UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 000-26124

IXYS CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE		77-0140882
(State or other jurisdiction		(I.R.S. Employer Identification No.)
of incorporation or organization)

1590 BUCKEYE DRIVE
MILPITAS, CALIFORNIA 95035-7418
(Address of principal executive offices and Zip Code)

(408) 457-9000
(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 þ       No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o       No o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of January 29, 2010 was 31,329,514.

 

 

IXYS CORPORATION

FORM 10-Q
December 31, 2009

INDEX

		Page
PART I — FINANCIAL INFORMATION			3
ITEM 1. FINANCIAL STATEMENTS			3
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS			3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS			4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS			5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			27
ITEM 4. CONTROLS AND PROCEDURES			27
PART II — OTHER INFORMATION			28
ITEM 1. LEGAL PROCEEDINGS			28
ITEM 1A. RISK FACTORS			28
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			41
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			41
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			41
ITEM 5. OTHER INFORMATION			41
ITEM 6. EXHIBITS			41
EX-10.1
EX-31.1
EX-31.2
EX-32.1

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IXYS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

		December 31,				March 31,
		2009				2009
ASSETS
Current assets:
Cash and cash equivalents		$	86,496			$	55,441
Restricted cash			199				136
Accounts receivable, net of allowances of $1,579 at December 31, 2009 and $1,899 at March 31, 2009			36,542				37,251
Inventories			65,378				75,601
Prepaid expenses and other current assets			4,791				3,994
Deferred income taxes			13,017				12,797
Total current assets			206,423				185,220
Property, plant and equipment			47,691				52,912
Other assets			9,602				6,728
Deferred income taxes			8,106				7,972
Total assets		$	271,822			$	252,832
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capitalized lease obligations		$	3,450			$	3,739
Current portion of loans payable			1,498				1,455
Accounts payable			16,688				13,767
Accrued expenses and other current liabilities			13,689				15,342
Total current liabilities			35,325				34,303
Long term income tax payable			4,845				4,845
Capitalized lease obligations, net of current portion			2,322				4,418
Long term loans, net of current portion			32,288				17,599
Pension liabilities			14,360				13,175
Total liabilities			89,140				74,340
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock, $0.01 par value:
Authorized: 5,000,000 shares; none issued and outstanding			—				—
Common stock, $0.01 par value:
Authorized: 80,000,000 shares; 36,720,901 issued and 31,259,914 outstanding at December 31, 2009 and 36,054,936 issued and 30,633,949 outstanding at March 31, 2009			367				361
Additional paid-in capital			181,014				177,551
Treasury stock, at cost: 5,460,987 common shares at December 31, 2009 and 5,420,987 common shares at March 31, 2009			(45,662	)			(45,374	)
Retained earnings			39,285				43,984
Accumulated other comprehensive income			7,678				1,970
Total stockholders’ equity			182,682				178,492
Total liabilities and stockholders’ equity		$	271,822			$	252,832

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

IXYS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Net revenues		$	64,032			$	58,337			$	166,663			$	215,308
Cost of goods sold			48,321				45,683				128,000				154,095
Gross profit			15,711				12,654				38,663				61,213
Operating expenses:
Research, development and engineering			5,144				4,733				14,202				15,558
Selling, general and administrative			8,817				9,209				25,183				30,701
Restructuring charges			32				—				1,042				—
Impairment charges			—				3,749				—				3,749
Total operating expenses			13,993				17,691				40,427				50,008
Operating income (loss)			1,718				(5,037	)			(1,764	)			11,205
Other income (expense):
Interest income			108				254				317				980
Interest expense			(426	)			(405	)			(1,203	)			(1,349	)
Other income (expense), net			691				(109	)			(1,702	)			1,624
Income (loss) before income tax			2,091				(5,297	)			(4,352	)			12,460
(Provision for) benefit from income tax			(1,692	)			1,315				(347	)			(4,899	)
Net income (loss)		$	399			$	(3,982	)		$	(4,699	)		$	7,561
Net income (loss) per share
Basic		$	0.01			$	(0.13	)		$	(0.15	)		$	0.24
Diluted		$	0.01			$	(0.13	)		$	(0.15	)		$	0.23
Cash dividends per share			—				—				—			$	0.10
Weighted average shares used in per share calculation
Basic			31,100				30,979				30,893				31,238
Diluted			31,269				30,979				30,893				32,236

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

IXYS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

		Nine Months Ended
		December 31,
		2009				2008
Cash flows from operating activities:
Net income (loss)		$	(4,699	)		$	7,561
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			9,130				9,783
Provision for receivable allowances			2,873				4,568
Net change in inventory provision			3,056				6,054
Foreign currency adjustments on intercompany amounts			1,235				(157	)
Goodwill impairment charge			—				3,749
Stock-based compensation			2,443				1,925
Loss (gain) on investments and disposal of fixed assets			(157	)			182
Changes in operating assets and liabilities:
Accounts receivable			(685	)			5,808
Inventories			10,006				(18,969	)
Prepaid expenses and other current assets			465				(2,541	)
Other assets			45				57
Accounts payable			2,164				(3,664	)
Accrued expenses and other liabilities			(2,579	)			3,199
Pension liabilities			(61	)			(388	)
Net cash provided by operating activities			23,236				17,167
Cash flows from investing activities:
Change in restricted cash			(63	)			482
Business combination, net of cash and cash equivalents acquired			(2,625	)			(420	)
Purchases of investments			(554	)			(1,083	)
Purchases of property and equipment			(2,565	)			(7,792	)
Proceeds from sale of investments			398				3,923
Net cash used in investing activities			(5,409	)			(4,890	)
Cash flows from financing activities:
Principal payments on capital lease obligations			(3,058	)			(3,580	)
Repayments of long term loans and notes payable			(1,136	)			(1,823	)
Proceeds from line of credit			15,000				—
Proceeds from employee equity plans			1,026				3,480
Purchase of treasury stock			(288	)			(7,290	)
Payment of dividend to stockholders			—				(3,161	)
Net cash provided by (used in) financing activities			11,544				(12,374	)
Effect of exchange rate fluctuations on cash and cash equivalents			1,684				(2,513	)
Net increase (decrease) in cash and cash equivalents			31,055				(2,610	)
Cash and cash equivalents at beginning of period			55,441				56,614
Cash and cash equivalents at end of period		$	86,496			$	54,004

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Unaudited Condensed Consolidated Financial Statements

     The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of IXYS Corporation and its wholly-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most difficult judgments include, but are not limited to, revenue reserves, inventory valuation, accounting for income taxes, allocation of purchase price in business combinations and restructuring costs. All significant intercompany transactions have been eliminated in consolidation. All adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been made. The condensed balance sheet as of March 31, 2009 has been derived from our audited balance sheet as of that date. It is recommended that the interim financial statements be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2009 contained in our Annual Report on Form 10-K. Interim results are not necessarily indicative of the operating results expected for later quarters or the full fiscal year.

     We have evaluated subsequent events through the date that the financial statements were issued on February 5, 2010.

2. Accounting Changes and Recent Accounting Pronouncements

     On July 1, 2009, the Financial Accounting Standards Board, or FASB, officially launched the FASB Accounting Standards Codification^TM, or Codification, which has become the single official source of authoritative, nongovernmental U.S. Generally Accepted Accounting Principles, or GAAP. The Codification, which is effective for interim and annual periods ending on or after September 15, 2009, is organized into approximately 90 accounting topics. Going forward, U.S. GAAP will no longer be issued in the form of an “accounting standard,” but as an update to the applicable “topic” or “subtopic” within the Codification. As such, accounting guidance will be classified as either “authoritative” or “non-authoritative” based on its inclusion in or exclusion from the Codification. We adopted the Codification starting with the quarter ended September 30, 2009.

     In the quarter ended June 30, 2009, we adopted the authoritative guidance issued by the FASB on business combinations. The guidance generally requires an entity to recognize the assets acquired, liabilities assumed, contingencies, and contingent consideration at their fair value on the acquisition date. In circumstances where the acquisition-date fair value for a contingency cannot be determined during the measurement period and it is concluded that it is probable that an asset or liability exists as of the acquisition date and the amount can be reasonably estimated, a contingency is recognized as of the acquisition date based on the estimated amount. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. The guidance is applicable to business combinations on a prospective basis, and applied to the acquisition of assets from Leadis Technology Inc., or Leadis, in the quarter ended September 30, 2009. See Note 3, “Business Combination” for further information regarding the acquisition.

