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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended October 31, 2004

or

For the transition period from              to             

Commission file number 1-6395

SEMTECH CORPORATION

(Exact name of registrant as specified in its charter)

200 Flynn Road, Camarillo, California, 93012-8790

(Address of principal executive offices, Zip Code)

Registrant’s telephone number, including area code: (805) 498-2111

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 has 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  ¨

Number of shares of Common Stock, $0.01 par value per share, outstanding at November 30, 2004: 74,062,436

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SEMTECH CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(in thousands, except per share data)

(Unaudited)

See accompanying notes.

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SEMTECH CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except share data)

See accompanying notes.

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SEMTECH CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

See accompanying notes.

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SEMTECH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated condensed financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K. Certain amounts for prior periods have been reclassified to conform to the current presentation.

In the opinion of the Company, these unaudited statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Semtech Corporation and subsidiaries as of October 31, 2004, and the results of their operations for the third quarter and the three quarters then ended and their cash flows for the three quarters then ended.

The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any subsequent period or for the entire year.

Fiscal Year

The Company reports on the basis of fifty-two and fifty-three week periods and ends its fiscal year on the last Sunday in January. All quarters consist of thirteen weeks, except for one fourteen-week quarter in 53-week years. The other quarters generally end on the last Sunday of April, July, and October. The fiscal year ended January 25, 2004 consisted of 52 weeks, with each quarter consisting of thirteen weeks. The fiscal year ending January 30, 2005 consists of 53 weeks, with the quarters ending in April 2004, July 2004 and January 2005 consisting of thirteen weeks and the quarter ending in October 2004 consisting of fourteen weeks.

Income Taxes

U.S. federal and state income taxes have not been provided for the undistributed earnings of the Company’s foreign operations. The Company policy is to leave the income permanently reinvested offshore. The amount of earnings designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in the Company’s offshore assets and expectations of the future cash needs of U.S. and foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be repatriated.

Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax basis of assets and liabilities, using the statutory marginal income tax rate in effect for the years in which the differences are expected to reverse. Deferred income tax expense or benefit is based on the changes in the deferred income tax assets or liabilities from period to period.

Management evaluates the deferred tax asset to determine whether it is more likely than not that the deferred tax asset will be realized. Realization of the net deferred tax asset is dependent on generating sufficient taxable income during the periods in which temporary differences will reverse. As a result of past permanent book-tax differences, the Company has generated substantial U.S. tax losses (NOL). The size of the deferred tax asset attributable to federal NOL’s and credit carryforwards, compared to the current projected levels of federal taxable income, has elevated the Company’s concern regarding the ability to fully utilize this deferred tax asset prior to expiration. Accordingly, the Company has established valuation reserves to address these concerns.

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Earnings Per Share

Basic earnings per common share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per common share incorporate the incremental shares issuable upon the assumed exercise of stock options. The weighted average number of shares used to compute basic earnings per share in the third quarters of fiscal years 2005 and 2004 were 74,000,000 and 73,704,000, respectively. The weighted average number of shares used to compute basic earnings per share in the first nine months of fiscal years 2005 and 2004 were 74,220,000 and 73,449,000, respectively. The weighted average number of shares used to compute diluted earnings per share in the third quarters of fiscal years 2005 and 2004 were 77,486,000 and 77,902,000, respectively. For the first nine months of fiscal years 2005 and 2004, the weighted average number of shares used to compute diluted earnings per share were 78,320,000 and 77,154,000, respectively.

Options to purchase approximately 3,559,000 and 3,049,000 shares, respectively, were not included in the computation of the third quarters of fiscal years 2005 and 2004 diluted net income per share because such options were considered anti-dilutive. Options to purchase approximately 3,207,000 and 5,442,000 shares, respectively, were not included in the computation of the first nine months of fiscal years 2005 and 2004 diluted net income per share because such options were considered anti-dilutive. Shares associated with the Company’s previously outstanding convertible subordinated notes were also not included in the computation of earnings per share as they were anti-dilutive.

Stock-Based Compensation

The Company accounts for its employee stock option plans under the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123.”

SFAS No. 123, as amended by SFAS No. 148, permits companies to recognize, as expense over the vesting period, the fair value of all stock-based awards on the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Because the Company’s stock-based compensation plans have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, management believes that the existing option valuation models do not necessarily provide a reliable single measure of the fair value of awards from the plan. Therefore, as permitted, the Company applies the existing accounting rules under APB No. 25 and provides pro forma net income and pro forma net income per share disclosures for stock-based awards made during the indicated period as if the fair value method defined in SFAS No. 123, as amended, had been applied. Net income and net income per share for the third quarters and first three quarters of fiscal years 2005 and 2004 would have been reduced to the following pro forma amounts:

The pro forma effect on net income for the third quarters and first three quarters of fiscal years 2005 and 2004 may not be representative of the pro forma effect on net income of future years because the SFAS No. 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to January 30, 1995.

