ensure that information requiredto be disclosed by the company in the reports that it files under theSecurities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarizedand reported, within required time periods. Our management, with the participation of our Chief Executive Officer,Alexander Lidow, and Chief Financial Officer, Michael P. McGee, carried out anevaluation of the effectiveness of our disclosure controls and procedurespursuant to Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that, as of the end of the period covered by thisreport, such controls and procedures are effective at the reasonable assurancelevel in making known to them material information related to us (including ourconsolidated subsidiaries) required to be included in this report.

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

(b)        Changes in internal controls

Therewas no change in our internal controls during the fiscal second quarter 2007that has materially affected, or are reasonably likely to materially affect,our internal controls over financial reporting.

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### **PART II.********                                               OTHER INFORMATION**

### **ITEM 1.****                                                     Legal Proceedings**

The Company is, from time to time, involved in litigationincidental to the conduct of its business.

In June 2000, the Company filed suit in FederalDistrict Court in Los Angeles, California against IXYS Corporation, alleginginfringement of its key U.S. patents 4,959,699; 5,008,725 and 5,130,767.  The suit sought damages and other reliefcustomary in such matters.  The FederalDistrict Court entered a permanent injunction, effective on June 5, 2002, barringIXYS from making, using, offering to sell or selling in, or importing into theUnited States, MOSFETs (including IGBTs) covered by the Company’s U.S. patents4,959,699; 5,008,725 and/or 5,130,767. In August 2002, the Court of Appeals for the Federal Circuit stayed thatinjunction, pending appeal on the merits. In that same year, following trial on damages issues, a Federal DistrictCourt jury awarded the Company $9.1 million in compensatory damages.  The Federal District Court subsequentlytripled the damages, increasing the award from $9.1 million to approximately$27.2 million, and ruled that the Company is entitled to an additional award ofreasonable attorney’s fees for a total monetary judgment of about $29.5million.  In March 2004, the U.S. Courtof Appeals for the Federal Circuit reversed the summary judgment granted to theCompany by the Federal District Court in Los Angeles of infringement by IXYS ofits U.S. patents 4,959,699; 5,008,725 and 5,130,767.  The Federal Circuit reversed in part andvacated in part infringement findings of the District Court, granted IXYS the rightto present certain affirmative defenses, and vacated the injunction againstIXYS entered by the District Court.  Theruling by the Federal Circuit had the effect of vacating the damages judgmentobtained against IXYS.  The FederalCircuit affirmed the District Court’s rulings in the Company’s favor regardingthe validity and enforceability of the three IR patents. Following remand afederal court jury in Los Angeles, California, held on September 15, 2005, thatIXYS elongated octagonal MOSFETs and IGBTs infringed on the 4,959,699 patentbut did not infringe on the 5,008,725 and 5,130,767 patents.  On October 6, 2005, the jury awarded theCompany $6.2 million in damages.  Basedon the jury’s verdict, on February 14, 2006, the District Court entered its finaljudgment (including permanent injunctions prohibiting IXYS from furtherinfringing sales for the remaining life of the 4,959,699 patent) and found thatthe Company is entitled to $6.2 million in compensatory damages forinfringement through September 30, 2005, plus an additional 6.5 percent ofinfringing sales after September 30, 2005. On July 14, 2006, the Federal Circuit entered an order vacating thatjudgment and remanded the IR v. IXYS action so that the District Court couldconsider whether to reissue a permanent injunction in light of the SupremeCourt’s decision in eBay Inc. v. MercExchange, L.L.C.,    U.S.   ,126 S.Ct. 1837, 164 L.Ed.2d 641 (2006). The Company then requested that the District Court re-enter the finaljudgment (and permanent injunction).  OnSeptember 14, 2006, the District Court granted the Company’s motion andre-entered the final judgment.

On January 17, 2007, the Federal Circuit denied amotion by IXYS to stay the permanent injunction pending appeal, stating thatIXYS had failed to show likelihood of success on the merits of any appeal.  Accordingly, the permanent injunction willremain in effect until the ’699 patent expires in September 2007, unless it isfirst vacated by the Federal Circuit’s decision on the merits of theappeal.  Although briefing on the appealhas not yet begun, the Company expects to oppose IXYS’s appeal both on the meritsand on jurisdictional grounds based on IXYS’s failure to timely file its noticeof appeal.  The Company believes that itis reasonably assured that the value of the judgment pending appeal is at least$2.5 million.