     In the quarter ended June 30, 2009, we adopted the authoritative guidance issued by the FASB on fair value measurement for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption did not have a significant impact on our unaudited consolidated financial statements.

     In the quarter ended June 30, 2009, we adopted the authoritative guidance issued by the FASB that changes the accounting and reporting for noncontrolling interests. The guidance establishes accounting and reporting standards to improve the relevance, comparability and transparency of financial information that a reporting entity provides in its consolidated financial statements. The guidance is not presently applicable to us.

     In the quarter ended June 30, 2009, we adopted the authoritative guidance issued by the FASB on determining fair value when the volume and level of activity for an asset or liability has significantly decreased, and on identifying transactions that are not orderly. Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value. The adoption did not have any impact on our unaudited condensed consolidated financial statements.

     In December 2008, the FASB issued authoritative guidance on employers’ disclosures about postretirement benefit plan assets. The guidance requires more detailed annual disclosures about employers’ plan assets, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets and valuation techniques used to measure the fair value of plan assets. The guidance does not change the accounting treatment for postretirement benefits plans and is effective for us for the fiscal year ended March 31, 2010, or fiscal 2010.

     In the quarter ended June 30, 2009, we adopted the authoritative guidance issued by the FASB on recognition and presentation of other-than-temporary impairment. The guidance amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments in the financial statements. The guidance also clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. The adoption did not have any impact on our unaudited condensed consolidated financial statements.

     In the quarter ended June 30, 2009, we adopted the authoritative guidance issued by the FASB on interim disclosure about fair value of financial instruments. The guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. Additionally, the guidance requires disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments on an interim basis as well as changes of methods and significant assumptions from prior periods. The guidance does not change the accounting treatment for these financial instruments and the adoption did not have significant impact on our unaudited condensed consolidated financial statements.

     In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities. The guidance eliminates a required quantitative approach to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis. It requires an ongoing reassessment of whether an entity is the primary beneficiary. The guidance is effective for us beginning in the quarter ending June 30, 2010. We are currently evaluating the impact that the adoption of the guidance will have on our condensed consolidated financial statements.

     In the quarter ended September 30, 2009, we adopted the authoritative guidance issued by FASB on fair value measurements and disclosures. The guidance provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain defined valuation techniques. The adoption of the guidance did not have significant impacts on our unaudited condensed consolidated financial statements.

3. Business Combination

     Leadis Technology Inc.

     On September 14, 2009, we completed the acquisition of the assets and certain associated intellectual property of the LED driver and display driver businesses of Leadis. The acquisition was intended to expand our market opportunity in the LED market.

     The total consideration for the acquisition was $3.5 million, of which $2.6 million was paid in cash. The balance of the consideration, $875,000, net of adjustments arising after the closing date, is included in our accounts payable balance and will be paid in March 2010. We also purchased inventory for cash consideration of $569,000. The following table represents the preliminary purchase price allocation of assets acquired on the closing date of the acquisition (in thousands):

		Preliminary				Estimated
		Purchase Price				Useful Life
		Allocation				(in months)
Intangible assets:
Existing technology		$	1,200				24
Customer relationships			210				24
Contract backlog			1,170				12
Non-compete agreement			20				24
Trade name			210				24
Total intangible assets			2,810
Goodwill			690
Total purchase price		$	3,500

     Goodwill represents the excess of purchase price of an acquired business over the fair value of the underlying intangible assets. Since these assets were acquired by an entity with a favorable tax ruling, goodwill will not result in any effective tax benefit. The primary item that generated the goodwill is the value of the synergies between the acquired businesses and our previously existing

business, which does not qualify as an amortizable intangible asset. The fair value of the amortizable intangible assets was determined using the income approach, royalty savings approach and cost approach. As of December 31, 2009, we have incurred $134,000 in legal and consulting costs related to the acquisition. The costs incurred have been fully expensed and are included in “Selling, general and administrative expenses” on our unaudited condensed consolidated statements of operations.

     The consolidated financial statements include the operating results of the acquired businesses from the date of acquisition. The earnings and the pro-forma financial information have not been presented because the effect of this acquisition was not material to our financial results.

Zilog Inc.

     On December 5, 2009, we entered into a definitive agreement to acquire Zilog Inc., or Zilog, a supplier of application specific, embedded microcontroller units that are system-on-chip solutions for industrial and consumer markets. See Note 16, “Commitments and Contingencies” for further information regarding the acquisition.

4. Restructuring Charges

     In the quarter ended September 30, 2009, we initiated plans to restructure our European manufacturing and assembly operations to align them to current market conditions. The plans primarily involved the termination of employees and centralization of certain positions. Costs related to termination of employees represented severance payments and benefits. The restructuring charges recorded in conjunction with the plans represented severance costs and have been included under “Restructuring charges” in our unaudited condensed consolidated statements of operations. The restructuring accrual as of December 31, 2009 was included under “Accrued expenses and other current liabilities” on our unaudited condensed consolidated balance sheets.

     Restructuring activity as of and for the three and nine months ended December 31, 2009 was as follows (in thousands):

		Severance and
		Related Benefits
Charges		$	1,010
Cash payments			(176	)
Currency translation adjustment			2
Balance at September 30, 2009		$	836
Charges			32
Cash payments			(46	)
Currency translation adjustment			(11	)
Balance at December 31, 2009		$	811

     We anticipate that the remaining restructuring obligations of $811,000 as of December 31, 2009 will be substantially paid by June 30, 2010.

5. Fair Value

     We account for certain assets and liabilities at fair value. In determining fair value, we consider its principal or most advantageous market and the assumptions that market participants would use when pricing, such as inherent risk, restrictions on sale and risk of nonperformance. The fair value hierarchy is based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value measurements are classified under the following hierarchy:

		Level 1		—		Quoted prices for identical instruments in active markets.
		Level 2		—		Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.
		Level 3		—		Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

     Assets measured at fair value on a recurring basis, excluding accrued interest components, consisted of the following types of instruments as of December 31, 2009 and March 31, 2009 (in thousands):

		December 31, 2009 (1)												March 31, 2009 (1)
						Fair Value Measured at												Fair Value Measured at
						Reporting Date Using												Reporting Date Using
		Total				Level 1				Level 2				Total				Level 1				Level 2
						(unaudited)												(unaudited)
Assets
Marketable equity securities (2)		$	216			$	216			$	—			$	525			$	525			$	—
Derivative contract (3)			(170	)			—				(170	)			(124	)			—				(124	)
Total assets measured at fair value		$	46			$	216			$	(170	)		$	401			$	525			$	(124	)

     We measure our marketable securities and derivative contracts at fair value. Marketable securities are valued using the quoted market prices and are therefore classified as Level 1 estimates.

     We use derivative instruments to manage exposures to changes in foreign currency exchange rates and interest rates, and the fair values of these instruments are recorded on the balance sheets. We have elected not to designate these instruments as accounting hedges. The changes in the fair value of these instruments are recorded in the current period’s income statement and are included in other income (expense), net. All of our derivative instruments are traded on over-the-counter markets where quoted market prices are not readily available. For those derivatives, we measure fair value using prices obtained from the counterparties with whom we have traded. The counterparties price the derivatives based on models that use primarily market observable inputs, such as yield curves and option volatilities. Accordingly, we classify these derivatives as Level 2. See Note 9, “Borrowing Arrangements” for further information regarding the terms of the derivative contract. We did not enter into any new derivative contracts in the three and nine months ended December 31, 2009.

     Cash and cash equivalents are recognized and measured at fair value in our consolidated financial statements. Accounts receivable and prepaid expenses and other current assets are financial assets with carrying values that approximate fair value. Accounts payable and accrued expenses and other current liabilities are financial liabilities with carrying values that approximate fair value.

     Long term loans, which primarily consist of notes from banks, approximate fair value as the interest rates either adjust according to the market rates or the interest rates approximate the market rates at December 31, 2009. See Note 10, “Pension Plans” for a discussion of pension liabilities.

