MICROSEMI CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 27, 2004

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File No. 0-8866

MICROSEMI CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

95-2110371

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2381 Morse Avenue, Irvine, California 92614

(Address of principal executive offices) (Zip Code)

(949) 221-7100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

The number of shares of the issuer’s Common Stock, $0.20 par value, outstanding on July 22, 2004 was 59,630,184.

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

The unaudited consolidated income statements for the quarter and nine months ended June 27, 2004 of Microsemi Corporation and Subsidiaries (“Microsemi”, “the Company”, “we”, “our”, “ours” and “us”), the unaudited consolidated statements of cash flows for the nine months ended June 27, 2004, and the comparative unaudited consolidated financial information for the corresponding periods of the prior year, together with the balance sheets as of June 27, 2004 (unaudited) and as of September 28, 2003, are included herein.

MICROSEMI CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(amounts in thousands, except per share data)


	September 28, 2003			June 27, 2004
				(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	29,353		$	41,160
Accounts receivable, net of allowance for doubtful accounts, $1,445 at September 28, 2003 and $1,351 at June 27, 2004		28,866			33,837
Inventories		53,679			58,555
Deferred income taxes		5,239			5,239
Other current assets		1,234			2,906

Total current assets		118,371			141,697

Property and equipment, net		62,973			61,444
Deferred income taxes		10,162			10,162
Goodwill		3,258			3,258
Other intangible assets, net		6,622			5,714
Other assets		4,257			4,262

TOTAL ASSETS	$	205,643		$	226,537

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Notes payable	$	121		$	121
Current maturity of long-term debt		89			89
Accounts payable		11,918			14,289
Accrued liabilities		14,910			22,287
Income taxes payable		4,165			5,827

Total current liabilities		31,203			42,613

Long-term debt		449			406

Other long-term liabilities		4,131			3,940

Stockholders’ equity (see Note 10):
Preferred stock, $1.00 par value; authorized 1,000 shares; none issued		—			—
Common stock, $0.20 par value; authorized 100,000 shares; issued and outstanding 58,204 and 59,598 at September 28, 2003 and June 27, 2004, respectively		5,821			11,921
Capital in excess of par value of common stock		120,134			119,023
Retained earnings		43,915			48,653
Accumulated other comprehensive loss		(10	)		(19	)

Total stockholders’ equity		169,860			179,578

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	205,643		$	226,537

The accompanying notes are an integral part of these statements

MICROSEMI CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Income Statements

(amounts in thousands, except earnings per share)


	Quarters Ended
	June 29, 2003		June 27, 2004
Net sales	$	50,534	$	64,130
Cost of sales		34,230		42,282

Gross profit		16,304		21,848

Operating expenses:
Selling, general and administrative		9,351		9,816
Research and development		4,974		5,250
Amortization of intangible assets		303		302
Restructuring charges		—		1,277

Total operating expenses		14,628		16,645

Operating income		1,676		5,203

Other income (expense):
Interest, net		67		56
Other, net		2		(12	)

Total other income		69		44

Income before income taxes		1,745		5,247

Provision for income taxes		576		1,732

NET INCOME	$	1,169	$	3,515

Earnings per share:
Basic	$	0.02	$	0.06

Diluted	$	0.02	$	0.06

Common and common equivalent shares outstanding:
Basic		57,910		59,483

Diluted		59,156		62,608

The accompanying notes are an integral part of these statements.

MICROSEMI CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Income Statements

(amounts in thousands, except earnings per share)


	Nine Months Ended
	June 29, 2003			June 27, 2004
Net sales	$	144,620		$	176,820
Cost of sales		100,560			117,540

Gross profit		44,060			59,280

Operating expenses:
Selling, general and administrative		27,459			28,876
Research and development		14,762			15,362
Amortization of intangible assets		1,016			908
Restructuring charges		686			7,241
Gain on sales of assets, net		(2,393	)		—

Total operating expenses		41,530			52,387

Operating income		2,530			6,893

Other income (expense):
Interest, net		(71	)		197
Other, net		(25	)		(18	)

Total other income (expense)		(96	)		179

Income before income taxes		2,434			7,072
Provision for income taxes		803			2,334

Income before cumulative effect of a change in accounting principle		1,631			4,738

Cumulative effect of a change in accounting principle, net of income taxes		(14,655	)		—

Net income (loss)	$	(13,024	)	$	4,738

Basic and Diluted earnings (loss) per share:
Earnings before cumulative effect of a change in accounting principle	$	0.03		$	0.08
Cumulative effect of a change in accounting principle		(0.25	)		—

Earnings (loss) per share	$	(0.22	)	$	0.08

Common and common equivalent shares outstanding:
-Basic		57,862			58,529

-Diluted		58,550			61,327

The accompanying notes are an integral part of these statements.

MICROSEMI CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

(amounts in thousands)


	Nine Months Ended
	June 29, 2003			June 27, 2004
Cash flows from operating activities:
Net income (loss)	$	(13,024	)	$	4,738
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		7,936			9,065
Provision for doubtful accounts		220			65
(Gain) loss on dispositions and retirements of assets		(850	)		87
Impairment of goodwill, net of income taxes		14,655			—
Changes in assets and liabilities
Accounts receivable		3,699			(5,036	)
Inventories		(1,002	)		(4,876	)
Other current assets		(120	)		(250	)
Accounts payable		(2,263	)		2,371
Accrued liabilities		(561	)		7,377
Income taxes payable		714			1,662
Other long-term liabilities		(16	)		(191	)

Net cash provided by operating activities		9,388			15,012

Cash flows from investing activities:
Purchases of property and equipment		(8,504	)		(8,137	)
Changes in other assets		1,338			(5	)
Proceeds from sales of assets		3,627			—

Net cash used in investing activities		(3,539	)		(8,142	)

Cash flows from financing activities:

Payments of long-term debt		(3,960	)		(43	)
Exercise of employee stock options		318			4,989

Net cash provided by (used in) financing activities		(3,642	)		4,946

Effect of exchange rate changes on cash		3			(9	)

Net increase in cash and cash equivalents		2,210			11,807
Cash and cash equivalents at beginning of period		23,060			29,353

Cash and cash equivalents at end of period	$	25,270		$	41,160

The accompanying notes are an integral part of these statements.

MICROSEMI CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 27, 2004

1. PRESENTATION OF FINANCIAL INFORMATION

The unaudited consolidated financial statements include the accounts of Microsemi Corporation and its subsidiaries (“Microsemi”, “the Company”, “we”, “our”, “ours” and “us”). Intercompany transactions have been eliminated in consolidation

The financial information furnished herein is unaudited, but in the opinion of our management, includes all adjustments (all of which are normal, recurring adjustments) necessary for a fair presentation of the results of operations for the periods indicated. The results of operations for the quarter or the nine months ended June 27, 2004 are not necessarily indicative of the results to be expected for the full year.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore do not include all information and note disclosures necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements thereto in the Annual Report on Form 10-K for the fiscal year ended September 28, 2003.

2. INVENTORIES

Inventories used in the computation of cost of goods sold were (amounts in thousands):


	September 28, 2003		June 27, 2004
Raw materials	$	13,696	$	12,910
Work in process		25,505		31,535
Finished goods		14,478		14,110

	$	53,679	$	58,555

3. CONTINGENCY

In Broomfield, Colorado, the owner of a property located adjacent to a manufacturing facility owned by Microsemi Corp. - Colorado (“the Subsidiary”) had notified the subsidiary and other parties, of a claim that contaminants migrated to his property, thereby diminishing its value. In August 1995, the subsidiary, together with Coors Porcelain Company, FMC Corporation and Siemens Microelectronics, Inc. (former owners of the manufacturing facility), agreed to settle the claim and to indemnify the owner of the adjacent property for remediation costs. Although TCE and other contaminants previously used by former owners at the facility are present in soil and groundwater on the subsidiary’s property, we vigorously contest any assertion that the subsidiary caused the contamination. In November 1998, we signed an agreement with the three former owners of this facility whereby they have 1) reimbursed us for $530,000 of past costs, 2) assumed responsibility for 90% of all future clean-up costs, and 3) promised to indemnify and protect us against any and all third-party claims relating to the contamination of the facility. An Integrated Corrective Action Plan was submitted to the State of Colorado. Sampling and management plans were prepared for the Colorado Department of Public Health & Environment. State and local agencies in Colorado are reviewing current data and considering study and cleanup options. The most recent forecast estimated that the total project cost, up to the year 2020, would be approximately $5,300,000; accordingly, we recorded a charge of $530,000 for this project in fiscal year 2003. There has not been any significant development since September 28, 2003.

We are involved in various pending litigation matters, arising out of the normal conduct of our business, including from time to time litigation relating to commercial transactions, contracts, and environmental matters. In the opinion of management, the final outcome of these matters will not have a material adverse effect on our financial position, results of operations or cash flows.

4. COMPREHENSIVE INCOME

Comprehensive income is defined as the change in equity (net assets) of a business enterprise during the period from transactions and other events and circumstances from non-owner sources. Our comprehensive income consists of net income and the change of the cumulative foreign currency translation adjustment. Accumulated other comprehensive loss consists of the cumulative foreign currency translation adjustment. Total comprehensive income (loss) for the quarters and nine months ended June 29, 2003 and June 27, 2004 were calculated as follows (amounts in 000’s):


	Quarters Ended				Nine Months Ended
	June 29, 2003		June 27, 2004		June 29, 2003			June 27, 2004
Net income (loss)	$	1,169	$	3,515	$	(13,024	)	$	4,738
Translation adjustment		3		—		3			(9	)

Comprehensive income (loss)	$	1,172	$	3,515	$	(13,021	)	$	4,729

5. EARNINGS PER SHARE

Basic earnings per share have been computed based upon the weighted average number of common shares outstanding during the respective periods. Diluted earnings per share have been computed, when the result is dilutive, using the treasury stock method for stock options outstanding during the respective periods.