Federal, state, foreign and local laws andregulations impose various restrictions and controls on the storage, use anddischarge of certain materials, chemicals and gases used in semiconductormanufacturing processes and on the operation of our facilities andequipment.  We believe we use reasonableefforts to maintain a system of compliance and controls for these laws andregulations.  Despite our efforts andcontrols, from time to time, issues may arise with respect to these matters,including the possibility of administrative proceedings for potentialnon-compliance where penalties might be assessed.  We do not believe that compliance with suchlaws and regulations as now in effect will have a material adverse effect onour results of operations, financial position or cash flows (see also Note 13, “EnvironmentalMatters”).

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**ITEM 1A.****             Risk Factors**

The following items are new risk factors or riskfactors that have changed materially from those disclosed in the “Risk Factors”section of our Annual Report on Form 10-K for the fiscal year ended June 30,2006, filed on September 15, 2006:

***While we have entered into agreements to sell ourPower Control Systems business, we cannot guarantee that the transaction willclose; and the******failure toexecute on our plans to divest or discontinue product lines that are notconsistent with our business objectives, and replace those revenues withhigher-margin product sales could adversely affect our operating results.***

Wehave entered into definitive agreements with Vishay Intertechnology, Inc. tosell our Power Control Systems business consisting of our Commodity Product andNon-Aligned Product segments (the “Divestiture”).  While we have entered into definitiveagreements, the agreements contain a number of conditions to closing.  While a closing is expected by April 1, 2007,we cannot guarantee that closing will take place by then or at all.

If the Divestiture iscompleted, it is our goal that within the next couple of years, the remainingrevenues would grow faster and the remaining business would be moreprofitable.  We do not believe that thecompletion of the Divestiture will substantially alter the customer base thatwe serve or the competition that we face currently.  However, to achieve our goals, for a fewquarters following a successful completion of the Divestiture, we plan to morefully develop our Focus Product segments by realigning our sales, distributionand product development functions.  Wewill also configure our manufacturing and support infrastructure to address atleast initially lower revenue levels.  Despite our plans and efforts, we cannotassure you that we will be successful in achieving our goals or carrying outplans for realignment.

Additionally, the activities and obligations involvedwith the Divestiture could involve changes to various aspects of our business(including the separation of the PCS business from our remaining business)which could have a material adverse effect on our profitability to an extent wehave not anticipated.  Even if we fullyexecute and implement our plans, there may be unforeseen factors that couldhave a material adverse impact on our operating results.

***Our continuing obligations underthe transaction documents for the Divestiture could adversely affect ouroperating results.***

As part of the Divestiture, we will be involved in thetransition of certain of the divested business and assets with Vishay,including providing certain manufacturing, sales and marketing and administrativesupport services for a period of up to three years.  Such services being transitional nature andrelated to the Divestiture may not be provided at levels of profitabilitycommensurate with other aspects of our business and there may also be unforeseenfactors or other obligations or events arising out of the services which wouldadversely affect our profitability and operating results.  

Additionally, other activities and obligationsinvolved with the Divestiture, including our continuing covenants andobligations under transaction documents, such as our obligations ofindemnification and covenant not to compete, could involve changes to variousaspects of our business or could involve costs which have a material adverseeffect on our profitability and on our operating results to an extent we havenot anticipated.  

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

During fiscal 2003 secondquarter ended December 31, 2002, we announced certain restructuringinitiatives.  Under these initiatives,the goal was to reposition us to better fit the market conditions andde-emphasize our commodity business.  Ourrestructuring plan included consolidating and closing certain manufacturingsites, upgrading equipment and processes in designated facilities anddiscontinuing production in a number of others that cannot support moreadvanced technology platforms or products within our Focus Product segments.  We also planned to lower overhead costsacross our support organizations.

Additionally, on November 8,2006, we entered into definitive agreements with Vishay Intertechnology, Inc. forthe Divestiture.  Associated with theDivestiture, we plan to realign our sales, distribution and product developmentfunctions to a business based solely on our Focus Products.  We also plan to configure our manufacturingand support infrastructure to address the initially lower revenue levelsfollowing the Divestiture.  We expectthat there may be impairment of assets, severance and otherrestructuring-related charges associated with the Divestiture and subsequentreorganization, which will be recorded as incurred.  We have estimated that totalseverance-related charges will be approximately $10 million, of whichapproximately $5.3 million has been recognized over the retention period as ofDecember 31, 2006, in accordance with SFAS No. 146.  We are currently evaluating other potentialcharges associated with the Divestiture pending its closure.

Ifwe do not reconfigure our infrastructure or there are delays in implementingour plans, we could have higher relative costs associated with post Divestiturerevenues, adversely affecting our margins and profitability.  Additionally,there may be unforeseen factors or other obligations or events arising out ofthe Divestiture (including possible indemnity obligations) that could result inchanges in the amount or timing of charges to be taken or otherwise materiallyadversely impact our margins, profitability and business.