6. Inventories

     Inventories consist of the following (in thousands):

		December 31,				March 31,
		2009				2009
		(unaudited)
Raw materials		$	14,206			$	14,431
Work in process			34,135				39,916
Finished goods			17,037				21,254
Total		$	65,378			$	75,601

7. Other Assets

     Other assets consist of the following (in thousands):

		December 31,				March 31,
		2009				2009
		(unaudited)
Available-for-sale investment securities		$	216			$	525
Long term equity investment			4,739				4,183
Goodwill			690				—
Intangible assets, net			2,466				256
Advance to vendors and other items			1,491				1,764
Total		$	9,602			$	6,728

     Other assets include goodwill and intangible assets acquired from Leadis in September 2009. See Note 3, “Business Combination” for further information regarding the acquisition, goodwill, intangible assets and the estimated useful life of these assets.

8. Accrued Expenses and Other Liabilities

     Accrued expenses and other liabilities consist of the following (in thousands):

		December 31,				March 31,
		2009				2009
		(unaudited)
Uninvoiced goods and services		$	5,671			$	5,755
Compensation and benefits			4,203				5,916
Restructuring accrual			811				—
Commission, royalties, deferred revenue and other			3,004				3,671
Total		$	13,689			$	15,342

9. Borrowing Arrangements

   Bank of the West

     On November 13, 2009, we entered into a credit agreement, for a revolving line of credit with Bank of the West, or BOW, under which we may borrow up to $15.0 million. Borrowings may be repaid and re-borrowed during the term of the credit agreement. The obligations are guaranteed by two of our subsidiaries. All amounts owed under the credit agreement are due and payable on October 31, 2011. On November 16, 2009, we borrowed $15.0 million pursuant to the credit agreement.

     The credit agreement provides different interest rate alternatives under which we may borrow funds. We may elect to borrow based on LIBOR plus a margin, an alternative base rate plus a margin or a floating rate plus a margin. The margin can range from 1.5% to 3.25%, depending on interest rate alternatives and on our leverage of liabilities to effective tangible net worth.

     For the initial period, we chose a six-month LIBOR commitment, resulting in an interest rate, inclusive of BOW’s margin, of 3.0625% per annum. During the quarter ended December 31, 2009, monthly interest of approximately $40,000 was paid to BOW.

     The credit agreement is subject to a set of financial covenants, including minimum effective tangible net worth, the ratio of cash, cash equivalents and accounts receivable to current liabilities, profitability beginning with the quarter ended June 30, 2010, maximum losses in the fiscal quarters before such quarter, a ratio of EBITDA to interest expense and a minimum amount of U.S. domestic cash on hand. At December 31, 2009, we complied with the financial covenants.

     The credit agreement also includes a $3.0 million letter of credit subfacility commencing April 1, 2010. See Note 16, “Commitment and Contingencies” for further information regarding the terms of the subfacility.

     IKB Deutsche Industriebank

     On June 10, 2005, IXYS Semiconductor GmbH, our German subsidiary, borrowed €10.0 million, or about $12.2 million at the time, from IKB Deutsche Industriebank for a term of 15 years. The outstanding balance at December 31, 2009 was €7.0 million, or $10.0 million.

     The interest rate on the loan is determined by adding the then effective three month Euribor rate and a margin. The margin can range from 70 basis points to 125 basis points, depending on the calculation of a ratio of indebtedness to cash flow for our German subsidiary.

     We have entered into an interest rate swap to economically hedge the interest rate risk. Under the swap arrangement, during the first five years of the loan, if the Euribor rate exceeds 3.75%, then the Euribor rate for the purposes of the loan shall be 4.1%, and, if the Euribor rate falls below 2.0%, then the Euribor rate for the purposes of the loan shall be 3.0%. The effective interest rate at December 31, 2009 was 3.7%. The swap agreement expires on June 30, 2010 and is not designated as a hedge in the financial statements. See Note 5, “Fair Value” for further information regarding the derivative contract.

     During each fiscal quarter, a principal payment of €167,000, or about $239,000, and a payment of accrued interest are required.

     Financial covenants for a ratio of indebtedness to cash flow, a ratio of equity to total assets and a minimum stockholders’ equity for the German subsidiary must be satisfied for the loan to remain in good standing. The loan may be prepaid in whole or in part at the end of a fiscal quarter without penalty. At December 31, 2009, we complied with the financial covenants. The loan is partially collateralized by a security interest in the facility owned by IXYS in Lampertheim, Germany.

LaSalle Bank National Association

     On August 2, 2007, IXYS Buckeye, LLC, a subsidiary of our company, entered into an Assumption Agreement with LaSalle Bank National Association, trustee for Morgan Stanley Dean Witter Capital I Inc., for the assumption of a loan of $7.5 million in connection with the purchase of property in Milpitas, California. The loan carries a fixed annual interest rate of 7.455%. Monthly payments of principal and interest of $56,000 are due under the loan. In addition, monthly impound payments aggregating $14,000 are to be made for items such as real property taxes, insurance and capital expenditures. The loan is due and payable on February 1, 2011. At maturity, the remaining balance on the loan will be approximately $7.1 million. The loan is secured by a guarantee from our company and collateralized by a security interest in the property acquired. Aggregate loan costs of $93,000 incurred in connection with the loan are amortized over the loan period and the unamortized balance is netted against the loan liability.

Note payable issued on acquisition

     On September 10, 2008, we issued a note payable with a face value of $2.0 million in connection with the purchase of real property and the acquisition of the shares of Reaction Technology Incorporated, or RTI. The note is repayable in 60 equal monthly installments of $38,666, which includes interest at an annual rate of 6.0%. The note is collateralized by a security interest in the property acquired and the current assets of RTI.

10. Pension Plans

     We maintain two defined benefit pension plans: one for United Kingdom employees and one for German employees. These plans cover most of the employees in the United Kingdom and Germany. Benefits are based on years of service and the employees’ compensation. We deposit funds for these plans, consistent with the requirements of local law, with investment management companies, insurance companies or trustees and/or accrue for the unfunded portion of the obligations. The measurement date for the projected benefit obligations and the plan assets is March 31. Both plans have been curtailed. As such, the plans are closed to new entrants and no credit is provided for additional periods of service.

     The net periodic pension expense includes the following components (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
		(unaudited)								(unaudited)
Service cost		$	—			$	—			$	—			$	—
Interest cost on projected benefit obligation			497				507				1,458				1,734
Expected return on plan assets			(257	)			(377	)			(759	)			(1,300	)
Recognized actuarial loss			31				20				91				69
Net periodic pension expense		$	271			$	150			$	790			$	503

     We expect to contribute approximately $625,000 to the plans in the fiscal year ending March 31, 2010. This contribution is primarily contractual.

11. Employee Equity Incentive Plans

     Stock Purchase and Stock Option Plans

     On June 5, 2009, the Board of Directors approved the adoption of the 2009 Equity Incentive Plan, or the 2009 Plan, under which 900,000 shares of our common stock are reserved for the grant of stock options. On September 10, 2009, our stockholders approved the 2009 Plan.

     Employee Stock Purchase Plan

     In May 1999, the Board of Directors approved the 1999 Employee Stock Purchase Plan, or the Purchase Plan, and reserved 500,000 shares of common stock for issuance under the Purchase Plan. Under the Purchase Plan, all eligible employees may purchase our common stock at a price equal to 85% of the lower of the fair market value at the beginning of the offer period or the semi-annual purchase date. Stock purchases are limited to 15% of an employee’s eligible compensation. On July 31, 2007, the Board of Directors amended the Purchase Plan and reserved an additional 350,000 shares of common stock for issuance under the Purchase Plan. During the three and nine months ended December 31, 2009, there were 45,306 and 86,668 shares purchased under the Purchase Plan, leaving approximately 148,000 shares available for purchase under the plan in the future.

     Stock-Based Compensation

     The following table summarizes the effects of stock-based compensation charges (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Income Statement Classifications		(unaudited)								(unaudited)
Selling, general and administrative expenses		$	702			$	753			$	2,443			$	1,925
Stock-based compensation effect in income before taxes			702				753				2,443				1,925
Provision for income taxes (1)			267				271				928				693
Net stock-based compensation effects in net income (loss)		$	435			$	482			$	1,515			$	1,232

     During the three and nine months ended December 31, 2009, the unaudited condensed consolidated statements of operations and cash flows do not reflect any tax benefit for the tax deduction from option exercises and other awards. As of December 31, 2009, approximately $5.6 million in stock based compensation is to be recognized for unvested stock options granted under our equity incentive plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.4 years.