After the close of trading on February 20, 2004, a 2-for-1 stock split of shares of our common stock effected by means of a stock dividend. This stock split has been reflected in the following calculation of earnings per share for all periods presented (see Note 10).

Earnings per share (“EPS”) for the respective quarters and respective nine months ended June 29, 2003 and June 27, 2004 were calculated as follows (amounts in thousands, except per share data):


	Quarters Ended				Nine Months Ended
	June 29, 2003		June 27, 2004		June 29, 2003			June 27, 2004
BASIC

Net income (loss)	$	1,169	$	3,515	$	(13,024	)	$	4,738

Weighted-average common shares outstanding		57,910		59,483		57,862			58,529

Basic earnings (loss) per share	$	0.02	$	0.06	$	(0.22	)	$	0.08

DILUTED

Net income (loss)	$	1,169	$	3,515	$	(13,024	)	$	4,738

Weighted-average common shares outstanding for basic		57,910		59,483		57,862			58,529
Dilutive effect of stock options		1,246		3,125		688			2,798

Weighted-average common shares outstanding on a diluted basis		59,156		62,608		58,550			61,327

Diluted earnings (loss) per share	$	0.02	$	0.06	$	(0.22	)	$	0.08

Approximately 5,834,000 and 540,000 options were not included in the computation of diluted EPS in the third quarters of fiscal years 2003 and 2004, respectively, and 7,968,000 and 361,000 options were not included in the computation of diluted EPS in the first nine months of fiscal years 2003 and 2004, respectively, as they would have been antidilutive.

6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT

Financial Accounting Standards Board Interpretation No. 46

In January 2003, the FASB issued FIN 46, which requires that certain variable interest entities be consolidated by the primary beneficiary of the entity even if the equity investors in the entity do not have a controlling financial interest or do not have sufficient equity at risk. FIN 46 is effective immediately for all variable interest entities created after January 31, 2003. For all such entities created prior to February 1, 2003, FIN 46 is effective for interim or annual fiscal periods ending after December 15, 2003.

In December 2003, the FASB replaced FIN 46 with FIN 46R to clarify the application of Accounting Research Bulletin Number 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R was effective for all public entities that have interest in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004.

We did not have any interest in any variable interest entity or any special-purpose entity; therefore, adoptions of FIN 46 and FIN 46R did not have any effect on our financial position, results of operations and cash flows.

7. STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) provides an alternative to APB 25 in accounting for stock-based compensation issued to employees. SFAS 123 provides for a fair value based method of accounting for employee stock options and similar equity instruments. However, companies that continue to account for stock-based compensation arrangements under APB 25 are required by SFAS 123 to disclose, in the notes to financial statements, the pro forma effect on net income (loss) and net income (loss) per share as if the fair value based method prescribed by SFAS 123 had been applied. We continue to account for stock-based compensation using the provisions of APB 25 and present the pro forma information required by SFAS 123 as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (SFAS 148).

The following table illustrates the effects on net income (loss) and earnings (loss) per share as if the fair value based method had been applied to all outstanding awards in each period (amounts in thousands, except earnings (loss) per share):


	Quarters Ended						Nine Months Ended
	June 29, 2003			June 27, 2004			June 29, 2003			June 27, 2004
Net income (loss), as reported	$	1,169		$	3,515		$	(13,024	)	$	4,738

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,536	)		(2,002	)		(3,984	)		(6,548	)

Pro forma net income (loss)	$	(367	)	$	1,513		$	(17,008	)	$	(1,810	)

Earnings (loss) per share:
Basic - as reported	$	0.02		$	0.06		$	(0.22	)	$	0.08

Basic - pro forma	$	(0.01	)	$	0.03		$	(0.29	)	$	(0.03	)

Diluted - as reported	$	0.02		$	0.06		$	(0.22	)	$	0.08

Diluted - pro forma	$	(0.01	)	$	0.02		$	(0.29	)	$	(0.03	)

The fair value of each stock option grant was estimated pursuant to SFAS 123 on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:


	Quarters Ended				Nine Months Ended
	June 29, 2003		June 27, 2004		June 29, 2003		June 27, 2004
Risk free interest rate	2.52	%	3.95	%	2.67	%	3.34	%
Expected dividend yield	None		None		None		None
Expected lives	5 years		5 years		5 years		5 years
Expected volatility	76.0	%	79.0	%	76.0	%	79.0	%

8. SEGMENT INFORMATION

We operate in a single industry segment as a manufacturer of semiconductors in different geographic areas, including the United States, Europe and Asia. Intergeographic sales primarily represent intercompany sales which are accounted for based on established sales prices between the related companies and are eliminated in consolidation.

Financial information by geographic areas is as follows (amounts in thousands):


	Nine Months Ended
	June 29, 2003			June 27, 2004
Net sales:
United States
Sales to unaffiliated customers	$	127,202		$	152,980
Intergeographic sales		13,931			17,823
Europe
Sales to unaffiliated customers		17,328			22,505
Intergeographic sales		112			419
Asia
Sales to unaffiliated customers		90			1,335
Intergeographic sales		713			135
Eliminations of intergeographic sales		(14,756	)		(18,377	)

Total	$	144,620		$	176,820

Income (loss) from operations:
United States	$	2,414		$	5,297
Europe		632			1,827
Asia		(516	)		(231	)

Total	$	2,530		$	6,893

Capital expenditures:
United States	$	8,228		$	7,947
Europe		34			130
Asia		242			60

Total	$	8,504		$	8,137

Depreciation and amortization:
United States	$	7,733		$	8,709
Europe		165			156
Asia		38			200

Total	$	7,936		$	9,065


	September 28, 2003			June 27, 2004
Identifiable assets:
United States	$	192,558		$	206,697
Europe		10,551			17,025
Asia		2,534			2,815

Total	$	205,643		$	226,537

9. RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS

In 2001, we commenced our Capacity Optimization Enhancement Program (the “Plan”) to increase company-wide capacity utilization and operating efficiencies through consolidations and realignments of operations.

We started phase 1 of the Plan (“Phase 1”) in fiscal year 2001, which included (a) the closure of most of our operations in Watertown, Massachusetts and relocation of those operations to other Microsemi plants in Lawrence and Lowell, Massachusetts and Scottsdale, Arizona and (b) the closure of the CDI, Melrose, Massachusetts facility and relocation of those operations to Lawrence, Massachusetts.

At June 27, 2004, the remaining restructuring balance of $0.2 million of Phase 1 relates to the renovation of the leased facilities. The following table reflects the activities of Phase 1 and the Accrued Liabilities in the consolidated balance sheets at the dates below (amounts in 000s):


	Workforce Reductions			Plant Closures			Total
Balance at September 29, 2002	$	2,161		$	726		$	2,887

Provisions		686			—			686
Cash expenditures		(2,430	)		(427	)		(2,857	)
Other non-cash write-off		(417	)		—			(417	)

Balance at September 28, 2003	$	0			299			299

Cash expenditures-fiscal year 2004					(120	)		(120	)

Balance at June 27, 2004				$	179		$	179

Fiscal year 2004 restructuring

In October 2003, we announced the consolidation of the hi-rel products operations of Microsemi Corp. - Santa Ana of Santa Ana, California (“Santa Ana”) into Microsemi Corp. – Integrated Products of Garden Grove, California (“IPG”) and Microsemi Corp. - Scottsdale of Scottsdale, Arizona (“Scottsdale”). Santa Ana represented approximately 20% of our shipments in fiscal year 2003, had approximately 380 employees and occupies 123,000 square feet in two facilities, one owned and one leased.

Restructuring-related costs have been and will be recorded as incurred in accordance with SFAS 112, “Employers’ Accounting for Postemployment Benefits (“FAS 112”) or SFAS No. 146, “Accounting for the Costs Associated with Exit or Disposal Activities” (“FAS 146”), as appropriate. The estimated severance payments are approximately $5.4 million, of which, $4.9 million and $0.3 million were recorded in the nine months ended June 27, 2004 as required by FAS 112 and FAS 146, respectively. We will record an additional $0.2 million over the future service periods as required by FAS 146. The severance payments cover approximately 350 employees, including 55 management positions. Approximately 30 employees have been or will be transferred to other Microsemi operations. We recorded $1.0 million for impairment related to the leased facility in Santa Ana. We also recorded $0.2 million for other restructuring related expenses. We do not anticipate any material charge for cancellations of operating leases. Any change of estimate will be recognized as an adjustment to the accrued liabilities in the period of change. The consolidation of Santa Ana is currently expected to be completed in fiscal year 2005. However, the exact timing depends on the readiness at Scottsdale, Lawrence and IPG and the acceptances by customers of the processes transferred to these facilities. We have assigned a transition team to coordinate these efforts to minimize any potential adverse financial impact due to this consolidation.