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

We havetraditionally relied on our patents and proprietary technologies.  Patent litigation settlements and royaltyincome substantially contribute to our financial results.  Enforcement of our intellectual propertyrights 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 expirebetween 2006 and 2010, although our broadest MOSFET patents expire in 2007 and2008. We expect that with the expiration of our key MOFSET patents in calenderyears 2007 and 2008, our royalty revenue will be reduced substantially and ourgross profit will be adversely impacted accordingly.

Ourroyalty income is also largely dependent on the following factors: the continuingintroduction and acceptance of products that are not covered by our patents;remaining covered under unexpired MOSFET patents; the defensibility andenforceability of our patents; changes in our licensees’ unit sales, prices ordie sizes; the terms, if any, upon which expiring license agreements arerenegotiated; and our ability to obtain revenue from new licensingopportunities.  Market conditions and mixof licensee products, as well as sales of non-infringing devices cansignificantly adversely affect royalty income. We also cannot guarantee that we can obtain new licenses to offsetreductions in royalties from existing licenses.  While we try to predict the effects of thesefactors and efforts, often there are variations or factors that can significantlyaffect results different from that predicted. Accordingly, we cannot guarantee that our predictions of our IP segmentrevenue will be consistent with actual results. We also cannot guarantee that our royalty income will continue at levelsconsistent with prior periods.  Anydecrease in our royalty income could have a material adverse effect on ouroperating results and financial condition.

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### **ITEM 4.****    ****               Submission of Matters to a Vote of SecurityHolders**

The following matters were submitted to a vote of the Company’sstockholders at its annual meeting of stockholders held on November 20,2006.  All such matters were approved bythe Company’s stockholders.  Below is asummary of, where applicable, the number of votes cast for, against orwithheld, as well as the number of abstentions as to each matter.
| **Description of Matter** | ** **            | **For** | ** ** | **Authority  Withheld** | ** ** |
|-------------------------------------|-----------------------|---------|------------|-------------------------|------------|
|                                |                  |    |       |                    |       |   |
| 1.                                  | Election of Directors |    |       |                    |       |   |
|                                |                  |    |       |                    |       |   |
|                                     | James D. Plummer      |    | 63,505,844 |                    | 3,354,738  |   |
|                                | Robert S. Attiyeh     |    | 65,098,117 |                    | 1,762,465  |   |
|                                     | Philip M. Neches      |    | 65,785,039 |                    | 1,075,543  |   |

 

Inaddition, the terms of office of the following directors continued after themeeting: Eric Lidow, Alexander Lidow, Jack O. Vance, Rochus E. Vogt, and MinoruMatsuda.
|        | ** **                | **For** | ** ** | **Against** | ** ** | **Abstentions** | ** ** |
|--------|---------------------------|---------|------------|-------------|------------|-----------------|------------|
|   |                      |    |       |        |       |            |       |   |
| 2.     | Ratification of           |    | 66,699,930 |        | 88,802     |            | 71,849     |   |
|   | PricewaterhouseCoopersLLP |    |       |        |       |            |       |   |
|   | as the Company’s     |    |       |        |       |            |       |   |
|   | Independent  Registered   |    |       |        |       |            |       |   |
|   | Public  Accounting Firm   |    |       |        |       |            |       |   |
|   | For Fiscal Year 2007      |    |       |        |       |            |       |   |

 