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The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Option valuation models also require the input of highly subjective assumptions such as expected option life and expected stock price volatility.

Recently Issued Accounting Standards

On October 13, 2004, the Financial Accounting Standards Board (FASB) concluded that the Proposed Statement of Financial Accounting Standards, Share-Based Payment, which would require all companies to measure compensation cost for all share-based payments (including stock options) at fair value, would be effective for public companies for interim or annual periods beginning after June 15, 2005. The Company could adopt the new standard in one of two ways – the modified prospective transition method or the modified retrospective transition method. Assuming this new standard is implemented as scheduled, the Company will adopt this new standard in the third quarter of fiscal year 2006 and is currently evaluating the effect that the adoption of this standard will have on its financial position and results of operations.

2. Stock and Convertible Subordinated Debt Repurchase Programs

Prior Program

On January 4, 2001, the Company announced that its Board of Directors had approved a program to repurchase up to $50.0 million of its common stock and registered convertible subordinated notes. In fiscal year 2002, the Company indicated that its Board had authorized an additional $50.0 million in buybacks, increasing the total amount authorized under the buyback program to $100.0 million. In fiscal year 2003, the Company indicated that its Board had authorized an additional $100.0 million in buybacks, increasing the total amount authorized under the buyback program to $200.0 million. In the first quarter of fiscal year 2004, the Company indicated that its Board had authorized an additional $75.0 million in buybacks, increasing the total amount authorized under the buyback program to $275.0 million. On July 18, 2003 the Company called the remaining outstanding balance of convertible subordinated notes and amended the buyback program to authorize only the repurchase of common stock. This buyback program expired with $13.1 million of unused authorization on January 25, 2004.

As of January 25, 2004, the Company had repurchased 2,421,200 shares of its common stock at a cost of $49.4 million under this program. All repurchased shares of common stock have been reissued as a result of stock option exercises. As of January 25, 2004, the Company had repurchased 234,999 convertible subordinated notes (face value of $1,000 each) for $212.5 million in cash in open market transactions. The Company retired all repurchased notes and called the remaining convertible subordinated notes on July 18, 2003.

Current Program

In the first quarter of fiscal year 2005, the Company announced that its board of directors had approved a program to repurchase up to $50.0 million of its common stock.

In the third quarter of fiscal year 2005, the Company bought back 611,700 shares at a cost of $11.5 million and in the first three quarters of fiscal year 2005, 1,365,700 shares were bought back at a cost of $27.6 million. As of October 31, 2004, 83,567 of these shares have been reissued as a result of stock option exercises and the remaining 1,282,133 were being held as treasury shares.

3. Temporary and Long-Term Investments

Temporary and long-term investments consist of government, bank and corporate obligations. Temporary investments have original maturities in excess of three months, but mature within twelve months of the balance sheet date. Long-term investments have maturities in excess of one year from the date of the balance sheet.

The Company classifies its investments as “available for sale” because it expects to possibly sell some securities prior to maturity. The Company’s investments are subject to market risk, primarily interest rate and credit risk. The Company’s investments are managed by a limited number of outside professional managers within investment

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guidelines set by the Company. Such guidelines include security type, credit quality and maturity and are intended to limit market risk by restricting the Company’s investments to high quality debt instruments with relatively short-term maturities.

The Company included a $595,000 decline in unrealized loss and a $463,000 decline in unrealized gain, net of tax, in the comprehensive income portion of the Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the third quarters of fiscal years 2005 and 2004, respectively. For the first three quarters of fiscal years 2005 and 2004, $854,000 of increased unrealized loss and $1.6 million decline of unrealized gain, net of tax, was included in the comprehensive income portion of the Consolidated Statements of Stockholders’ Equity and Comprehensive Income, respectively.

Temporary and long-term investments consist of the following security types, stated at fair market value and book value, with the difference in these amounts booked as part of comprehensive income:

The Company realized interest income of $2.1 million and $1.1 million during the third quarters of fiscal years 2005 and 2004, respectively. For the first nine months of fiscal years 2005 and 2004, the Company realized interest income of $4.5 million and $6.3 million, respectively.