The following table reflects the activities related to the consolidation of Santa Ana and the Accrued Liabilities in the consolidated balance sheets at June 27, 2004 (amounts in 000s):


	Employee Severance			Other Related Costs			Impairment of Assets			Total
Provisions	$	5,234		$	198		$	1,000		$	6,432
Cash expenditures		(504	)		(198	)					(702	)
Other non-cash write off								(1,000	)		(1,000	)

Balance at June 27, 2004	$	4,730		$	—		$	—		$	4,730

In the second quarter of fiscal year 2004, we started to consolidate the remainder of our operations in Watertown, Massachusetts. The production will be moved to our facilities in Scottsdale, Arizona (“Scottsdale”) and Lowell, Massachusetts (“Lowell”). Restructuring-related costs have been and will be recorded as incurred in accordance with FAS 112 or FAS 146, as appropriate. The estimated severance payments are approximately $0.9 million, of which, $0.7 million and $0.1 million were recorded in the nine months ended June 27, 2004 as required by FAS 112 and FAS 146, respectively. We will record an additional $0.1 million over the future service periods as required by FAS 146. The severance payments cover approximately 32 employees, including 9 management positions. We do not anticipate any material charge for cancellations of operating leases or for the relocation of equipment. Any change of estimate will be recognized as an adjustment to the accrued liabilities in the period of change. We have assigned a transition team to coordinate these activities to minimize any potential adverse financial impact due to this consolidation. The consolidation of the Watertown operations is expected to be completed by December 2004.

The following table reflects the activities of the final phase of the consolidation of Watertown and the liabilities included in Accrued Liabilities in the consolidated balance sheets at June 27, 2004 (amounts in 000s):


	Employee Severance
Provision	$	809
Cash expenditure		(199	)

Balance at June 27, 2004	$	610

10. STOCK SPLIT

On January 26, 2004, we announced a 2-for-1 stock split of our common stock to be effected by means of a stock dividend to stockholders of record as of the close of business on February 6, 2004 (the record date). Stockholders received one additional share of common stock for every one share held as of the record date. The dividend was distributed as of the close of business on Friday, February 20, 2004. The ex-dividend date was Monday, February 23, 2004. As a result of the stock split, we issued 29,603,287 shares of our common stock. Upon completion of the stock split, the total outstanding shares of our common stock were 59,206,574. All shares and per share information have been adjusted to reflect the 2-for-1 stock split for all periods presented in this report.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q includes current beliefs, expectations and other forward looking statements, the realization of which may be adversely impacted by any of the factors discussed or referenced under the heading “Important Factors Related to Forward-Looking Statements and Associated Risks,” found in this section. This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the accompanying unaudited consolidated financial statements and notes should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto in the Annual Report on Form 10-K for the fiscal year ended September 28, 2003.

Microsemi is a leading designer, manufacturer and marketer of high performance analog and mixed-signal integrated circuits and high reliability discrete semiconductors. Our semiconductors manage and control or regulate power, protect against transient voltage spikes and transmit, receive and amplify signals.

Our products include individual components as well as integrated circuit solutions that enhance customer designs by improving performance, reliability and battery optimization, reducing size or protecting circuits. The principal markets we serve include implanted medical, defense/aerospace and satellite, notebook computers and monitors, automotive and mobile connectivity applications.

We currently serve a broad group of customers. None of our customers accounts for more than 5% of our total revenues in the first nine months of fiscal year 2004. The following are our major customers: Seagate Technology (5%), Guidant Corporation (5%), The Boeing Co. (3%), Siemens AG (2%), Raytheon Co. (2%), Medtronic Incorporated (2%), and BAE Systems (2%). The percentage amounts in parenthesis are the approximate sales to these customers as percentages of our revenues in the first nine months of fiscal year 2004.


	Workforce Reductions			Plant Closures			Total
Balance at September 29, 2002	$	2,161		$	726		$	2,887
Provisions		686			—			686
Cash expenditures		(2,430	)		(427	)		(2,857	)
Other non-cash write-off		(417	)		—			(417	)

Balance at September 28, 2003	$	0			299			299

Cash expenditures-fiscal year 2004					(120	)		(120	)

Balance at June 27, 2004				$	179		$	179

Fiscal year 2004 restructuring

The consolidation of Santa Ana is expected to result, subsequent to its completion, in annual cost savings of $8 million to $12 million from the elimination of redundant facilities and related expenses and employee reductions. Further, we own the plant and the real estate in Santa Ana, California, and we expect to offer the property for sale at the prevailing market price which is expected to exceed book value.

The following table reflects the activities related to the consolidation of Santa Ana and the Accrued Liabilities in the consolidated balance sheets at June 27, 2004 (amounts in 000s):


	Employee Severance			Other Related Costs			Impairment of Assets			Total
Provisions	$	5,234		$	198		$	1,000		$	6,432
Cash expenditures		(504	)		(198	)					(702	)
Other non-cash write off		—			—			(1,000	)		(1,000	)

Balance at June 27, 2004	$	4,730		$	—		$	—		$	4,730

In the second quarter of fiscal year 2004, we started to consolidate the remainder of our operations in Watertown, Massachusetts. The production will be moved to our facilities in Scottsdale, Arizona (“Scottsdale”) and Lowell, Massachusetts (“Lowell”). Restructuring-related costs have been and will be recorded as incurred in accordance with FAS 112 or FAS 146, as appropriate. The estimated severance payments are approximately $0.9 million, of which, $0.7 million and $0.1 million were recorded in the nine months ended June 27, 2004 as required by FAS 112 and FAS 146, respectively. We will record an additional $0.1 million over the future service periods as required by FAS 146. The severance payments cover approximately 32 employees, including 9 management positions. We do not anticipate any material charge for cancellations of operating leases or for the relocation of equipment. Any change of estimate will be recognized as an adjustment to the liability in the period of change. We have assigned a transition team to coordinate these activities to minimize any potential adverse financial impact due to this consolidation. The consolidation of the Watertown operations is expected to be completed by December 2004.

The final phase of the consolidation of Watertown is expected to result subsequently in annual cost savings of approximately $1.0 million from the eliminations of redundant facilities, employee reductions, and associated costs.


	Employee Severance
Provision	$	809
Cash expenditure		(199	)

Balance at June 27, 2004	$	610

RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 29, 2003 COMPARED TO THE QUARTER ENDED JUNE 27, 2004.

Net sales increased $13.6 million or 26.9% from $50.5 million for the third quarter of fiscal year 2003 (“2003”) to $64.1 million for the third quarter of fiscal year 2004 (“2004”). The increase included approximately $5.6 million, $2.0 million, $5.8 million and $2.3 million of higher sales for defense and aerospace, computer and peripheral, mobile connectivity and automotive products, respectively, offset by approximately $1.2 million and $0.9 million in lower shipments of medical products and of other products, respectively.

Sales to OEM’s represented approximately 58% and 59% of our revenues in 2003 and 2004, respectively. The breakout of net sales to OEM customers (which excludes sales to distributors) for 2003 and 2004 were as follows:


	2003		2004
Defense/Aerospace	41	%	41	%
Medical	24	%	17	%
Computer/ Peripheral	10	%	11	%
Mobile Connectivity	5	%	13	%
Automotive	7	%	9	%
Others	13	%	9	%

Gross profit increased $5.5 million, from $16.3 million (32.3% of sales) for 2003 to $21.8 million (34.1% of sales) for 2004. The improvement in gross profit in the third quarter was the combined result of: 1) higher gross margins on new products; 2) improved factory utilization; 3) cost savings resulting from phase 1 of our Capacity Optimization Enhancement Program; and 4) increased revenues. In 2004, costs of sales included approximately $0.6 million related to the consolidation of the wafer fabrication from Santa Ana to Microsemi Corp. -Integrated Products in Garden Grove, California (the “Integrated Products Group” or “IPG”), $0.4 million for time spent by employees for the consolidation of Santa Ana, $0.5 million of expenses related to a product line that we discontinued in June 2004 and $0.2 million of excess capacity at our Watertown operations.

Selling, general and administrative expenses increased $0.4 million, from $9.4 million for 2003 to $9.8 million for 2004, primarily due to higher selling expenses associated with higher sales.

Amortization of other intangible assets was approximately $0.3 million for each of the third quarters of fiscal years 2003 and 2004, respectively.

The effective income tax rates were 33.0% for the respective third quarters of fiscal years 2003 and 2004.

In 2004, restructuring charges of $1.3 million included approximately $0.2 million of accrued severance payments, $1.0 million of estimated impairment of leasehold improvements relating to the leased building in Santa Ana, California and $0.1 million for other expenses.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 29, 2003 COMPARED TO THE NINE MONTHS ENDED JUNE 27, 2004.

Net sales increased $32.2 million or 22.3% from $144.6 million for the first nine months of fiscal year 2003 (“2003”) to $176.8 million for the first nine months of fiscal year 2004 (“2004”). The increase included approximately $16.3 million, $6.9 million, $14.0 million and $6.2 million of higher sales for defense and aerospace, computer and peripheral, mobile connectivity and automotive products, respectively, offset by decreases of approximately $3.1 million and $8.1 million in lower shipments of medical products and of other products, respectively.