     The Black-Scholes option pricing model is used to estimate the fair value of options granted under our equity incentive plans and rights to acquire stock granted under our stock purchase plan. The weighted average estimated fair values of employee stock option grants and rights granted under the 1999 Employee Stock Purchase Plan, as well as the weighted average assumptions that were used in calculating such values during the three and nine months ended December 31, 2009 and 2008, were based on estimates at the date of grant as follows:

		Stock Options												Purchase Plan
		Three months				Nine months								Three months								Nine months
		ended				ended								ended								ended
		December 31,				December 31,								December 31,								December 31,
		2008 (1)				2009				2008				2009				2008				2009				2008
Weighted average estimated fair value of grant per share		$	2.94			$	3.49			$	3.38			$	3.20			$	5.28			$	4.19			$	4.21
Risk-free interest rate			2.3	%			2.3	%			2.4	%			0.3	%			2.0	%			0.4	%			2.6	%
Expected term in years			4.6				5.0				4.6				0.5				0.5				0.5				0.5
Volatility			51.6	%			57.0	%			50.4	%			53.2	%			96.1	%			80.1	%			77.8	%
Dividend yield			0	%			0	%			0	%			0	%			0	%			0	%			0	%

     Activity with respect to outstanding stock options for the nine months ended December 31, 2009 was as follows:

						Weighted
		Number of				Average Exercise				Intrinsic
		Shares				Price Per Share				Value (1)
										(000)
Balance at March 31, 2009			6,063,569			$	8.42
Options granted			100,000			$	6.88
Options exercised			(805,300	)		$	2.80			$	3,837
Options cancelled			(46,250	)		$	7.11
Options expired			(37,323	)		$	12.42
Balance at December 31, 2009			5,274,696			$	9.23
Exercisable at December 31, 2009			3,489,071			$	9.89
Exercisable at March 31, 2009			3,635,269			$	8.61

     Activity with respect to outstanding restricted stock units for the nine months ended December 31, 2009 was as follows:

						Weighted
		Number of				Average Grant				Aggregate
		Shares				Date Fair Value				Fair Value (1)
										(000)
Balance at March 31, 2009			64,900			$	9.58
RSUs vested (2)			(32,450	)		$	9.58			$	251
RSUs forfeited			(250	)		$	9.73			$	2
Balance at December 31, 2009			32,200			$	9.58

12. Comprehensive Income

     The components of total comprehensive income (loss) and related tax effects were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
		(unaudited)								(unaudited)
Net income (loss)		$	399			$	(3,982	)		$	(4,699	)		$	7,561
Unrealized gain (loss) on available-for-sale investment securities, net of taxes of $4 and $22 for the three and nine months ended December 31, 2009 and net of taxes of $(30) and $(273) for the three and nine months ended December 31, 2008			7				(59	)			41				(529	)
Foreign currency translation adjustments			(1,053	)			(4,274	)			5,667				(10,912	)
Total comprehensive income (loss)		$	(647	)		$	(8,315	)		$	1,009			$	(3,880	)

     The components of accumulated other comprehensive income, net of tax, at the end of each period were as follows (in thousands):

		December 31,				March 31,
		2009				2009
		(unaudited)
Accumulated net unrealized gain (loss) on available-for-sale investments securities, net of taxes of $20 at December 31, 2009 and $(2) at March 31, 2009		$	37			$	(4	)
Unrecognized actuarial loss, net of tax of $942			(2,422	)			(2,422	)
Accumulated foreign currency translation adjustments			10,063				4,396
Total accumulated other comprehensive income		$	7,678			$	1,970

13. Computation of Net Income (Loss) per Share

     Basic and diluted earnings (loss) per share are calculated as follows (in thousands, except per share amounts):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
		(unaudited)								(unaudited)
Basic:
Weighted average shares			31,100				30,979				30,893				31,238
Net income (loss)		$	399			$	(3,982	)		$	(4,699	)		$	7,561
Net income (loss) per share		$	0.01			$	(0.13	)		$	(0.15	)		$	0.24
Diluted:
Weighted average shares			31,100				30,979				30,893				31,238
Common equivalent shares from stock options			169				—				—				998
Weighted average shares used in diluted per share calculation			31,269				30,979				30,893				32,236
Net income (loss)		$	399			$	(3,982	)		$	(4,699	)		$	7,561
Net income (loss) per share		$	0.01			$	(0.13	)		$	(0.15	)		$	0.23

     Basic net income (loss) available per common share is computed using net income (loss) and the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed using net income (loss) and the weighted average number of common shares outstanding, assuming dilution, which includes potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of stock options and assumed vesting of restricted stock units using the treasury stock method. For the quarter ended December 31, 2009, we excluded 4.7 million outstanding stock options from the calculation of net income per share because the exercise price of these stock options were greater than or equal to the average market value of the common shares. These options could be included in the calculation in the future, if the average market value of the common shares increases and is greater than the exercise price of these options. Due to our net loss for the nine months ended December 31, 2009, outstanding stock options and restricted stock units to purchase 1.1 million shares of our common stock were excluded from the diluted net loss per share calculation because their inclusion would have been anti-dilutive.

Similarly, due to our net loss for the quarter ended December 31, 2008, outstanding stock options and restricted stock units to purchase 1.4 million of our common stock were excluded from the diluted net loss per share calculation. For the nine months ended December 31, 2008, there were outstanding stock options and restricted stock units to purchase 3.9 million shares that were not included in the computation of dilutive net income per share since the exercise price of the options were greater than or equal to the average market price of the common stock.

14. Segment Information

     We have a single operating segment. This operating segment is comprised of semiconductor products used primarily in power-related applications. While we have separate legal subsidiaries with discrete financial information, we have one chief operating decision maker with highly integrated businesses. Our sales by major geographic area (based on destination) were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
		(unaudited)								(unaudited)
United States		$	17,315			$	17,507			$	49,731			$	60,532
Europe and the Middle East
France			1,297				1,491				3,104				5,803
Germany			6,807				8,153				18,571				32,269
Italy			1,119				1,520				2,712				6,044
Sweden			1,178				445				2,908				3,521
United Kingdom			3,770				3,511				9,808				13,690
Other			7,000				7,597				18,251				27,657
Asia Pacific
China			14,584				6,534				32,787				25,213
Japan			3,145				1,852				7,364				7,197
Korea			2,216				1,527				5,114				5,882
Other			2,887				4,378				8,525				13,470
Rest of the World
India			1,631				2,275				4,721				9,437
Other			1,083				1,547				3,067				4,593
Total		$	64,032			$	58,337			$	166,663			$	215,308

     The following table sets forth net revenues for each of our product groups for the three and nine months ended December 31, 2009 and 2008 (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
		(unaudited)								(unaudited)
Power semiconductors		$	43,662			$	45,318			$	122,999			$	170,669
Integrated circuits			15,306				7,533				29,997				24,945
Systems and RF power semiconductors			5,064				5,486				13,667				19,694
Total		$	64,032			$	58,337			$	166,663			$	215,308

     For the three and nine months ended December 31, 2009, one customer accounted for 10.4% and 11.3% of our net revenues. For the three and nine months ended December 31, 2008, no customer accounted for more than 10% of our net revenues.

15. Income Taxes

     For the three and nine months ended December 31, 2009, we recorded income tax provisions of $1.7 million and $347,000. For the three and nine months ended December 31, 2008, we recorded an income tax benefit of $1.3 million and an income tax provision of

$4.9 million, respectively. For the three months ended December 31, 2009, the provision for income tax represented the adjustment of the income tax account to reflect a change in our estimated income taxes for the year based on nine months of experience, offset by a favorable impact on the reversal of accrued tax expenses of $350,000 following the conclusion of an audit in a foreign tax jurisdiction. The provision for income tax for the nine months ended December 31, 2009 was incurred because we had profits in certain jurisdictions and losses in jurisdictions with comparatively lower tax rates, partially offset by the release of valuation allowances. For the three and nine months ended December 31, 2008, our accounting for income tax was affected by permanent items, including the goodwill impairment, net of a valuation allowance release.