4. Inventories

Inventories consisted of the following:

5. Convertible Subordinated Notes

The Company no longer has any convertible subordinated notes outstanding. As described below, the Company called the remaining outstanding balance of its convertible subordinated notes in July 2003.

On February 14, 2000, the Company completed a private offering of $400.0 million principal amount of convertible subordinated notes that pay interest semiannually at a rate of 4 ¹/2% and were convertible into common stock at a conversion price of $42.23 per share. The notes were due on February 1, 2007 and were callable by the Company on or after February 6, 2003. Since the offering date, the Company had repurchased through a buyback program a portion of the convertible subordinated notes in open market transactions and on July 18, 2003, the Company called the remaining convertible subordinated notes.

In connection with the issuance of these convertible subordinated notes, the Company incurred $11.5 million in underwriter fees and other costs. The underwriter fees and other costs were amortized as interest expense using the effective interest method for outstanding notes and written off against the gain for those notes repurchased and retired prior to maturity. The Company used the net proceeds of the offering for general corporate purposes, including working capital, expansion of sales, marketing and customer service capabilities, and product development.

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For the first quarter of fiscal year 2005, there were no Company convertible subordinated notes outstanding and likewise, there was no interest expense associated with them. In the first quarter of fiscal year 2004, the Company incurred $2.4 million in interest expense associated with the convertible subordinated notes.

On July 18, 2003, the Company called the remaining $165.0 million outstanding balance of its convertible subordinated notes. The Company incurred a pre-tax charge related to the calling of the notes of $6.8 million or a net-of-tax impact of approximately 7 cents per diluted share in the second quarter of fiscal year 2004. The pre-tax charge was made up of a $4.2 million call premium and $2.6 million of non-cash expense associated with previously paid note issuance costs.

6. Commitments and Contingencies

On June 22, 2001, we were notified by the California Department of Toxic Substances Control (“State”) that we may have liability associated with the clean up of the one-third acre Davis Chemical Company site in Los Angeles, California. We have been included in the clean-up program because we are one of the companies that used the Davis Chemical Company site for waste recycling and/or disposal between 1949 and 1990. We have joined with other potentially responsible parties in an effort to resolve this matter with the State. The group has entered into a Consent Order with the State that requires the group to perform a soils investigation at the site and submit a draft remedial action plan. The group has also agreed to perform limited groundwater sampling. The State has the right to require the removal of contaminated soils and to expand the scope of work to include further investigation of groundwater contamination. The Consent Order does not require the group to remediate the site. To date, the Company’s share of the group’s expenses has not been material and has been expensed. At this time there is not a specific proposal or budget with respect to additional studies or the clean-up of the site. Thus, no reserve has been established for this matter.

In November 2003, the Company and other members of the Davis Chemical Site group received notices from Consumer Defense Group Action (“CDGA”) alleging violations of California’s Proposition 65 occurring in connection with the site. Proposition 65 prohibits the discharge of listed chemicals in a manner that reaches or threatens to reach a source of drinking waters and requires warnings on products or locations known to contain listed chemicals. The notice letter sent by the CDGA is a prerequisite for bringing a private enforcement action. Although the statutory notice period expired in January 2004, the Company is unaware of any lawsuit having been filed against it or any member of the group. No reserve has been established for this Proposition 65 matter.

The Company has operated at various locations throughout its history and may be subject to future statutory or contractual claims related to environmental matters. For example, certain contaminants have been found in the groundwater at the Company’s previously leased facility in Newbury Park, California. Monitoring results over a number of years indicate that contaminants are coming from an adjacent facility. It is currently not possible to determine the ultimate amount of possible future clean-up costs, if any, that may be required of the Company at this site or at any of its other past or present sites. Accordingly, no reserve for clean up of such sites has been provided at this time.

From time to time, claims are made against the Company by customers, suppliers, employees and others, including persons seeking payment based on the Company’s alleged use of their intellectual property. The Company is also periodically named as a defendant in lawsuits involving intellectual property and other matters that are routine to the nature of its business. Management is of the opinion that the ultimate resolution of all such pending matters will not have a material adverse effect on the accompanying consolidated financial statements. Other than the customer dispute resolved in March 2003, over at least the last decade the Company has not entered into any cash settlements with customers that have been material to its financial statements.