Sales of OEM’s represented approximately 59% and 60% of our revenues in 2003 and 2004, respectively. The breakout of net sales to OEM customers (which excludes sales to distributors) in 2003 and 2004 were as follows:


	2003		2004
Defense/Aerospace	38	%	41	%
Medical	24	%	17	%
Notebooks/Monitors	11	%	12	%
Mobile Connectivity	5	%	12	%
Automotive	6	%	9	%
Others	16	%	9	%

Gross profit increased $15.2 million, from $44.1 million (30.5% of sales) for 2003 to $59.3 million (33.5% of sales) for 2004. The improvement in gross profit in the current nine months was the combined result of: 1) higher gross margins on new products; 2) improved factory utilization; 3) cost savings resulting from phase 1 of our Capacity Optimization Enhancement Program; and 4) increased revenues. In the first nine months of fiscal year 2004, costs of sales included approximately $1.7 million related to the consolidation of the wafer fabrication from Santa Ana to Microsemi Corp. -Integrated Products in Garden Grove, California (the “Integrated Products Group” or “IPG”), $1.1 million for time spent by existing employees for the consolidation of Santa Ana, $0.5 million of expenses related to a product line that we discontinued in June 2004 and $1.2 million of excess capacity at our Watertown operations.

Selling, general and administrative expenses increased $1.4 million, from $27.5 million for 2003 to $28.9 million for 2004, primarily due to higher selling expenses associated with higher sales.

Amortization of other intangible assets was $1.0 million and $0.9 million for 2003 and 2004, respectively.

In 2004, restructuring charges of $7.2 million included approximately $6.0 million of accrued severance payments, $1.0 million of estimated impairment of leasehold improvements relating to the leased building in Santa Ana, California and $0.2 million for other expenses.

We had lower average balances of debt and more cash for short-term investments in the current nine months, compared to the prior year nine months; consequently, we had $0.1 million of net interest expense in 2003 compared to $0.2 million of net interest income in 2004.

The effective income tax rates were 33.0% for the respective first nine months of fiscal years 2003 and 2004.

FINANCIAL CONDITION

In the first nine months of fiscal year 2004 (“2004”), we financed our operations with cash from operations.

Net cash provided by operating activities was $9.4 million and $15.0 million for the first nine months of fiscal years 2003 (“2003”) and 2004, respectively. The net loss of $13.0 million for 2003 included an after tax, non-cash charge of $14.7 million for impairment of goodwill, upon adoption of FAS 142 in fiscal year

2003. The $5.6 million increase in net cash provided by operating activities was mostly due to the improvement of operating income, excluding the effect of the aforementioned $14.7 million charge. The increase was also affected by the combined effect of other non-cash items included in income or expense, and changes in operating assets and liabilities such as accounts receivable, inventories, accounts payable, and accrued liabilities.

Accounts receivable increased from $28.9 million at September 28, 2003 to $33.8 million at June 27, 2004. The increase of accounts receivable was primarily due to higher sales in the third quarter of fiscal year 2004 compared with sales in the fourth quarter of fiscal year 2003. The Days Sales Outstanding (“DSO”) was 50 days and 48 days at September 28, 2003 and at June 27, 2004, respectively.

Inventories were $53.7 million at September 28, 2003 and $58.6 million at June 27, 2004. The increase in inventory was necessary to cover shipments during changes of manufacturing locations due to our consolidations program as well as for the anticipated higher revenues in the fourth quarter.

At June 27, 2004 we had $42.6 million of current liabilities, an increase of $11.4 million from $31.2 million at September 28, 2003. The increase was primarily due to accrued severance payments related to the consolidations of the Santa Ana and Watertown divisions (see Note 9) and income tax payable, which will be paid later in the year.

Net cash used in investing activities was $3.5 million and $8.1 million for 2003 and 2004, respectively. We spent $8.5 million and $8.1 million for capital equipment in 2003 and 2004, respectively. In 2003, we received approximately $1.3 million from a note receivable, $1.5 million from sale of the Carlsbad design center, $0.9 million from sale of stock of Semcon (net of the $0.6 million of cash in bank at date of disposition) and $1.2 million from sale of real estate in Watertown, Massachusetts.

Net cash (used for) provided by financing activities was ($3.6) million and $4.9 million for 2003 and 2004, respectively. In 2003, we paid off approximately $3.9 million of the Santa Ana Industrial Development Revenue Bonds. We received $0.3 million and $5.0 million from exercises of stock options in 2003 and 2004, respectively.

At June 27, 2004, we had $4.3 million of the long-term portion of long-term debt and other long-term liabilities, down $0.3 million, or 6.5%, from $4.6 million at September 28, 2003. The decrease was due to the payment, as scheduled, of a portion of our long-term debt and installment payments due under the Supplemental Employment Retirement Plan for certain former long-term employees.

We had $29.4 million and $41.2 million in cash and cash equivalents at September 28, 2003 and June 27, 2004, respectively.

Current ratios were 3.8 to 1 at September 28, 2003 and 3.3 to 1 at June 27, 2004.

We have a $30.0 million credit line with a bank, which expires in March 2006 and includes a facility to issue letters of credit. As of June 27, 2004, $0.4 million was outstanding in the form of a letter of credit; consequently $29.6 million was available under this credit facility.

As of June 27, 2004, we were in compliance with the covenants of our current bank credit agreement and leases.

The estimated cost to consolidate Santa Ana, including severance payments to employees, relocations of equipment and employees, is expected to be between $10.0 million to $15.0 million. We currently expect to complete the consolidation in fiscal year 2005. We estimated the total severance payments at $5.4 million, of which $0.5 million has been paid, and $4.0 million will be paid within the next 12 months. The remainder of $0.9 million will be paid in the following nine months. We anticipate that the source for paying such costs will be our internally generated cash and cash equivalents. However we own the plant and real estate in Santa Ana, California, and we expect to offer the property for sale at prevailing market prices. We expect to recoup a major portion of the consolidation-related costs from the future real estate sale proceeds.

We estimated the total severance payments for Watertown at $0.9 million, of which $0.2 million has been paid, and $0.7 million will be paid in the next 12 months. We anticipate that the source for paying such costs will be our internally generated cash and cash equivalents.

As of June 27, 2004, we had no additional material commitments for capital expenditures.

Based upon information currently available to us, we believe that we can meet our cash requirements and capital commitments in the foreseeable future with cash balances, internally generated funds from ongoing operations and, if necessary, from the available line of credit.

The following table summarizes our undiscounted contractual payment obligations and commitments as of June 27, 2004:

Payment Obligations by Year (in 000’s)


	Capital leases		Long-term debt and other liabilities		Operating leases		Total
2004	$	115	$	533	$	963	$	1,611
2005		336		2,277		2,833		5,446
2006		304		4,039		2,106		6,449
2007		293		3,318		1,320		4,931
2008		293		336		457		1,086
Thereafter		5,920		760		2,295		8,975

Total	$	7,261	$	11,263	$	9,974	$	28,498

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT

Financial Accounting Standards Board Interpretation No. 46

Critical Accounting Policies and Estimates

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States that require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended September 28, 2003. We believe that at June 27, 2004, there has been no material change to this information.

IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

Some of the statements in this report or incorporated by reference are forward-looking, including, without limitation, the statements under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Forward-looking statements include those that contain words like “may,” “will,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “maintain,” “continue” and variations of these words or comparable words. In addition, all of the information herein that does not state an historical fact is forward-looking, including any statement or implication about a future time, result or other circumstance. Forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. Actual results may differ substantially from the results that the forward-looking statements suggest for various reasons. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

The forward-looking statements included in this report are based on, among other items, current assumptions that we will be able to meet our current operating cash and debt service requirements, that we will be able to successfully complete announced plant closures and plant consolidations on the anticipated schedule and without unanticipated costs or expenses, that we will continue to retain the full-time services of all of our present executive officers and key employees, that we will be able to successfully resolve any disputes and other business matters as anticipated, that competitive conditions within the analog, mixed signal and discrete semiconductor, integrated circuit or custom component assembly industries will not affect us adversely, that our customers will not cancel orders or terminate or renegotiate their purchasing relationships with us, that we will retain existing key personnel, that our forecasts will reasonably anticipate market demand for our products, and that there will be no other material adverse changes in our operations or business. Other factors that could cause results to vary materially from current expectations are referred to elsewhere in this report. Assumptions relating to the foregoing involve judgments that are difficult to make and future circumstances that are difficult to predict accurately or correctly. Forecasting and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our internal forecasts, which may in turn affect expectations or future results. We do not undertake to announce publicly the changes that may occur in our expectations. Readers are cautioned against giving undue weight to any of the forward-looking statements.

Adverse changes to our results could result from any number of factors, including but not limited to fluctuations in economic conditions, potential effects of inflation, lack of earnings visibility, dependence upon certain customers or markets, dependence upon suppliers, future capital needs, rapid technological changes, difficulties in integrating acquired businesses, ability to realize cost savings or productivity gains, potential cost increases, dependence on key personnel, difficulties regarding hiring and retaining qualified personnel in a competitive labor market, risks of doing business in international markets, and problems of third parties.

The inclusion of forward-looking information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.

Although the readers may also refer to the risk factors in our previous filings, we are setting out some of the more relevant risk factors below in full for the convenience of the readers:

Downturns in the highly cyclical semiconductor industry have adversely affected the operating results and the value of our business.

The semiconductor industry is highly cyclical, and the value of our business has declined during the “down” portion of these cycles. During recent years, we as well as many others in our industry, experienced significant declines in the pricing of, as well as demand for, products. The market for semiconductors has experienced severe and prolonged downturns. In the future, these downturns may prove to be as, or possibly more, severe. The markets for our products depend on continued demand in the mobile connectivity, automotive, digital media, telecommunications, computers/peripherals, military and aerospace, space/satellite, industrial/commercial and medical markets, and these end-markets have experienced changes in demand that have adversely affected our operating results and financial condition.