16. Commitments and Contingencies

Legal Proceedings

     We are currently involved in a variety of legal matters that arise in the normal course of business. Were an unfavorable ruling to occur, there could be a material adverse impact on our financial condition, results of operations or cash flows.

Bank of the West

     In September 2009, we entered in an agreement with BOW for a letter of credit facility of $3.0 million. The facility expires on March 31, 2010. At December 31, 2009, there was an open letter of credit with a balance of $52,000 to support inventory purchases.

     On November 13, 2009, we entered into a credit agreement with BOW. The credit agreement includes a letter of credit subfacility, under which BOW agrees to issue letters of credit of up to $3.0 million upon the expiration of the current facility on March 31, 2010. However, borrowing under this subfacility is limited to the extent of availability under the $15.0 million revolving line of credit. The credit agreement expires on October 31, 2011. See Note 9, “Borrowing Arrangements” for further information regarding the terms of the credit agreement.

Zilog Inc.

     On December 5, 2009, we entered into a definitive agreement to acquire Zilog. Under the terms of the agreement, we will acquire all of the Zilog’s outstanding common shares for $3.5858 per share in cash. Payment for shares and for stock options is expected to aggregate approximately $62.4 million. The acquisition is subject to the approval of Zilog shareholders and other customary closing conditions. The transaction is expected to be completed during the quarter ended March 31, 2010. See Note 3, “Business Combination” for further information regarding the acquisition.

Other Commitments and Contingencies

     On occasion, we provide limited indemnification to customers against intellectual property infringement claims related to our products. To date, we have not experienced significant activity or claims related to such indemnifications. We also provide in the normal course of business indemnification to our officers, directors and selected parties. We are unable to estimate any potential future liability, if any. Therefore, no liability for these indemnification agreements has been recorded as of December 31, 2009 and March 31, 2009.

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

     This discussion contains forward-looking statements, which are subject to certain risks and uncertainties, including, without limitation, those described elsewhere in this Form 10-Q and, in particular, in Item 1A of Part II hereof. Actual results may differ materially from the results discussed in the forward-looking statements. For a discussion of risks that could affect future results, see “Item 1A. Risk Factors.” All forward-looking statements included in this document are made as of the date hereof, based on the information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement, except as may be required by law.

Overview

     We are a multi-market integrated semiconductor company. Our three principal product groups are: power semiconductors; integrated circuits, or ICs; and systems and radio frequency, or RF, power semiconductors.

     Our power semiconductors improve system efficiency and reliability by converting electricity at relatively high voltage and current levels into the finely regulated power required by electronic products. We focus on the market for power semiconductors that are capable of processing greater than 200 watts of power.

     We also design, manufacture and sell integrated circuits for a variety of applications. Our analog and mixed signal ICs are principally used in telecommunications applications. Our mixed signal application specific ICs, or ASICs, address the requirements of the medical imaging equipment and display markets. Our power management and control ICs are used in conjunction with power semiconductors.

     Our systems include laser diode drivers, high voltage pulse generators and modulators, and high power subsystems, sometimes known as stacks, that are principally based on our high power semiconductor devices. Our RF power semiconductors enable circuitry that amplifies or receives radio frequencies in wireless and other microwave communication applications, medical imaging applications and defense and space applications.

     Over the past two quarters, our revenues from the sale of ICs have increased significantly, primarily through sales to the consumer product market, while our revenues from the sales of power semiconductors and RF power semiconductors have increased modestly. Distribution revenues increased because of the growth of sales to the consumer product market. Geographically, over the same periods, sales to all major geographic areas increased except North America. Our sales to all major market segments increased except the medical market. Our selling, general and administrative expenses, or SG&A expenses, continued to be relatively flat. In the quarter ended December 31, 2009, as compared to the immediately preceding quarter, our research, development and engineering expenses, or R&D expenses, increased as a result of the acquisition of the display driver business from Leadis Technology Inc. In future periods, both our SG&A and R&D expenses are expected to continue at approximately these levels. Because of continued economic volatility, our visibility regarding the future remains uncertain, although orders received for our products did strengthen in the quarter ended December 31, 2009.

Critical Accounting Policies and Significant Management Estimates

     The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the reasonableness of its estimates. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

     We believe the following critical accounting policies require that we make significant judgments and estimates in preparing our consolidated financial statements.

     Revenue recognition. We sell to distributors and original equipment manufacturers. Approximately 49.7% of our revenues in the nine months ended December 31, 2009 and 46.5% of our revenues in the nine months ended December 31, 2008 were from distributors. We provide some of our distributors with the following programs: stock rotation and ship and debit. Ship and debit is a sales incentive program for products previously shipped to distributors. We recognize revenue from product sales upon shipment provided that we have received a valid purchase order, the price is fixed and determinable, the risk of loss has transferred, collection of resulting receivable is reasonable assured, there are no customer acceptance requirements and there are no remaining significant

obligations. Our shipping terms are generally FOB shipping point. Reserves for allowances are also recorded at the time of shipment. Our management must make estimates of potential future product returns and so called “ship and debit” transactions related to current period product revenue. Our management analyzes historical returns and ship and debit transactions, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and allowances. Significant management judgments and estimates must be made and used in connection with establishing the allowances in any accounting period. We have visibility into inventory held by our distributors to aid in our reserve analysis. Different judgments or estimates would result in material differences in the amount and timing of our revenue for any period.

     Accounts receivable from distributors are recognized and inventory is relieved when title to inventories transfer, typically upon shipment from our company, at which point we have a legally enforceable right to collection under normal payment terms. Under certain circumstances, where our management is not able to reasonably and reliably estimate the actual returns, revenues and costs relating to distributor sales are deferred until products are sold by the distributors to their end customers. Deferred amounts are presented net and included under accrued expenses and other liabilities in our unaudited condensed consolidated financial statements.

     We state our revenues net of taxes collected from our customers that are required to be remitted to the various government agencies. The amount of taxes collected from customers and payable to government is included under accrued expenses and other liabilities. Shipping and handling costs are included in cost of sales.

     Allowance for sales returns. We maintain an allowance for sales returns for estimated product returns by our customers. We estimate our allowance for sales returns based on our historical return experience, current economic trends, changes in customer demand, known returns we have not received and other assumptions. If we were to make different judgments or utilize different estimates, the amount and timing of our revenue could be materially different. Given that our revenues consist of a high volume of relatively similar products, to date our actual returns and allowances have not fluctuated significantly from period to period and our returns provisions have historically been reasonably accurate. This allowance is included as part of the accounts receivable allowance on the balance sheet and as a reduction of revenues in the statement of operations.

     Allowance for stock rotation. We also provide “stock rotation” to select distributors. The rotation allows distributors to return a percentage of the previous six months’ sales in exchange for orders of an equal or greater amount. In the nine months ended December 31, 2009 and 2008, approximately $1.0 million and $1.6 million, respectively, of products were returned to us under the program. We generally establish the allowance for all sales to distributors except in cases where the revenue recognition is deferred and recognized upon sale by the distributor of products to the end customer. The allowance, which is management’s best estimate of future returns, is based upon the historical experience of returns and inventory levels at the distributors. This allowance is included as part of the accounts receivable allowance on the balance sheet and as a reduction of revenues in the statement of operations. Should distributors increase stock rotations beyond our estimates, our financial statements would be adversely affected.

     Allowance for ship and debit. Ship and debit is a program designed to assist distributors in meeting competitive prices in the marketplace on sales to their end customers. Ship and debit requires a request from the distributor for a pricing adjustment for a specific part for a customer sale to be shipped from the distributor’s stock. We have no obligation to accept this request. However, it is our historical practice to allow some companies to obtain pricing adjustments for inventory held. We receive periodic statements regarding our products held by our distributors. Our distributors had approximately $3.7 million in inventory of our products on hand at December 31, 2009. Ship and debit authorizations may cover current and future distributor activity for a specific part for sale to the distributor’s customer. At the time we record sales to the distributors, we provide an allowance for the estimated future distributor activity related to such sales since it is probable that such sales to distributors will result in ship and debit activity. The sales allowance requirement is based on sales during the period, credits issued to distributors, distributor inventory levels, historical trends, market conditions, pricing trends we see in our direct sales activity with original equipment manufacturers and other customers, and input from sales, marketing and other key management. We believe that the analysis of these inputs enable us to make reliable estimates of future credits under the ship and debit program. This analysis requires the exercise of significant judgments. Our actual results to date have approximated our estimates. At the time the distributor ships the part from stock, the distributor debits us for the authorized pricing adjustment. This allowance is included as part of the accounts receivable allowance on the balance sheet and as a reduction of revenues in the statement of operations. If competitive pricing were to decrease sharply and unexpectedly, our estimates might be insufficient, which could significantly adversely affect our operating results.