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**ITEM 6****                                                  Exhibits**
| Index: |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.1    | Certificate of  Incorporation, as Amended to date (incorporated by reference to Exhibit 3.1  to the Company’s Registration Statement on Form S-8 filed with the Commission  on July 19, 2005; Registration No. 333-117489)                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.2    | Bylaws, as  Amended (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly  Report on Form 10-Q filed with the Commission on November 11, 2005)                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.1   | First Amendment  to Master Purchase Agreement and Stock Purchase Agreement dated January 23,  2007, between International Rectifier Corporation and Vishay International,  Inc.                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.2   | Second Amendment  to the Amended and Restated Rights Agreement dated November 20, 2006, between  International Rectifier Corporation and Mellon Investor Services.                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.3   | Transition and  General Release Agreement, dated October 9, 2006, between Walter Lifsey and  International Rectifier Corporation (incorporated by reference to Exhibit  99.1 of the Company’s Current Report on Form 8-K filed with the Securities  and Exchange Commission on October 9, 2006).                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.4   | Credit  Agreement, dated November 6, 2006, among International Rectifier Corporation,  the Lenders described therein, Bank of America, N.A. as Syndication Agent and  HSBC Bank USA, National Association and Deutsche Bank AG New York Branch as  Co-Documentation Agents and JPMorgan Chase Bank, National Association, as  Administrative Agent, (incorporated by reference to Exhibit 99.1 of the  Company’s Current Report on Form 8-K filed with the Securities and Exchange  Commission on November 9, 2006). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.5   | Master Purchase  Agreement dated as of November 8, 2006, by and between International  Rectifier Corporation and Vishay Intertechnology, Inc. with respect to all  outstanding capital stock of the Target Companies and certain of the assets  of International Rectifier Corporation (incorporated by reference to Exhibit 2.1  of the Company’s Current Report on Form 8-K filed with the Securities and  Exchange Commission on November 14, 2006).                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.6   | Asset Purchase  Agreement dated as of November 8, 2006, by and among International Rectifier  Corporation, International Rectifier Southeast Asia Pte, Ltd. and Vishay Intertechnology,  Inc. with respect to certain assets of its Power Control Systems Business  (incorporated by reference to Exhibit 2.2 of the Company’s Current Report on  Form 8-K filed with the Securities and Exchange Commission on November 14,  2006).                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.7   | Stock Purchase  Agreement dated as of November 8, 2006, by and between International  Rectifier Corporation and Vishay Intertechnology, Inc. with respect to all  outstanding capital stock of International Rectifier Electronic Motion  Systems Ltd. (incorporated by reference to Exhibit 2.3 of the Company’s  Current Report on Form 8-K filed with the Securities and Exchange Commission  on November 14, 2006).                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.8   | Stock Purchase  Agreement dated as of November 8, 2006, by and between International Rectifier  Corporation and Vishay Intertechnology, Inc. with respect to all outstanding  capital stock of International Rectifier Canada Limited (incorporated by  reference to Exhibit 2.4 of the Company’s Current Report on Form 8-K filed  with the Securities and Exchange Commission on November 14, 2006).                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.9   | Stock Purchase  Agreement dated as of November 8, 2006, by and between International  Rectifier Corporation and Vishay Intertechnology, Inc. with respect to all  outstanding capital stock of IR Germany Holdings GmbH (incorporated by  reference to Exhibit 2.5 of the Company’s Current Report on Form 8-K filed  with the Securities and Exchange Commission on November 14, 2006).                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.10  | Stock Purchase  Agreement dated as of November 8, 2006, by and between International  Rectifier Corporation and Vishay Intertechnology, Inc. with respect to all  outstanding capital stock of International Rectifier (India) Limited (incorporated  by reference to Exhibit 2.6 of the Company’s Current Report on Form 8-K filed  with the Securities and Exchange Commission on November 14, 2006).                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.11  | Stock Purchase  Agreement dated as of November 8, 2006, by and between International  Rectifier Corporation and Vishay Intertechnology, Inc. with respect to all  outstanding capital stock of International Rectifier Corporation Italiana  S.p.A. Incorporated by reference to Exhibit 2.7 to the Company’s Current  Report on Form 8-K filed on November 14, 2006.                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.12  | Stock Purchase  Agreement dated as of November 8, 2006, by and between International  Rectifier Corporation and Vishay Intertechnology, Inc. with respect to all  outstanding capital stock of Xi’an IR Micro-Electronics Co., Ltd. (incorporated  by reference to Exhibit 2.8 of the Company’s Current Report on Form 8-K filed  with the Securities and Exchange Commission on November 14, 2006).                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.13  | Transition  Services Agreement, dated as of November 8, 2006, by and between  International Rectifier Corporation and Vishay Intertechnology, Inc. (incorporated  by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on November 14, 2006).                                                                                                                                                                                                 |

 

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|        |                                                                                                                                                                                                                  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                  |
| 11.1   | Statement  Regarding Computation of Per Share Earnings (incorporated by reference to  Note 2, “Net Income Per Common Share”, of the Notes to Unaudited Consolidated  Financial Statements contained herein) |
|   |                                                                                                                                                                                                                  |
| 31.1   | Certification  Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                  |
|   |                                                                                                                                                                                                                  |
| 31.2   | Certification  Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                  |
|   |                                                                                                                                                                                                                  |
| 32.1   | Certification  Pursuant to 18 U.S.C. 1350, Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                         |
|   |                                                                                                                                                                                                                  |
| 32.2   | Certification  Pursuant to 18 U.S.C. 1350, Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                         |

 

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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**                               |
| ** **       |   | ** **                                   |
| ** **       |   | ** **                                   |
| ** **       |   | ** **                                   |
| February 9, 2007 |   | /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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