Concentration of the factories in the semiconductor industry.

Relevant portions of the semiconductor industry, and those that serve or supply this industry, tend somewhat to be concentrated in certain areas of the world, and therefore, the semiconductor industry has from time to time been, and may from time to time be adversely affected by natural disasters in various locale, epidemics and health advisories such as those related to Sudden Acute Respiratory Syndrome.

The semiconductor business is highly competitive and increased competition could reduce our value.

The semiconductor industry, including the areas in which we do business, is highly competitive. We expect intensified competition from existing competitors and new entrants. Competition is based on price, product performance, product availability, quality, reliability and customer service. Pricing pressures may emerge. For instance, competitors may attempt to gain a greater market share by lowering prices. The market for commercial products is characterized by declining selling prices. We anticipate that our average selling prices will decrease in future periods, although the timing and amount of these decreases cannot be predicted with any certainty. The pricing pressure in the semiconductor industry in recent years has been due primarily to the Asian currency crisis, industry-wide excess manufacturing capacity, weak economic growth, the slowdown in capital spending that followed the “dot-com” collapse, the reduction in capital spending by telecom companies and satellite companies, and certain effects of the tragic events of terrorism on September 11, 2001. We compete in various markets with companies of various sizes, many of which are larger and have greater resources than we have, and thus may be better able to pursue acquisition candidates and to withstand adverse economic or market conditions. In addition, companies not currently in direct competition with us may introduce competing products in the future. We have numerous competitors. Some of our current major competitors are Motorola, Inc., National Semiconductor Corporation, Texas Instruments, Inc., Philips Electronics, ON Semiconductor, L.L.C., Fairchild Semiconductor Corporation, Micrel Incorporated, International Rectifier Corporation, Semtech Corporation, Linear Technology Corp., Maxim Integrated Products, Inc., Skyworks Solutions, Inc., Diodes, Inc., Vishay Intertechnology, Inc. and its subsidiary Siliconix Incorporated. Some of our competitors in developing markets are Triquint Semiconductor, Inc., Mitel Corporation, RF Micro Devices, Inc., Conexant Systems, Inc., Anadigics, Inc. and Skyworks Solutions, Inc. We may not be able to compete successfully in the future or competitive pressures may harm our financial condition, operating results or cash flows.

New technologies could result in the development of competing products and a decrease in demand for our products.

Our financial performance depends on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. Our failure to develop new technologies or to react to changes in existing technologies could materially delay our development of new products, which could result in product obsolescence, decreased revenues and/or a loss of our market share to competitors. Rapidly changing technologies and industry standards, along with frequent new product introductions, characterize much of the semiconductor industry. A fundamental shift in technologies in our product markets could have a material adverse effect on our competitive position within the industry.

For instance, presently we are challenged to develop new products for use with various alternative wireless LAN standards, such as 802.11a, 802.11b and 802.11g and combinations thereof. Although this development has already resulted in design wins related to 802.11a and 802.11g, the solutions related to the other standards and the combination of all of the standards are still in development and are in constant change. The success of products using various standards is subject to rapid changes in market preferences and advancements in competing technologies.

Failure to protect our proprietary technologies or maintain the right to use certain technologies may negatively affect our ability to compete.

We rely heavily on our proprietary technologies. Our future success and competitive position may depend in part upon our ability to obtain or maintain protection of certain proprietary technologies used in our principal products. We do not have significant patent protection on many aspects of our technology. Our

reliance upon protection of some of our technology as “trade secrets” will not necessarily protect us from the use by other persons of our technology, or their use of technology that is similar or superior to that which is embodied in our trade secrets. Others may be able to independently duplicate or exceed our technology in whole or in part. We may not be successful in maintaining the confidentiality of our technology, dissemination of which could have a material adverse effect on our business. In addition, litigation may be necessary to determine the scope and validity of our proprietary rights. In instances in which we hold any patents or patent licenses, any patents held by us may be challenged, invalidated or circumvented, or the rights granted under any patents may not provide us with competitive advantages. Patents often provide only narrow protection and require public disclosure of information that may otherwise be subject to trade secret protection. Also patents expire and are not renewable. Obtaining or protecting our proprietary rights may require us to defend claims of intellectual property infringement by our competitors. While we are not currently engaged as a defendant in intellectual property litigation that we believe will have a material adverse effect, we could become subject to lawsuits in which it is alleged that we have infringed upon the intellectual property rights of others.

If any such infringements exist, arise or are claimed in the future, we may be exposed to substantial liability for damages and may need to obtain licenses from the patent owners, discontinue or change our processes or products or expend significant resources to develop or acquire non-infringing technologies. We may not be successful in such efforts or such licenses may not be available under reasonable terms. Our failure to develop or acquire non-infringing technologies or to obtain licenses on acceptable terms or the occurrence of related litigation itself could have a material adverse effect on our operating results, financial condition and cash flows.

Future business could be adversely affected by delays in production of compound semiconductor technology.

We utilize process technology to manufacture compound semiconductors such as gallium arsenide (GaAs), indium gallium phosphide (InGaP), silicon germanium (SiGe), and indium gallium arsenide phosphide (InGaAsP) primarily to manufacture semiconductor components. We are pursuing this development effort internally as well as with third party foundries. Our efforts sometimes may not result in commercially successful products. Certain of our competitors offer this capability and our customers may purchase our competitors’ products. The third party foundries that we use may delay or fail to deliver technology and products to us. Our business and prospects could be materially and adversely affected by delay or by our failure to produce these products.

Compound semiconductor products may not successfully compete with silicon-based products.

Our choices of technologies for development and future implementation may not reflect future market demand. The production of GaAs, InGaP, SiGe, InGaAsP or SiC integrated circuits is more costly than the production of silicon circuits, and we believe it will continue in the future to be more costly. The costs differ because of higher costs of raw materials, lower production yields and higher unit costs associated with lower production volumes. Silicon semiconductor technologies are widely used in process technologies for integrated circuits, and these technologies continue to improve in performance. As a result, we must offer compound semiconductor products that provide vastly superior performance to that of silicon for specific applications in order for them to be competitive with silicon products. If we do not offer compound semiconductor products that provide sufficiently superior performance to offset the cost differential and otherwise successfully compete with silicon-based products, our operating results may be materially and adversely affected. In addition, other alternatives exist and are being developed, and may have superior performance or lower cost.

We may not be able to develop new products to satisfy changes in demand.

We may be unsuccessful in our efforts to identify new product opportunities and develop and bring products to market in a timely and cost-effective manner. Products or technologies developed by others may render our products or technologies obsolete or non-competitive. In addition, to remain competitive, we must continue to reduce package sizes, improve manufacturing yields and expand sales. We may not be able to accomplish these goals. Designs that we have introduced recently include primarily integrated circuits and subsystems such as class D audio subsystems for newly-introduced home theatre DVD players supporting surround sound, PDA backlighting subsystems, backlight control and power management solutions for the automotive market, LED driver solutions and power amplifiers for certain wireless LAN components. Their success will be subject to various risks and uncertainties.

We must commit resources to production prior to receipt of purchase commitments and could lose some or all of the associated investment.

We sell products primarily pursuant to purchase orders for current delivery, rather than pursuant to long-term supply contracts. Many of these purchase orders may be revised or cancelled without penalty. As a result, we must commit resources to the production of products without any advance purchase commitments from customers. Our inability to sell products after we devote significant resources to them could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Variability of our manufacturing yields may affect our gross margins.

Our manufacturing yields vary significantly among products, depending on the complexity of a particular integrated circuit’s design and our experience in manufacturing that type of integrated circuit. We have in the past experienced difficulties in achieving planned yields, which have adversely affected our gross margins.

The fabrication of integrated circuits is a highly complex and precise process. Problems in the fabrication process can cause a substantial percentage of wafers to be rejected or numerous integrated circuits on each wafer to be non-functional, thereby reducing yields. These difficulties include:

•

Defects in masks, which are used to transfer circuit patterns onto our wafers;

•

Impurities in the materials used;

•

Contamination of the manufacturing environment; and

•

Equipment failure.

Because a large portion of our costs of manufacturing is relatively fixed, and average selling prices for our products tend to decline over time, it is critical for us to improve the number of shippable integrated circuits per wafer and increase the production volume of wafers in order to maintain and improve our results of operations. Yield decreases can result in substantially higher unit costs, which could materially and adversely affect our operating results and have done so in the past. Moreover, our process technology has primarily used standard silicon semiconductor manufacturing equipment, and production yields of compound integrated circuits have been relatively low compared with silicon integrated circuit devices. We may be unable to continue to improve yields in the future, and we may suffer periodic yield problems, particularly during the early production of new products or introduction of new process technologies. In either case, our results of operations could be materially and adversely affected.

Our inventories may become obsolete and other assets may be subject to risks.

The life cycles of some of our products depend heavily upon the life cycles of the end products into which our products are designed. Products with short life cycles require us to manage closely our production and inventory levels. Life cycles for some of our products can be as short as 6 to 24 months. Inventory may also become obsolete because of adverse changes in end-market demand. We may in the future be adversely affected by obsolete or excess inventories which may result from unanticipated changes in the estimated total demand for our products or the estimated life cycles of the end products into which our products are designed. The asset values determined under Generally Accepted Accounting Principles for inventory and other assets each involve the making of material estimates by us, many of which could be based on mistaken assumptions or judgments. See “There may be goodwill impairments that would adversely affect Microsemi”.