     Additions to the ship and debit allowance are estimates of the amount of expected future ship and debit activity related to sales during the period and reduce revenues and gross profit in the period. The following table sets forth the beginning and ending balances of, additions to, and deductions from, our allowance for ship and debit during the nine months ended December 31, 2009 (in thousands):

Balance at March 31, 2009		$	414
Additions			301
Deductions			(353	)
Balance at June 30, 2009		$	362
Additions			634
Deductions			(593	)
Balance at September 30, 2009		$	403
Additions			574
Deductions			(556	)
Balance at December 31, 2009		$	421

     Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments. We evaluate our allowance for doubtful accounts based on the aging of our accounts receivable, the financial condition of our customers and their payment history, our historical write-off experience and other assumptions. If we were to make different judgments of the financial condition of our customers or the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. This allowance is reported on the balance sheet as part of the accounts receivable allowance and is included on the statement of operations as part of selling, general and administrative expense. This allowance is based on historical losses and management’s estimates of future losses.

     Inventories. Inventories are recorded at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market value. Our accounting for inventory costing is based on the applicable expenditure incurred, directly or indirectly, in bringing the inventory to its existing condition. Such expenditures include acquisition costs, production costs and other costs incurred to bring the inventory to its use. As it is impractical to track inventory from the time of purchase to the time of sale for the purpose of specifically identifying inventory cost, our inventory is therefore valued based on a standard cost, given that the materials purchased are identical and interchangeable at various production processes. The authoritative guidance provided by FASB requires certain abnormal expenditures to be recognized as expenses in the current period versus being capitalized in inventory. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facilities. We review our standard costs on an as-needed basis but in any event at least once a year, and update them as appropriate to approximate actual costs.

     We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. The value of our inventories is dependent on our estimate of future demand as it relates to historical sales. If our projected demand is overestimated, we may be required to reduce the valuation of our inventories below cost. We regularly review inventory quantities on hand and record an estimated provision for excess inventory based primarily on our historical sales and expectations for future use. We also recognize a reserve based on known technological obsolescence, when appropriate. However, for new products, we do not consider whether there is excess inventory until we develop sufficient sales history or experience a significant change in expected product demand, based on backlog. Actual demand and market conditions may be different from those projected by our management. This could have a material effect on our operating results and financial position. If we were to make different judgments or utilize different estimates, the amount and timing of our write-down of inventories could be materially different.

     Excess inventory frequently remains saleable. When excess inventory is sold, it yields a gross profit margin of up to 100%. Sales of excess inventory have the effect of increasing the gross profit margin beyond that which would otherwise occur, because of previous write-downs. Once we have written down inventory below cost, we do not subsequently write it up when it is subsequently sold or scrapped. We do not physically segregate excess inventory nor do we assign unique tracking numbers to it in our accounting systems. Consequently, we cannot isolate the sales prices of excess inventory from the sales prices of non-excess inventory. Therefore, we are unable to report the amount of gross profit resulting from the sale of excess inventory or quantify the favorable impact of such gross profit on our gross profit margin.

     The following table provides information on our excess and obsolete inventory reserve charged against inventory at cost (in thousands):

Balance at March 31, 2009		$	34,697
Sale of excess inventory			(814	)
Scrap of excess inventory			(566	)
Additional accrual of excess inventory			4,458
Balance at June 30, 2009		$	37,775
Sale of excess inventory			(719	)
Scrap of excess inventory			(495	)
Additional accrual of excess inventory			2,313
Balance at September 30, 2009		$	38,874
Sale of excess inventory			(1,758	)
Scrap of excess inventory			(334	)
Additional accrual of excess inventory			1,262
Balance at December 31, 2009		$	38,044

     The practical efficiencies of wafer fabrication require the manufacture of semiconductor wafers in minimum lot sizes. Often, when manufactured, we do not know whether or when all the semiconductors resulting from a lot of wafers will sell. With more than 10,000 different part numbers for semiconductors, excess inventory resulting from the manufacture of some of those semiconductors will be continual and ordinary. Because the cost of storage is minimal when compared to potential value and because our products do not quickly become obsolete, we expect to hold excess inventory for potential future sale for years. Consequently, we have no set time line for the sale or scrapping of excess inventory.

     In addition, our inventory is also being written down to the lower of cost or market or net realizable value. We review our inventory listing on a quarterly basis for an indication of losses being sustained for costs that exceed selling prices less direct costs to sell. When it is evident that our selling price is lower than current cost, the inventory is marked down accordingly. At December 31, 2009, our lower of cost or market reserve was $652,000.

     Furthermore, we perform an annual inventory count and periodic cycle counts for specific parts that have a high turnover. We also periodically identify any inventory that is no longer usable and write it off.

     Income tax. 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 estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We 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 establish a valuation allowance. A valuation allowance reduces our deferred tax assets to the amount that is more likely than not to be realized. In determining the amount of the valuation allowance, we consider estimated future taxable income as well as feasible tax planning strategies in each taxing jurisdiction in which we operate. If we determine that it is more probable than not that we will not realize all or a portion of our remaining deferred tax assets, then we will increase our valuation allowance with a charge to income tax expense. Conversely, if we determine that it is likely that we will ultimately be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, then the related portion of the valuation allowance will reduce goodwill, intangible assets or income tax expense. Significant management judgment is required in determining our provision for income taxes and potential tax exposures, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance, which could materially impact our financial position and results of operations. Our ability to utilize our deferred tax assets and the need for a related valuation allowance are monitored on an ongoing basis.

     Furthermore, computation of our tax liabilities involves examining uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on the two-step process as prescribed. The first step is to evaluate the tax position for recognition by determining if there is sufficient available evidence to indicate if it is more likely than not that the position will be sustained on an audit, including resolution of any related appeals or litigation processes. The second step requires us to measure and determine the approximate amount of the tax benefit at the largest amount that is more than 50% likely of being realized upon ultimate settlement with the tax authorities. It is inherently difficult and requires significant judgment to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We reexamine these uncertain tax positions on a quarterly basis. This reassessment is based on various factors during the period including, but not limited to, changes in worldwide tax laws and treaties, changes in facts or circumstances, effectively settled issues under audit and any new audit activity. A change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Recent Accounting Pronouncements

     For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated condensed financial statements, see “Note 2: Accounting Changes and Recent Accounting Pronouncements” in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.

Results of Operations — Three and Nine Months Ended December 31, 2009 and 2008

     The following table sets forth selected consolidated statements of operations data for the fiscal periods indicated and the percentage change in such data from period to period. These historical operating results may not be indicative of the results for any future period.

		Three Months Ended												Nine Months Ended
		December 31,												December 31,
		2009				% change				2008				2009				% change				2008
		(000)								(000)				(000)								(000)
Net revenues		$	64,032				9.8	%		$	58,337			$	166,663				-22.6	%		$	215,308
Cost of goods sold			48,321				5.8	%			45,683				128,000				-16.9	%			154,095
Gross profit		$	15,711				24.2	%		$	12,654			$	38,663				-36.8	%		$	61,213
Operating expenses:
Research, development and engineering		$	5,144				8.7	%		$	4,733			$	14,202				-8.7	%		$	15,558
Selling, general and administrative			8,817				-4.3	%			9,209				25,183				-18.0	%			30,701
Restructuring charges			32			nm					—				1,042			nm					—
Impairment charges			—				-100.0	%			3,749				—				-100.0	%			3,749
Total operating expenses		$	13,993				-20.9	%		$	17,691			$	40,427				-19.2	%		$	50,008

     The following table sets forth selected statements of operations data as a percentage of net revenues for the fiscal periods indicated. These historical operating results may not be indicative of the results for any future period.