On March 28, 2003, the Company announced that it had resolved a customer dispute. Under the terms of the settlement, the Company agreed to pay the customer $12.0 million in cash in two equal annual installments, plus rebates on the future purchase of certain products by the customer over a two year period. The rebates, which can be up to 10%, are dependent upon the amount of eligible products the customer purchases. In the first quarter of fiscal

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year 2004, the Company made a $6.0 million cash payment to the customer, representing the first of two payments equaling the $12.0 million settlement. The second cash payment was made in the first quarter of fiscal year 2005. Amounts accrued for the rebates during fiscal year 2004 and through the third quarter of fiscal year 2005 have not been material. The Company is vigorously pursuing insurance coverage for the full value of the settlement but is unable to estimate the size of, if any, eventual insurance settlement or to give a tentative date for when an insurance settlement might be reached.

As an inducement for Jason Carlson, now Chief Executive Officer, to join the Company in 2002, the Company agreed that should his services be terminated by the Board of Directors, he will be granted a severance allowance equal to six months salary and benefits continuation upon signing of a non-compete agreement and a full release of all claims and obligations.

In the normal course of its business, the Company indemnifies other parties, including customers, distributors, and lessors, with respect to certain matters. These obligations typically arise under contracts under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to certain matters, such as acts or omissions of Company employees, infringement of third-party intellectual property rights, and certain environmental matters. The Company has also entered into agreements with its directors and some Company executives indemnifying them against certain liabilities incurred in connection with their duties, and the Company’s Certificate of Incorporation and Bylaws contain similar indemnification obligations with respect to the Company’s directors and employees. In some cases there are limits on and exceptions to the Company’s potential indemnification liability. The Company cannot estimate the amount of potential future payments, if any, that the Company might be required to make as a result of these agreements. Over at least the last decade, the Company has not incurred any significant expense as a result of agreements of this type. Accordingly, the Company has not accrued any amounts for such indemnification obligations. However, there can be no assurances that the Company will not incur expense under these indemnification provisions in the future.

Effective June 11, 1998, the Company’s Board of Directors approved a Stockholder Protection Agreement to issue a Right for each share of common stock outstanding on July 31, 1998 and each share issued thereafter (subject to certain limitations). These Rights, if not cancelled by the Board of Directors, can be exercised into a certain number of Series X Junior Participating Preferred Stock after a person or group of affiliated persons acquire 25% or more of the Company’s common stock and subsequently allow the holder to receive certain additional Company or acquirer common stock if the Company is acquired in a hostile takeover.

7. Product Warranty and Indemnification

The Company’s general warranty policy provides for repair or replacement of defective parts. In some cases a refund of the purchase price is offered. In certain instances the Company has agreed to warranty terms, including some indemnification provisions, that could prove to be significantly more costly.

The product warranty accrual, which is included in cost of sales, reflects the Company’s best estimate of probable liability under its product warranties. The Company accrues for known warranty issues if a loss is probable and can be reasonably estimated, and accrues for estimated incurred but unidentified issues based on historical experience. The following table details the change in the product warranty accrual for the first three quarters of fiscal year 2005.

If there is a substantial increase in the rate of customer claims, if the Company’s estimates of probable losses relating to identified warranty exposures prove inaccurate, or its efforts to contractually limit liability prove inadequate, the Company may record a charge against future cost of sales. Over at least the last decade, warranty expense has been immaterial to our financial statements.

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8. Business Segments and Concentrations of Risk

As of January 25, 2004, the Company operates in two reportable segments: Standard Semiconductor Products and Rectifier, Assembly and Other Products. The Rectifier, Assembly and Other Products segment has represented less than 10% of net sales for the last three fiscal years.

The Standard Semiconductor Products segment makes up the vast majority of overall sales and includes the power management, protection, test and measurement, advanced communications and human input device product lines. The Rectifier, Assembly and Other Products segment includes the Company’s line of assembly and rectifier devices, which are the remaining products from its original founding as a supplier into the military, aerospace and industrial equipment market. It also includes other products made up of custom integrated circuit and foundry sales.

The accounting policies of the segments are the same as those described above and in the Company’s Form 10-K for the year ended January 25, 2004 in the summary of significant accounting policies. The Company evaluates segment performance based on net sales and operating income of each segment. Management does not track segment data or evaluate segment performance on additional financial information. As such, there are no separately identifiable segment assets nor is there any separately identifiable statements of income data (below operating income).

The Company does not track or assign assets to individual reportable segments. Likewise, depreciation expense and capital additions are also not tracked by reportable segments.

In the third quarter of fiscal year 2005, one of the Company’s Asian distributors accounted for approximately 12% of net sales. This same distributor accounted for approximately 16% of net sales in the third quarter of fiscal year 2004. No end-customer accounted for 10% or more of net sales in the third quarter or first nine months of fiscal years 2005 or 2004.