International operations and sales expose us to material risks.

Revenues from foreign markets represent a significant portion of total revenues. We maintain facilities or contracts with entities in China, Ireland, Thailand, the Philippines, and Taiwan. There are risks inherent in doing business internationally, including:

•

Changes in, or impositions of, legislative or regulatory requirements, including tax laws in the United States and in the countries in which we manufacture or sell our products;

•

Trade restrictions;

•

Transportation delays;

•

Work stoppages;

•

Economic and political instability;

•

Terrorist activities;

•

Changes in import/export regulations, tariffs and freight rates;

•

Difficulties in collecting receivables and enforcing contracts generally; and

•

Currency exchange rate fluctuations.

In addition, the laws of certain foreign countries may not protect our products, assets or intellectual property rights to the same extent as do U.S. laws. Therefore, the risk of piracy of our technology and products may be greater in those foreign countries. We may experience a material adverse effect on our financial condition, operating results and cash flows in the future.

Delays in beginning production, implementing production techniques, resolving problems associated with technical equipment malfunctions, or issues related to government or customer qualification of facilities could adversely affect our manufacturing efficiencies and our ability to realize cost savings.

Our manufacturing efficiency will be an important factor in our future profitability, and we may be unsuccessful in our efforts to maintain or increase our manufacturing efficiency. Our manufacturing processes are highly complex, require advanced and costly equipment and are continually being modified in an effort to improve yields and product performance. We have from time to time experienced difficulty in beginning production at new facilities or in effecting transitions to new facilities or new manufacturing processes. As a consequence, we have at times experienced delays in product deliveries and reduced yields. We may experience manufacturing problems in achieving acceptable yields or experience product delivery delays in the future as a result of, among other things, capacity constraints, construction delays, upgrading or expanding existing facilities or changing our process technologies, any of which could result in a loss of future revenues. Although thus far our Optimisation Program has proceeded on schedule, our operating results also could be adversely affected by increased costs and expenses related to relocation of production between our facilities if we encounter difficulties or delays or a technical or regulatory nature, including any issues related to government or customer qualification of our other facilities and production lines for the production of hi-rel products.

Interruptions, delays or cost increases affecting our materials, parts, equipment or subcontractors may impair our competitive position.

Our manufacturing operations, and the outside manufacturing operations, which we use increasingly, depend upon obtaining, in some instances, a governmental qualification of the manufacturing process, and in all instances, adequate supplies of materials, parts and equipment, including silicon, mold compounds and lead frames, on a timely basis from third parties. Some of the outside manufacturing operation we use are based in foreign countries. Our results of operations could be adversely affected if we are unable to obtain adequate supplies of materials, parts and equipment in a timely manner or if the costs of materials, parts or equipment increase significantly. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. Although we generally use materials, parts and equipment available from multiple suppliers, we have a limited number of suppliers for some materials, parts and equipment. While we believe that alternate suppliers for these materials, parts and equipment are available, an interruption could adversely affect our operations.

Some of our products are manufactured, assembled and tested by third-party subcontractors. Some of these contractors are based in foreign countries. We generally do not have any long-term agreements with these subcontractors. As a result, we may not have direct control over product delivery schedules or product quality. Outside manufacturers generally will have longer lead times for delivery of products as compared with our internal manufacturing, and therefore, when ordering from these suppliers, we will be required to make longer-term estimates of our customers’ current demand for products, and these estimates are difficult to make. Also, due to the amount of time typically required to qualify assemblers and testers, we could experience delays in the shipment of our products if we are forced to find alternate third parties to assemble or test our products. Any product delivery delays in the future could have a material adverse effect on our operating results, financial condition and cash flows. Our operations and ability to satisfy customer obligations could be adversely affected if our relationships with these subcontractors were disrupted or terminated.

We depend on third party subcontractors in Asia for assembly and packaging of a portion of our products. The packaging of our products is performed by a limited group of subcontractors and some of the raw materials included in our products are obtained from a limited group of suppliers. Although we seek to reduce our dependence on sole or limited source suppliers, disruption or termination of any of these sources could occur and such disruptions or terminations could harm our business and operating results. In the event that any of our subcontractors were to experience financial, operational, production or quality assurance difficulties resulting in a reduction or interruption in supply to us, our operating results could suffer until alternate subcontractors, if any, were to become available.

We anticipate that many of our next-generation products may be manufactured by third party subcontractors in Asia, and to the extent that such potential manufacturing relationships develop, they may be with a limited group of manufacturers. Therefore, any disruptions or terminations of manufacturing could harm our business and operating results. Also these subcontractors must be qualified by U.S. government or customer for hi-rel processes. Historically DSCC has rarely qualified any foreign manufacturing or assembly lines for reasons of national security; therefore, our ability to move manufacturing offshore may be limited or delayed.

Fixed costs may reduce operating results if our sales fall below expectations.

Our expense levels are based, in part, on our expectations as to future sales. Many of our expenses, particularly those relating to capital equipment and manufacturing overhead, are relatively fixed. Decreases in lead times between orders and shipments and customers’ ordering practices could adversely affect our ability to project future sales. We might be unable to reduce spending quickly enough to compensate for reductions in sales. Accordingly, shortfalls in sales could materially and adversely affect our operating results.

Reliance on government contracts for a portion of our sales could have a material adverse effect on results of operations.

Some of our sales are derived from customers whose principal sales are to the United States Government. If we experience significant reductions or delays in procurements of our products by the United States Government or terminations of government contracts or subcontracts, our operating results could be materially and adversely affected. Generally, the United States Government and its contractors and subcontractors may terminate their contracts with us for cause or for convenience. We have in the past experienced one termination of a contract due to the termination of the underlying government contracts. All government contracts are also subject to price renegotiation in accordance with U.S. Government Renegotiation Act. By reference to such contracts, all of the purchase orders we receive that are related to government contracts are subject to these possible events. There is no guarantee that we will not experience contract terminations or price renegotiations of government contracts in the future. A significant portion of our sales are to military and aerospace markets, which are subject to the uncertainties of governmental appropriations and national defense policies and priorities. These sales are derived from direct and indirect business with the U.S. Department of Defense, or DOD, and other U.S. government agencies. From time to time, we have experienced declining defense-related sales, primarily as a result of contract award delays and reduced military program funding. Military-related business is and has been anticipated to increase; however, the actual timing and amount of an increase has been occurring at a rate that has been slower than expected. The effects of defense spending increases are difficult to estimate and subject to many sources of delay. Our prospects for additional defense-related sales may be adversely affected in a material manner by numerous events or actions outside our control.

There may be unanticipated costs associated with increasing our capacity.

We anticipate that future growth of our business could require increased manufacturing capacity. Expansion activities are subject to a number of risks, including:

•

Unavailability or late delivery of the advanced, and often customized, equipment used in the production of our products;

•

Delays in bringing new production equipment on-line;

•

Delays in supplying products to our existing customers; and

•

Unforeseen environmental or engineering problems relating to existing or new facilities.

These and other risks may affect the ultimate cost and timing of our present or future expansion of our capacity.

We could potentially lose the services of any of our senior management personnel at any time due to possible reasons that could include death, incapacity, calamity, military service, retirement, resignation or competing employers. Our execution of current plans would be adversely affected by the loss. We may fail to attract and retain qualified technical, sales, marketing and managerial personnel required to continue to operate our business successfully.

Our future success depends, in part, upon our ability to continue to retain the services of our executive officers. That success also depends upon our ability to attract and retain other highly qualified technical, sales, marketing and managerial personnel. Personnel with the necessary expertise are scarce and competition for personnel with proper skills is intense. Also, attrition in personnel can result from, among other things, changes related to acquisitions, as well as retirement or disability. We may not be able to retain existing key technical, sales, marketing and managerial employees or be successful in attracting, assimilating or retaining other highly qualified technical, sales, marketing and managerial personnel, particularly at such times in the future as we may need to do so to fill a key position. If we are unable to continue to retain existing executive officers or other key employees or are unsuccessful in attracting new highly qualified employees, our business, financial condition and results of operations could be materially and adversely affected.

Failure to manage consolidation of operations effectively could adversely affect our ability to increase revenues and improve earnings.

Our ability to successfully offer our products in the semiconductor market requires effective planning and management processes. Our Capacity Optimization Enhancement Program, with consolidations and realignments of operations, and expected future growth, may place a significant strain on our management systems and resources, including our financial and managerial controls, reporting systems and procedures. In addition, we will need to continue to train and manage our workforce worldwide.

We may engage in future acquisitions that dilute the ownership interests of our stockholders and cause us to incur debt or to assume contingent liabilities.

As a part of our business strategy, we expect to review acquisition prospects that would complement our current product offerings, enhance our design capability or offer other growth opportunities. While we have no current agreements and no active negotiations underway with respect to any acquisitions, we may acquire businesses, products or technologies in the future. In the event of future acquisitions, we could:

•

Use a significant portion of our available cash;

•

Issue equity securities, which would dilute current stockholders’ percentage ownership;

•

Incur substantial debt;

•

Incur or assume contingent liabilities, known or unknown;

•

Incur impairment charges related to goodwill or other intangibles; and

•

Incur large, immediate accounting write-offs.