		% of Net Revenues								% of Net Revenues
		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Net revenues			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			75.5	%			78.3	%			76.8	%			71.6	%
Gross profit			24.5	%			21.7	%			23.2	%			28.4	%
Operating expenses:
Research, development and engineering			8.0	%			8.1	%			8.5	%			7.2	%
Selling, general and administrative			13.8	%			15.8	%			15.1	%			14.3	%
Restructuring charges			0.0	%			—				0.6	%			—
Impairment charges			—				6.4	%			—				1.7	%
Total operating expenses			21.8	%			30.3	%			24.2	%			23.2	%
Operating income (loss)			2.7	%			-8.6	%			-1.0	%			5.2	%
Other income (expense), net			0.6	%			-0.5	%			-1.6	%			0.6	%
Income (loss) before income tax			3.3	%			-9.1	%			-2.6	%			5.8	%
(Provision for) benefit from income tax			-2.7	%			2.3	%			-0.2	%			-2.3	%
Net income (loss)			0.6	%			-6.8	%			-2.8	%			3.5	%

Net Revenues.

     The following tables set forth the revenues for each of our product groups for the fiscal periods indicated:

		Three Months Ended December 31,												Nine Months Ended December 31,
Revenues		2009				% change				2008				2009				% change				2008
		(000)								(000)				(000)								(000)
Power semiconductors		$	43,662				-3.7	%		$	45,318			$	122,999				-27.9	%		$	170,669
Integrated circuits			15,306				103.2	%			7,533				29,997				20.3	%			24,945
Systems and RF power semiconductors			5,064				-7.7	%			5,486				13,667				-30.6	%			19,694
Total		$	64,032				9.8	%		$	58,337			$	166,663				-22.6	%		$	215,308

     The following tables set forth the average selling prices, or ASPs, and units for the fiscal periods indicated:

		Three Months Ended December 31,												Nine Months Ended December 31,
Average Selling Prices		2009				% change				2008				2009				% change				2008
Power semiconductors		$	2.38				-7.4	%		$	2.57			$	2.39				-11.2	%		$	2.69
Integrated circuits		$	0.77				0.0	%		$	0.77			$	0.76				0.0	%		$	0.76
Systems and RF power semiconductors		$	24.00				-7.3	%		$	25.88			$	21.73				-15.5	%		$	25.71

		Three Months Ended December 31,												Nine Months Ended December 31,
Units		2009				% change				2008				2009				% change				2008
		(000)								(000)				(000)								(000)
Power semiconductors			18,338				4.0	%			17,633				51,533				-18.8	%			63,496
Integrated circuits			19,926				104.1	%			9,763				39,674				21.1	%			32,759
Systems and RF power semiconductors			211				-0.5	%			212				629				-17.9	%			766
Total			38,475				39.4	%			27,608				91,836				-5.3	%			97,021

     The 9.8% increase in net revenues in the three months ended December 31, 2009 as compared to the three months ended December 31, 2008 reflected a significant increase of $7.8 million, or 103.2%, in the sale of ICs, offset by a $1.7 million, or 3.7%, decrease in the sale of power semiconductors and a $422,000, or 7.7%, decrease in the sale of systems and RF power semiconductors. The increase in revenues from the sale of ICs was primarily driven by a $6.3 million increase in the sales of our display driver ICs to the consumer products markets as a consequence of an acquisition. The decrease in power semiconductors was mainly due to a $1.6 million decrease in the sale of thyristor products, principally to the industrial and commercial market. The decline in revenues from the sale of systems and RF power semiconductors was broad based across all the major product lines.

     For the three months ended December 31, 2009 as compared to the three months ended December 31, 2008, IC unit growth was principally due to increased shipments of display driver ICs to the consumer products market, whereas in power semiconductors, the unit growth was primarily from increases in MOS products sales. The unit shipments in systems and RF power semiconductors were largely unchanged.

     The 22.6% decline in net revenues in the nine months ended December 31, 2009 as compared to the nine months ended December 31, 2008 reflected a $47.7 million, or 27.9% decrease in the sale of power semiconductors and a $6.0 million, or 30.6%, decrease in the sale of systems and RF power semiconductors, offset by an increase of $5.0 million, or 20.3%, in the sale of ICs. The decrease in power semiconductors was broad based in all the major product lines, including a $20.0 million decline in the sale of thyristor products, principally to the industrial and commercial market. The revenues from the sale of systems and RF power semiconductors decreased primarily due to a decrease of $4.9 million in the sale of subassemblies to the industrial and commercial market. The increase in revenues from ICs was principally due to a $7.2 million increase in the sale of display driver ICs, to the consumer products markets, offset by decrease in the sale of solid state relays, or SSRs, of $2.4 million, primarily to the consumer product market.

     For the nine months ended December 31, 2009 as compared to the nine months ended December 31, 2008, the decline in shipments of power semiconductors was due to reduced shipments of bipolar products, principally to the industrial and commercial market. In systems and RF power

semiconductors, the unit decline was principally caused by reduced shipments of RF power semiconductors. In ICs, the unit growth was because of increased shipments of display driver ICs to the consumer market, offset by a decrease in the sale of SSRs.

     For the three and nine months ended December 31, 2009 as compared to the comparable periods of the previous fiscal year, the decrease in the ASPs of power semiconductor and system and RF power semiconductors was due to a change in the mix of products sold; whereas, the ASPs of ICs were unchanged.

     For the quarter ended December 31, 2009, sales to customers in the United States represented approximately 27.0% of our net revenues and sales to international customers represented approximately 73.0% of our net revenues. Of our international sales, approximately 45.3% were derived from sales in Europe and the Middle East, approximately 48.9% were derived from sales in the Asia Pacific region and approximately 5.8% were derived from sales in the rest of the world. By comparison, for the quarter ended December 31, 2008, sales to customers in the United States represented approximately 30.0% of our net revenues and sales to international customers represented approximately 70.0% of our net revenues. Of our international sales, approximately 55.6% were derived from sales in Europe and the Middle East, approximately 35.0% were derived from sales in the Asia Pacific region and approximately 9.4% were derived from sales in the rest of the world.

     For the three months ended December 31, 2009 as compared to the three months ended December 31, 2008, we experienced substantial growth in sales in China, primarily to the consumer product market, offset by declines in revenues across all the major European countries, except the United Kingdom and Sweden, and in the U.S. and India. The decline in revenues in the European countries was primarily due to the decline in revenues from the industrial and commercial market. The decline in revenues in the U.S. and India was due to reduced shipments of thyristor products to the industrial and commercial market.

     For the nine months ended December 31, 2009, sales to customers in the United States represented approximately 29.8% of our net revenues and sales to international customers represented approximately 70.2% of our net revenues. Of our international sales, approximately 47.3% were derived from sales in Europe and the Middle East, approximately 46.0% were derived from sales in the Asia Pacific region and approximately 6.7% were derived from sales in the rest of the world. By comparison, for the nine months ended December 31, 2008, sales to customers in the United States represented approximately 28.1% of our net revenues and sales to international customers represented approximately 71.9% of our net revenues. Of our international sales, approximately 57.5% were derived from sales in Europe and the Middle East, approximately 33.4% were derived from sales in the Asia Pacific region and approximately 9.1% were derived from sales in the rest of the world.

     For the nine months ended December 31, 2009 as compared to the nine months ended December 31, 2008, our sales in China increased primarily to the consumer market, offset by substantial declines in revenues across all the major European countries and in the U.S. and India. The decline in the European countries was primarily due to reduced revenues from the industrial and commercial market. The decline in the U.S. was primarily due to the decrease in revenues from the medical market and the industrial and commercial market; whereas, the decline in revenues in India was due to lower shipments of thyristor products to the industrial and commercial market.

     For the three and nine months ended December 31, 2009, one customer accounted for 10.4% and 11.3%, respectively, of our net revenues. For the three and nine months ended December 31, 2008, no customer accounted for more than 10% of our net revenues.

     Our revenues were reduced by allowances for sales returns, stock rotations and ship and debit. See “Critical Accounting Policies and Significant Management Estimates” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Gross Profit.