As of October 31, 2004, one of the Company’s Asian distributors accounted for approximately 15% of net accounts receivable. Receivables from customers are not secured by any type of collateral.

A summary of net external sales by region follows. The Company does not track customer sales by region for each individual reporting segment.

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Long-lived assets located outside the United States as of October 31, 2004 and January 25, 2004 were approximately $18.2 million and $11.3 million, respectively. Some of these assets are at locations owned or operated by the Company’s suppliers in order to facilitate production for the Company.

The Company relies on a limited number of outside subcontractors and suppliers for silicon wafers, packaging and certain other tasks. Disruption or termination of supply sources or subcontractors could delay shipments and could have a material adverse effect on the Company. Several of the Company’s outside subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Malaysia, the Philippines and Germany. A significant amount of the Company’s assembly and test operations are conducted by third-party contractors in Malaysia and the Philippines, and the largest source of silicon wafers come from an outside foundry located in China.

9. Comprehensive Income

Comprehensive income consisted of the following:

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations together with the condensed financial statements and the notes to condensed financial statements included elsewhere in this Form 10-Q. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements, due to factors including, but not limited to, those set forth in the “Risk Factors and Forward Looking Statements” and “Quantitative and Qualitative Disclosure About Market Risk” sections of this Form 10-Q and the “Risk Factors” section of the our annual report on Form 10-K for the year ended January 25, 2004. We undertake no obligation to update any forward-looking statements after the date of this Form 10-Q.

Overview

We design, produce and market a broad range of products that are sold principally to customers in the computer, communications and industrial markets. Our products are designed into a wide variety of end-applications, including

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notebook and desktop computers, computer gaming systems, personal digital assistants (PDAs), cellular phones, wireline networks, wireless base stations and automated test equipment (ATE). Products within the communications market include products for local area networks, metro and wide area networks, cellular phones and base stations. Industrial applications include ATE, medical devices and factory automation systems. Our end-customers are primarily original equipment manufacturers and their suppliers, including Agilent, Cisco, Compal Electronics, Dell, Hewlett Packard, Intel, Lucky Goldstar, Microsoft, Motorola, Quanta Computer, Samsung Electronics, Samsung Display, Sony and Unisys.

We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. Product design and engineering revenue is recognized during the period in which services are performed. We defer revenue recognition on shipment of certain products to distributors where return privileges exist until the products are sold through to end-users. Gross profit is equal to our net sales less our cost of sales. Our cost of sales includes materials, depreciation on fixed assets used in the manufacturing process, shipping costs, direct labor and overhead. We determine the cost of inventory by the first-in, first-out method. Our operating costs and expenses generally consist of selling, general and administrative (SG&A), product development and engineering costs (R&D), costs associated with acquisitions, and other operating related charges.

Most of our sales to customers are made on the basis of individual customer purchase orders. Many large commercial customers include terms in their purchase orders, which provide liberal cancellation provisions. Trends within the industry toward shorter lead-times and “just-in-time” deliveries have resulted in our reduced ability to predict future shipments. As a result, we rely on orders received and shipped within the same quarter for a significant portion of our sales. Sales made directly to original equipment manufacturers during the third quarter fiscal year 2005 were 50% of net sales. The remaining 50% of net sales were made through independent distributors.

We divide and operate our business based on two reportable segments: Standard Semiconductor Products and Rectifier, Assembly and Other Products. We evaluate segment performance based on net sales and operating income of each segment. We do not track segment data or evaluate segment performance on additional financial information. We do not track balance sheet items by individual reportable segments. As such, there are no separately identifiable segment assets nor are there any separately identifiable statements of income data (below operating income). The Standard Semiconductor Products segment makes up the vast majority of overall sales and includes our power management, protection, test and measurement, advanced communications and human input device product lines. The Rectifier, Assembly and Other Products segment includes our line of assembly and rectifier devices, which are the remaining products from our founding as a supplier into the military and aerospace market. It also includes other products made up of custom integrated circuits and foundry sales.

Our business involves reliance on foreign-based entities. Most of our outside subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Malaysia, the Philippines and Germany. For the third quarter of fiscal year 2005, approximately 63% of our silicon in terms of finished wafers, was supplied by a third-party foundry in China, and this percentage could be even higher in future periods. For fiscal year 2004, approximately 62% of our silicon in terms of finished wafers were supplied by this third-party foundry in China. Foreign sales for third quarter of fiscal year 2005 constituted approximately 78% of our net sales. More than 90% of foreign sales in the third quarter of fiscal year 2005 were to customers located in the Asia-Pacific region. The remaining sales were to customers in Europe.