Such actions by us could impact our operating results and/or the price of our common stock.

We have acquired and may acquire other companies and may be unable successfully to integrate such companies with existing operations.

We have in the past acquired a number of businesses or companies, and additional product lines and assets. We may continue to expand and diversify our operations with additional acquisitions. If we are unsuccessful in integrating these companies or product lines with existing operations, or if integration is more difficult or more costly than anticipated, we may experience disruptions that could have a material adverse effect on our business, financial condition and results of operations. Some of the risks that may affect our ability to integrate or realize any anticipated benefits from the acquired companies, businesses or assets include those associated with:

•

Unexpected losses of key employees or customers of the acquired company;

•

Conforming the acquired company’s standards, processes, procedures and controls with our operations;

•

Coordinating new product and process development;

•

Hiring additional management and other critical personnel;

•

Increasing the scope, geographic diversity and complexity of our operations;

•

Difficulties in consolidating facilities and transferring processes and know-how;

•

Other difficulties in the assimilation of acquired operations, technologies or products;

•

Diversion of management’s attention from other business concerns; and

•

Adverse effects on existing business relationships with customers.

We have closed, combined, sold or disposed of certain subsidiaries or divisions, which has reduced our sales volume.

Since the beginning of fiscal year 2001, we closed Microsemi PPC Inc. and ceased the operations at Microsemi (H.K.) Ltd. (Hong Kong). We sold the business of Microsemi RF Products, Inc. in fiscal year 2002, which management believes would have contributed revenues of approximately $9.0 million to $11.0 million per year to our consolidated revenues. We sold our Carlsbad design center in September 2002 and our equity interest in Semcon Electronics Private Limited of Mumbai, India in October 2002. In October 2003, we announced the consolidation of Microsemi Corp. - Santa Ana, of Santa Ana, California (“Santa Ana”). Santa Ana represented approximately 20% of our annual revenues in fiscal 2003, had approximately 380 employees and occupies 123,000 square feet facilities. The consolidation of Santa Ana is expected to result in minimal impact on revenues; however, our plans to minimize or eliminate any loss of revenues during consolidation may not be achieved if the consolidation is managed or executed ineffectively or inefficiently.

We may consolidate, close or sell additional facilities, possibly resulting in loss of revenues and net income. We may be unsuccessful in our efforts to consolidate our business into fewer facilities and retain all of our revenues and income of those operations. While we hope to increase our manufacturing capacity utilization rates at remaining operations, the remaining operations will bear the corporate administrative and overhead costs that had been allocated to the discontinued business units.

Our products may be found to be defective and we may not have sufficient liability insurance.

One or more of our products may be found to be defective after we have already shipped the products in volume, requiring a product replacement or recall. We may also be subject to product returns that could impose substantial costs and have a material and adverse effect on our business, financial condition and results of operations. Our aerospace (including aircraft), military, medical and satellite businesses in particular expose us to potential liability risks that are inherent in the manufacturing and marketing of high reliability electronic components for critical applications. Production of many of these products is sensitive to minute impurities, which can be introduced inadvertently in manufacture. Any production mistakes can result in large and unanticipated product returns, product liability and warranty liability.

We may be subject to product liability claims with respect to our products. Our product liability insurance coverage may be insufficient to pay all such claims. Product liability insurance may become too costly for us or may become unavailable to us in the future. We may not have sufficient resources to satisfy any product liability claims not covered by insurance which would materially and adversely affect our financial position.

Environmental liabilities could adversely impact our financial position.

Federal, state and local laws and regulations impose various restrictions and controls on the discharge of materials, chemicals and gases used in our semiconductor manufacturing processes. In addition, under some laws and regulations, we could be held financially responsible for remedial measures if our properties are contaminated or if we send waste to a landfill or recycling facility that becomes contaminated, even if we did not cause the contamination. Also, we may be subject to common law claims if we release substances that damage or harm third parties. Further, future changes in environmental laws or regulations may require additional investments in capital equipment or the implementation of additional compliance programs in the future. Any failure to comply with environmental laws or regulations could subject us to significant liabilities and could have a material adverse effect on our operating results and financial condition.

In the conduct of our manufacturing operations, we have handled and do handle materials that are considered hazardous, toxic or volatile under federal, state and local laws. The risk of accidental release

of such materials cannot be completely eliminated. In addition, we operate or own facilities located on or near real property that was formerly owned and operated by others. These properties were used in ways that involved hazardous materials. Contaminants may migrate from or within or through property. These risks may give rise to claims. Where third parties are responsible for contamination, the third parties may not have funds, or make funds available when needed, to pay remediation costs imposed under environmental laws and regulations.

In Broomfield, Colorado, the owner of a property located adjacent to a manufacturing facility owned by a subsidiary of ours had notified the subsidiary and other parties, of a claim that contaminants migrated to his property, thereby diminishing its value. In August 1995, the subsidiary, together with Coors Porcelain Company, FMC Corporation and Siemens Microelectronics, Inc. (former owners of the manufacturing facility), agreed to settle the claim and to indemnify the owner of the adjacent property for remediation costs. Although TCE and other contaminants previously used by former owners at the facility are present in soil and groundwater on the subsidiary’s property, we vigorously contest any assertion that the subsidiary caused the contamination. In November 1998, we signed an agreement with the three former owners of this facility whereby they have 1) reimbursed us for $530,000 of past costs, 2) assumed responsibility for 90% of all future clean-up costs, and 3) promised to indemnify and protect us against any and all third-party claims relating to the contamination of the facility. An Integrated Corrective Action Plan was submitted to the State of Colorado. Sampling and management plans were prepared for the Colorado Department of Public Health & Environment. State and local agencies in Colorado are reviewing current data and considering study and cleanup options. The most recent forecast estimated that the total project cost, up to the year 2020, would be approximately $5,300,000; accordingly, we recorded a charge of $530,000 for this project in fiscal year 2003. There has not been any significant development since September 28, 2003.

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

Our headquarters and two of our major operating facilities, and certain other critical business operations are located near earthquake fault lines. We presently do not have earthquake insurance. We could be materially and adversely affected in the event of a major earthquake.

Delaware law and our charter documents contain provisions that could discourage or prevent a potential takeover of Microsemi that might otherwise result in our stockholders receiving a premium over the market price for their shares.

Provisions of Delaware law and our certificate of incorporation and bylaws could make the acquisition more difficult by means of a tender offer, a proxy contest, or otherwise, and the removal of incumbent officers and directors. These provisions include:

•

The Shareholder Rights Plan, which provides that an acquisition of 20% or more of the outstanding shares without our Board’s approval or ratification results in dilution to the acquiror;

•

Section 203 of the Delaware General Corporation Law, which prohibits a merger with a 15%-or- greater stockholder, such as a party that has completed a successful tender offer, until three years after that party became a 15%-or-greater stockholder; and

•

The authorization in the certificate of incorporation of undesignated preferred stock, which could be issued without stockholder approval in a manner designed to prevent or discourage a takeover or in a way that may dilute an investment in the Common Stock.

In connection with our charter, we have a Shareholder Rights Plan, and each share of Common Stock, par value $0.20, entitles the holder to one redeemable and cancellable Right (not presently exercisable) to acquire a fractional share of Series A Junior Participating Preferred Stock, under the terms and conditions as set forth in a Shareholder Rights Agreement. The existence of the Rights may make more difficult or impracticable for hostile change of control of us, which therefore may affect the anticipated return on an investor’s investment in the Common Stock.

We may have increasing difficulty to attract and hold outside Board members.

The directors and management of publicly traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and shareholder claims, as well as governmental and creditor claims which may be made against them in connection with their positions with publicly-held companies. Outside directors are becoming increasingly concerned with the availability of directors and officer’s liability insurance to pay on a timely basis the costs incurred in defending shareholder claims. Directors and officers liability insurance has recently become much more expensive and difficult to obtain than it had been. It has become increasingly more difficult to attract and retain qualified outside directors to serve on our Board.

We may not make the sales that are indicated by order rates or our book-to-bill ratio and book-to-bill ratio may become less meaningful.

Lead times for the release of purchase orders depend upon the scheduling practices of individual customers, and delivery times of new or non-standard products can be affected by scheduling factors and other manufacturing considerations. The rate of booking new orders can vary significantly from month to month. Customers frequently change their delivery schedules or cancel orders. For these reasons, our book-to-bill ratio may not be an indication of future sales.

The percentage of our business represented by space/satellite and military products may decline. If this occurs, we anticipate that our book-to-bill ratio will become less meaningful. Our space/satellite business is characterized by long lead times; however, our other end markets tend to place orders with short lead times. Prospective investors should not place undue reliance on our book-to-bill ratios or changes in book-to-bill ratios. We determine bookings based on orders that are scheduled for delivery within 12 months.

There may be some potential effects of system outages.

Risks are presented by electrical or telecommunications outages, computer hacking or other general system failure. We rely heavily on our internal information and communications systems and on systems or support services from third parties to manage our operations efficiently and effectively. Any of these are subject to failure. System-wide or local failures that affect our information processing could have material adverse effects on our business, financial condition, results of operations and cash flows. In addition, insurance coverage for the risks described above may be unavailable. Our plans are to further upgrade and integrate our enterprise information systems, which may cause additional strains on personnel and system resources or potential system outages.

There may be impairments of long-lived assets that would adversely affect Microsemi.

We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use.