In the past, we have made several small acquisitions in order to increase our pool of skilled technical personnel and penetrate new market segments such as test and measurement, advanced communications and system management devices. These acquisitions include: USAR Systems Incorporated; Practical Sciences, Inc.; Acapella Limited; and Edge Semiconductor. The acquisitions of USAR, Acapella and Edge were accounted for as poolings of interests.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

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On an ongoing basis, we evaluate and discuss with our audit committee our estimates, including those related to our allowance for doubtful accounts and sales returns, inventory reserves, asset impairments and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Our critical accounting policies and estimates do not vary between our two reportable segments. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies, among others, affect the significant judgments and estimates we use in the preparation of our consolidated financial statements:

Accounting for Temporary and Long-Term Investments

Our temporary and long-term investments consist of government, bank and corporate obligations. Temporary investments have original maturities in excess of three months, but mature within twelve months of the balance sheet date. Long-term investments have maturities in excess of one year from the date of the balance sheet. We classify our investments as “available for sale” because we expected to possibly sell some securities prior to maturity. We included a $595,000 decline in the unrealized loss and $463,000 of decline in the unrealized gain, net of tax, in the comprehensive income portion of the Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the third quarters of fiscal years 2005 and 2004, respectively. For the first three quarters of fiscal years 2005 and 2004, $854,000 of increased unrealized loss and $1.6 million decline of unrealized gain, net of tax, was included in the comprehensive income portion of the Consolidated Statements of Stockholders’ Equity and Comprehensive Income, respectively.

Allowance for Doubtful Accounts

We evaluate the collectibility of our accounts receivable based on a combination of factors. If we are aware of a customer’s inability to meet its financial obligations to us, we record an allowance to reduce the net receivable to the amount we reasonably believe we will be able to collect from the customer. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and our historical experience. If the financial condition of our customers were to deteriorate or if economic conditions worsen, additional allowances may be required in the future.

Revenue Recognition

We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. Product design and engineering revenue is recognized during the period in which services are performed. We defer revenue recognition on shipment of certain products to distributors where return privileges exist until the products are sold through to end-users. In addition, we record a provision for estimated sales returns in the same period as the related revenues are recorded.

We do not sell software as a finished product. The very limited amount of software development we perform relates to software embedded in some of our finished semiconductor products (sometimes called firmware, since it is part of the circuit). We offer no post-sale support on firmware products outside of the same ordinary-course customer service we provide for our other products.

Other than distributor return privileges (accounted for as indicated above), product warranty obligations and limited price concessions in the form of occasional volume pricing and rebates, we have no post-shipment obligations to our customers. In the cases of warranty obligations, we accrue the estimated costs of performing such warranty obligations. In the cases of volume pricing and rebates, such amounts are estimated and accrued upon shipment and the reported revenue is net of any such amounts.

We base estimates of sales returns, warranty obligations, volume pricing and rebates on historical data and other known factors. Actual amounts could be different from our estimates and current provisions, resulting in future charges to earnings.

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Inventory Valuation

Our inventories are stated at lower of cost or market and consist of materials, labor and overhead. We determine the cost of inventory by the first-in, first-out method. At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand. In order to state our inventory at lower of cost or market, we maintain reserves against our inventory. If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in cost of goods sold in the period the revision is made.

In the second quarter of fiscal year 2002, we had one-time costs of $14.0 million for the write-down of inventory and discontinuation of certain products as a result of a severe industry downturn and a related substantial drop in demand from end-customers, which indicated that certain products carried in our inventory were non-saleable as they were excess and/or obsolete. We wrote down our inventory by completely writing off the non-saleable products. In cases where written-off products were subsequently sold, we have disclosed such amounts in the discussion of the results of operations. Some of the written-off inventory has been destroyed.

Contingencies and Litigation

We are involved in various disputes and litigation matters as a claimant and as defendant. We record any amounts recovered in these matters when collection is certain. We record liabilities for claims against us when the losses are probable and estimable. Any amounts recorded are based on reviews by outside counsel, in-house counsel and management. Actual results may differ from estimates.

Accounting for Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items such as deferred revenue for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. Management evaluates our deferred tax asset as to whether it is likely that the deferred tax asset will be realized. If management ever determined that our deferred tax asset was not likely to be realized, a write-down of that asset would be required and would be reflected as a cost in the accompanying period.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, our statements of operations data expressed as a percentage of revenues.

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Comparison Of The Third Quarters Ended October 31, 2004 and October 26, 2003

We report on the basis of fifty-two and fifty-three week periods and end our fiscal year on the last Sunday in January. All quarters consist of thirteen weeks, except for one fourteen-week quarter in 53-week years. The third quarter of fiscal year 2005 was made up of fourteen weeks, while the third quarter of fiscal year 2004 was made up of thirteen weeks.

Net Sales. Net sales for the third quarter of fiscal year 2005 were $65.0 million, an increase of 35% compared to $48.1 million for the third quarter of fiscal year 2004. Overall macro-economic and semiconductor industry conditions were stronger in the third quarter of fiscal year 2005 compared to the prior year period. End-application demand for our products in the third quarter of fiscal year 2005 compared to the prior year period was strongest in the areas of cellular phones, communications infrastructure equipment and military/industrial, all of which were up approximately 70% or higher over the same period last year. The notebook computer segment was up about 25% over the prior year period. Sale of products used in automated test equipment were down about 8% compared to the prior year. The weakest demand was from the desktop computer, which was down about 15% compared to the prior year period and the computer gaming and graphics segments that were down approximately 45% and 80%, respectively. Sales by major end-markets are detailed below and are based on estimations by us.

Standard Semiconductor Products represented 96% of net sales in the third quarter of fiscal year 2005, while 4% were represented by the Rectifier, Assembly and Other Products segment. Sales of our Standard Semiconductor Products segment were 95% of net sales in the third quarter of fiscal year 2004 and Rectifier, Assembly and Other Products’ sales were 5%. Sales of Standard Semiconductor Products increased 36% in the third quarter of fiscal year 2005 as compared to the prior year period. Sales of Rectifier, Assembly and Other Products increased 20% in the third quarter of fiscal year 2005 as compared to the prior year period.

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The increase in sales of Standard Semiconductor Products in the third quarter of fiscal year 2005 reflected general strength in the end-markets of computing, communications and industrial. Sales of our Rectifier, Assembly and Other Products, which are mostly sold into military and industrial applications (part of the end-market of “Industrial/Other”) increased in the third quarter of fiscal year 2005 compared to the prior year period due to improved demand from industrial and military customers. These products are older technology products and other non-strategic product offerings, which we have de-emphasized due to their lower revenue and margin opportunities.

Gross Profit. Gross profit for the third quarter of fiscal year 2005 was $37.2 million, compared to $27.9 million for the prior year period. The increase was due to a 35% increase in sales that was only slightly offset by a decline in gross margin to 57%, down from 58% in the prior year third quarter.

In the third quarter of fiscal year 2005, we sold $63,000 of previously written-off inventory and $157,000 of previously written-off inventory was sold in the third quarter of fiscal year 2004.

The decline in gross margin from 58% to 57% for the third quarter of fiscal year 2005 was most impacted by a decline in sales of our test and measurement products, especially as a percentage of total sales. The gross margin decline also reflected lower manufacturing overhead utilization and lower average selling prices in the desktop computing segment during the third quarter of this year.

We have experienced long-term price reductions in our manufacturing costs, in part due to our outsourcing of most manufacturing functions. However, declines in the average selling prices of our parts, which is typical in the semiconductor industry, tend to offset much of the manufacturing cost savings. Our gross margin is most impacted by the mix of products used in particular end-applications.

Operating Costs and Expenses. Operating costs and expenses were $20.3 million, or 31% of net sales in the third quarter of fiscal year 2005. Operating costs and expenses for the third quarter of fiscal year 2004 were $16.8 million, or 35% of net sales.

Operating Income. Operating income was $17.0 million in the third quarter of fiscal year 2005, up from operating income of $11.1 million in the third quarter of fiscal year 2004. Operating income was impacted by an increase in net sales and lower operating expenses as a percentage of net sales.

We evaluate segment performance based on net sales and operating income of each segment. Detailed below is operating income by reportable segment.

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Operating income in the third quarter of fiscal year 2005 for the Standard Semiconductor Products segment improved due to a 36% increase in net sales and lower operating expenses as a percentage of net sales. Operating income for the Rectifier, Assembly and Other Products segment increased in the third quarter of fiscal year 2004 compared to the prior year, reflecting the impact of a 20% increase in sales and better manufacturing efficiencies.

Interest and Other Income, Net. Net interest and other income was income of $2.1 in the third quarter of fiscal year 2005. Net interest and other income in the third quarter of fiscal year 2004 was income of $1.1 million.