Our long-lived assets subject to this evaluation include property, plant and equipment and amortizable intangible assets.

We are required to make judgments and assumptions in identifying those events or changes in circumstances that may trigger impairment. Some of the factors we consider include:

•

Significant decrease in the market value of an asset.

•

Significant changes in the extent or manner for which the asset is being used or in its physical condition.

•

A significant change, delay or departure in our business strategy related to the asset.

•

Significant negative changes in the business climate, industry or economic conditions.

•

Current period operating losses or negative cash flow combined with a history of similar losses or a forecast that indicates continuing losses associated with the use of an asset.

An evaluation under FAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” includes an analysis of estimated future undiscounted net cash flows that the assets are expected to generate over

their remaining estimated useful lives. If the estimated future undiscounted net cash flows are insufficient to recover the carrying value of the assets over the remaining estimated useful lives, we will record an impairment loss in the amount by which the carrying value of the assets exceeds the fair value. As a result of our analysis, we will record a charge when we determine that our amortizable intangible assets or other long-lived assets have been impaired. Any such impairment charge could be significant and could have a material adverse effect on our financial position and results of operations. Major factors that influence our cash flow analysis are our estimates for future revenue and expenses associated with the use of the asset. Different estimates could have a significant impact on the results of our evaluation.

Potential impairment of existing long-lived assets and of long-lived assets that we acquire in the future, could also affect our future results of operations and balances in a similar way.

There may be goodwill impairments that would adversely affect Microsemi.

All public companies have been required to adopt Statement of Financial Accounting Standards No. 142 (“SFAS 142”), which changed the accounting for goodwill from an amortization method to an impairment-only approach. We adopted this standard at the beginning of fiscal year 2003. Consequently, goodwill and other intangible assets with indefinite lives are no longer being amortized, while those intangible assets with known useful lives will continue to be amortized over their respective useful lives. At least annually, we are required to reassess goodwill. If we determine that impairment exists, we will record a charge to earnings and a reduction in goodwill on our balance sheet. Whenever we determine that there has been an impairment of goodwill or other intangible assets with indefinite lives, we will record an impairment loss equal to the excess of the carrying value of goodwill over its then fair value. The identification of intangible assets and determination of the fair value and useful lives of goodwill and other intangible assets are subjective in nature and often involve the use of significant estimates and assumptions. The judgments made in determining the estimated useful lives assigned to each class of assets can significantly affect net income.

At June 27, 2004 we had $3.3 million of goodwill; however, up to 100% of goodwill could be determined to be impaired during the evaluations required by FAS 142.

Significant accounting policies have material effects on our calculations and estimations of amounts of major items in our financial statements.

Our operating results may be affected to the extent actual results differ from accounting estimates.

We base our critical accounting policies, including our policies regarding revenue recognition, reserves for returns, rebates, price protections, and bad debt and inventory valuation, on various estimates and judgments that we may make from time to time.

We record reductions to revenue for estimated allowances such as returns, rebate and competitive pricing programs. If actual returns, rebate and/or pricing adjustments exceed estimates, additional reductions to revenue would result.

Credit losses have been generally within our expectations and the established provisions; however, significant deterioration in the liquidity or financial position of any of our major customers or any group of our customers could have a material adverse impact on the collectibility of our accounts receivable and our future operating results.

Historically, the net realizable value of our inventories has generally been within our estimates. However, if we are not able to meet our sales expectations, or if market conditions deteriorate significantly from our estimates, reductions in the net realizable value of our inventories could have a material adverse impact on future operating results.

We use APB Opinion No. 25 to account for equity compensation, which may not fully reflect the economic consequences of granting options or other equity compensation.

There is more than one way under Generally Accepted Accounting Principles to account for the economic consequences of granting options or other equity compensation, and many accounting experts believe that charging earnings pursuant to FASB Statement 123 (“FASB 123”), as amended by FASB Statement 148 (“FAS 148”) would account better for the economic consequences of granting an option or other equity compensation than APB Opinion No. 25 (“APB 25”) would. We account for employee options for financial and accounting purposes under APB 25, which does not count the grant of stock or options as an expense in the way that FASB 123 would. The latter standard allows an option to charge to earnings the value arising from the grant of stock options. These compensation charges are not included in our financial statements, except for the disclosure required by FASB 123, as amended that we have set forth in Note 7. We have adopted FASB 123, as amended to the extent that it requires disclosure in the notes.

The volatility of our stock price could affect the value of an investment in our stock and our future financial position.

The market price of our stock has fluctuated widely. Between September 29, 2003 and June 27, 2004, the price of our common stock ranged between a low of $7.38 and a high of $17.10. The current market price of our common stock may not be indicative of future market prices, and we may not be able to sustain or increase the value of our common stock. Declines in the market price of our stock could adversely affect our ability to retain personnel with higher-priced stock incentives, to acquire businesses or assets in exchange for stock and/or to conduct future financing activities with the sale of stock.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from adverse changes in foreign currency exchange rates, interest rates, and stock market. We are exposed to various market risks, related to changes in foreign currency exchange rates and changes in interest rates.

We conduct business in a number of foreign currencies, principally those of Europe and Asia, directly or in our foreign operations. We may receive some revenues in foreign currencies and purchase some inventory and services in foreign currencies. Accordingly, we are exposed to transaction gains and losses that could result from changes in exchange rates of foreign currencies relative to the U.S. dollar. Transactions in foreign currencies have represented a relatively small portion of our business. Also these currencies have been relatively stable against the U.S. dollar for the past several years. As a result, foreign currency fluctuations have not had a material impact historically on our revenues or results of operations. There can be no assurance that those currencies will remain stable relative to the U.S. dollar or that future fluctuations in the value of foreign currencies will not have material adverse effects on our results of operations, cash flows or financial condition. The largest foreign currency exposure of ours results from activity in British pounds and the European Union Euro. We have not conducted a foreign currency hedging program thus far. We have and may continue to consider the adoption of a foreign currency hedging program.

We did not enter into derivative financial instruments and did not enter into any other financial instruments for trading, speculative purposes or to manage our interest rate risk. Our other financial instruments consist primarily of cash, accounts receivable, accounts payable, and long-term obligations. Our exposure to market risk for changes in interest rates relates primarily to short-term investments and short-term obligations. As a result, we do not expect fluctuations in interest rates to have a material impact on the fair value of these instruments. We do not engage in transactions intended to hedge our exposure to changes in interest rates.

We currently have a $30,000,000 revolving line of credit, which expires in March 2006. At June 27, 2004, $400,000 was utilized for a letter of credit; consequently, $29,600,000 was available under this line of credit. It bears interest at the bank’s prime rate plus 0.75% to 1.5% per annum or, at our option, at the Eurodollar rate plus 1.75% to 2.5% per annum. The interest rate is determined by the ratio of total funded debt to Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”). For instance, if we were to borrow presently the entire $30,000,000 from this credit line, a one-percent increase in the interest rate would result in an additional $300,000 of pre-tax interest expense annually.

Item 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Our Chief Executive Officer and Chief Financial Officer, with the assistance of other management, conducted an evaluation of our disclosure controls and procedures as of the end of the period covered by this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

(b) Changes in internal control over financial reporting.

During our third fiscal quarter, there have been no significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We review our internal controls for effectiveness on an ongoing basis, including routine reviews during the period covered by this Report. We plan to continue our review process, as part of our future evaluation of our disclosure controls and procedures and internal controls.

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

In our most recent Form 10-K as filed with the SEC on December 19, 2003, or our Forms 10-Q as filed on February 10, 2004 and May 12, 2004, respectively, we previously reported litigation in which we are involved, and no material changes in such litigation occurred during the fiscal period that is the subject of this report on Form 10-Q.

We are also involved from time to time in ordinary routine litigation incidental to our business, none of which, individually or collectively, involves claims for damages that would be material to our financial condition.

Item	2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

Inapplicable

Item 3. DEFAULTS UPON SENIOR SECURITIES

Inapplicable

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

Item 5. OTHER INFORMATION

None

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits:

Certifications pursuant to Exchange Act Rule 13a-14(a)

Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350

(b)

Reports on Form 8-K:

We furnished the SEC with a Form 8-K on April 22, 2004, under Item 7 and Item 9 (relating to Item 12), attaching the news release related to our earnings for the quarter ended March 28, 2004.

We furnished the SEC with a Form 8-K on July 22, 2004, under Item 7 and Item 12, attaching the news release related to our earnings for the quarter ended June 27, 2004.

The Company’s web site address is http://www.microsemi.com. Company filings with the SEC on Form 10-K, 10-Q and 8-K, and amendments, are made accessible on such web site as soon as practicable and always free of charge. Such web site is not intended to constitute any part of this report.

SIGNATURES

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


	MICROSEMI CORPORATION

DATED: August 5, 2004	By:	/s/ David R. Sonksen
		David R. Sonksen
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer and Chief Accounting Officer and duly authorized to sign on behalf of the Registrant)

EXHIBIT INDEX


Ex. No.		Exhibit Description
10.91		Board Member Retirement Process (1)


Retiree	Annual rate
Chairman	$	20,000
Other Directors	$	10,000


31		Certifications pursuant to Exchange Act Rule 13a-14(a)

32		Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350

(1)	Incorporated by reference to the indicated Exhibit to the Registrant’s Annual Report on Form 10-K filed on December 19, 2002 with the Commission for the fiscal year ended September 29, 2002.