Interest and other income includes interest income from investments, interest from income tax refunds, interest expense associated with our previously outstanding convertible subordinated notes, gain on the extinguishment of debt and other items. The increase in net interest and other income in the third quarter of fiscal year 2005 was most impacted by higher absolute amounts of interest income due to higher investment balances and one-time interest income associated with an income tax refund.

Provision for Taxes. Provision for income taxes was $4.5 million for the third quarter of fiscal year 2005, compared to $2.9 million in the third quarter of fiscal year 2004. The effective tax rates for the third quarters of fiscal years 2005 and 2004 were 24%.

Comparison Of The Three Quarters Ended October 31, 2004 and October 26, 2003

We report on the basis of fifty-two and fifty-three week periods and end our fiscal year on the last Sunday in January. All quarters consist of thirteen weeks, except for one fourteen-week quarter in 53-week years. The three quarters ended October 31, 2004 were made up of forty weeks, while the first three quarters of fiscal year 2004 were made up of thirty-nine weeks.

Net Sales. Net sales for the first three quarters of fiscal year 2005 were $195.2 million, an increase of 43% compared to $136.7 million for the first three quarters of fiscal year 2004. Overall macro-economic and semiconductor industry conditions were stronger in the first three quarters of fiscal year 2005 compared to the prior year period. End-application demand for our products in the first three quarters of fiscal year 2005 was strongest in the areas of cellular phones and communications infrastructure equipment, both of which were up more than 65% over the same period last year. The weakest demand was from the desktop computer and computer gaming segments, which were down about 15% and 45%, respectively, compared to the prior year period. Sales by major end-markets are detailed below and are based on estimations by us.

Standard Semiconductor Products represented 96% of net sales in the first three quarters of fiscal year 2005, while 4% were represented by the Rectifier, Assembly and Other Products segment. Sales of our Standard Semiconductor

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Products segment were 95% of net sales in the first three quarters of fiscal year 2004 and Rectifier, Assembly and Other Products’ sales were 5%. Sales of Standard Semiconductor Products increased 45% in the first three quarters of fiscal year 2005 as compared to the prior year period. Sales of Rectifier, Assembly and Other Products increased 4% in the first three quarters of fiscal year 2005 as compared to the prior year period.

The increase in sales of Standard Semiconductor Products in the first three quarters of fiscal year 2005 reflected general strength in the end-markets of computing, communications and industrial. Sales of our Rectifier, Assembly and Other Products, which are mostly sold into military and industrial applications (part of the end-market of “Industrial/Other”) increased a modest 4% in the first three quarters of fiscal year 2005 compared to the prior year period. These products are older technology products and other non-strategic product offerings, which we have de-emphasized due to their lower revenue and margin opportunities.

Gross Profit. Gross profit for the first three quarters of fiscal year 2005 was $114.8 million, compared to $78.3 million for the prior year period. The increase was due to a 43% increase in sales and a gross margin of 59%, up from 57% in the prior year first three quarters.

In the first three quarters of fiscal year 2005, we sold $423,000 of previously written-off inventory and $949,000 of previously written-off inventory was sold in the first three quarters of fiscal year 2004.

The improvement in gross margin in the first three quarters of fiscal year 2005 was mostly due to increased sales of our products used in portable applications and more capital intensive systems, like test and communications infrastructure equipment. Our products used in these end-applications tend to be more complex than other end-markets and require more technical expertise in terms of product design and layout. Products used in desktop computers, which have below corporate average gross margin, declined about 16% from the prior year period. Likewise, gross margin in the first three quarters of fiscal year 2005 was benefited by lower sales into desktop computer customers.

We have experienced long-term price reductions in our manufacturing costs, in part due to our outsourcing of most manufacturing functions. However, declines in the average selling prices of our parts, which is typical in the semiconductor industry, tend to offset much of any manufacturing cost savings. Our gross margin is most impacted by the mix of products used in particular end-applications.

Operating Costs and Expenses. Operating costs and expenses were $58.3 million, or 30% of net sales in the first three quarters of fiscal year 2005. Operating costs and expenses for the first three quarters of fiscal year 2004 were $50.3 million, or 37% of net sales.

Operating Income. Operating income was $56.6 million in the first three quarters of fiscal year 2005, up from operating income of $28.0 million in the first three quarters of fiscal year 2004. Operating income was impacted by an increase in net sales, higher gross margin and lower operating expenses as a percentage of net sales.

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We evaluate segment performance based on net sales and operating income of each segment. Detailed below is operating income by reportable segment.