     Gross profit margin increased to 24.5% in the three months ended December 31, 2009 from 21.7% in the three months ended December 31, 2008. The gross profit margin increase was primarily a result of a $3.5 million reduction in inventory write-downs in the quarter ended December 31, 2009 as compared to the quarter ended December 31, 2008.

     For the nine months ended December 31, 2009, the gross profit margin decreased to 23.2%, as compared to 28.4% for the nine months ended December 31, 2008. The decline in the gross profit margin was principally due to underutilized capacity caused by decreased revenues as a result of the global economic downturn.

Research, Development and Engineering.

     R&D expenses typically consist of internal engineering efforts for product design and development. As a percentage of net revenues, our R&D expenses for the three and nine months ended December 31, 2009 were 8.0% and 8.5%, respectively, as compared to 8.1% and 7.2% for the three and nine months ended December 31, 2008. The increase in the percentage of R&D expenses for the

nine months ended December 31, 2009 was due to a decrease in net revenues, rather than an increase in R&D expenses. Expressed in absolute dollars, for the three months ended December 31, 2009 as compared to the same period of the prior year, our R&D expenses increased by approximately $411,000, or 8.7%. The acquisition of our display driver business in the quarter ended September 30, 2009 resulted in an increase in R&D headcount and expenses in the quarter ended December 31, 2009. For the nine months ended December 31, 2009 as compared to the same period of the prior year, our R&D expenses decreased by approximately $1.4 million, or 8.7%. The decreases in R&D expenses were mainly due to a reduction in personnel costs related to plant shutdowns.

Selling, General and Administrative.

     As a percentage of net revenues, our SG&A expenses for the three and nine months ended December 31, 2009 were 13.8% and 15.1%, respectively, as compared to 15.8% and 14.3% for the three and nine months ended December 31, 2008. Expressed in absolute dollars, SG&A expenses declined by $392,000 and $5.5 million, or 4.3% and 18.0%, respectively, for the three and nine months ended December 31, 2009 as compared to the same periods in the prior year, primarily due to lower sales and marketing expenses caused by lower commission expense, as well as lower personnel costs and freight expense.

Restructuring Charges.

     In the quarter ended September 30, 2009, we initiated plans to restructure our European manufacturing and assembly operations to align them to current market conditions. The plans primarily involved the termination of employees and centralization of certain positions. Costs related to termination of employees represented severance payments and benefits. The restructuring charges recorded in conjunction with the plan represented severance costs and have been included under “Restructuring charges” in our unaudited condensed consolidated statements of operations. The restructuring accrual as of December 31, 2009 was included under “Accrued expenses and other current liabilities” on our unaudited condensed consolidated balance sheets.

     During the three and nine months ended December 31, 2009, we incurred restructuring charges of $32,000 and $1.0 million, respectively. See “Note 4: Restructuring Charges” in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.

Other Income (Expense), net.

     In the quarter ended December 31, 2009, other income, net was $691,000 as compared to other expense, net of $109,000 in the quarter ended December 31, 2008. The other income, net in the three months ended December 31, 2009 principally consisted of $682,000 of gains associated with changes in exchange rates for foreign currency transactions. The other expense, net in the three months ended December 31, 2008 consisted principally of losses associated with changes in exchange rates for foreign currency transactions.

     Other expense, net in the nine months ended December 31, 2009 was $1.7 million, as compared to other income, net of $1.6 million in the nine months ended December 31, 2008. For the nine months ended December 31, 2009, other expense, net consisted principally of losses associated with changes in exchange rates for foreign currency transactions of $1.6 million. For the nine months ended December 31, 2008, other income, net primarily consisted of gains associated with changes in exchange rates for foreign currency transactions.

Provision for Income Tax.

     For the three and nine months ended December 31, 2009, we recorded income tax provisions of $1.7 million and $347,000. For the three and nine months ended December 31, 2008, we recorded income tax benefit of $1.3 million and an income tax provision of $4.9 million, respectively. For the three months ended December 31, 2009, the provision for income tax represented the adjustment of the income tax account to reflect a change in our estimated income taxes for the year based on nine months of experience, offset by a favorable impact on the reversal of accrued tax expenses of $350,000 following the conclusion of an audit in a foreign tax jurisdiction. The provision for income tax for the nine months ended December 31, 2009 was incurred because we had profits in certain jurisdictions and losses in jurisdictions with comparatively lower tax rates, partially offset by the release of valuation allowances. For the three and nine months ended December 31, 2008, our accounting for income tax was affected by permanent items, including the goodwill impairment, net of a valuation allowance release.

Liquidity and Capital Resources

     At December 31, 2009, cash and cash equivalents were $86.5 million as compared to $55.4 million at March 31, 2009.

     Our cash provided by operating activities for the nine months ended December 31, 2009 was $23.2 million, an increase of $6.1 million as compared to the comparable period of the prior year. Our operating cash flow improved in large part as a result of reduced

inventory purchasing. Our net inventories decreased by $10.2 million, or 13.5%, as compared to net inventories at March 31, 2009, primarily due to reduced inventory purchases and higher inventory reserves. Accounts receivable at December 31, 2009 decreased by $709,000, or 1.9%, as compared to the accounts receivable at March 31, 2009, primarily due to the reduction in net revenues for the nine months ended December 31, 2009. Our accounts payable at December 31, 2009 increased by $2.9 million, or 21.2%, from accounts payable at March 31, 2009, primarily because of the timing of the purchase of inventory.

     Our net cash used in investing activities for the nine months ended December 31, 2009 was $5.4 million as compared to net cash used in investing activities of $4.9 million during the nine months ended December 31, 2008. During the nine months ended December 31, 2009, our uses of cash for investing activities principally reflected $2.6 million for a business combination and $2.6 million in purchases of property and equipment. During the nine months ended December 31, 2008, we spent $7.8 million on purchases of property, plant and equipment, which was offset by proceeds of $3.9 million from sales of investments and assets.

     For the nine months ended December 31, 2009, net cash received in financing activities was $11.5 million, as compared to net cash used in financing activities of $12.4 million in the nine months ended December 31, 2008. During the nine months ended December 31, 2009, net cash provided by financing activities primarily reflected $15.0 million in proceeds borrowed under line of credit, offset by $4.2 million in principal payments on capital lease and loan obligations. During the nine months ended December 31, 2008, net cash was used primarily for principal repayments on capital lease obligations and repayments of loans, offset by proceeds from employee equity plans.

     At December 31, 2009, capital lease obligations and loans payable totaled $39.6 million. This represented 45.7% of our cash and cash equivalents and 21.6% of our stockholders’ equity.

     We are obligated on a €7.0 million, or $10.0 million, loan. The loan has a remaining term of about 11 years, ending in June 2020, and bears a variable interest rate, dependent upon the current Euribor rate and the ratio of indebtedness to cash flow for the German subsidiary. Each fiscal quarter a principal payment of €167,000, or about $239,000, and a payment of accrued interest are required. Financial covenants for a ratio of indebtedness to cash flow, a ratio of equity to total assets and a minimum stockholders’ equity for the German subsidiary must be satisfied for the loan to remain in good standing. The loan may be prepaid in whole or in part at the end of a fiscal quarter without penalty. At December 31, 2009, we complied with the financial covenants. The loan is collateralized by a security interest in the facility in Lampertheim, Germany, which is owned by our U.S. parent.

     On August 2, 2007, we completed the purchase of a building in Milpitas, California. We moved our corporate office and a facility for operations to this location in January 2008. In connection with the purchase, we assumed a loan, secured by the building, of $7.5 million. The loan bears interest at the rate of 7.455% per annum and is due and payable in February 2011. Monthly payments of principal and interest of $56,000 are due under the loan. In addition, monthly impound payments aggregating $14,000 are to be made for items such as real property taxes, insurance and capital expenditures. The balance of the loan liability at December 31, 2009 was $7.2 million. At maturity, the remaining balance on the loan will be approximately $7.1 million.

     In September 2009, we entered into an agreement with Bank of the West, or BOW, for a letter of credit facility of $3.0 million. The facility expires on March 31, 2010. At December 31, 2009, there was an open letter of credit with a balance of $52,000 to support inventory purchases.

     On November 13, 2009, we entered into a credit agreement for a revolving line of credit with BOW, under which we may borrow up to $15.0 million. Borrowings may be repaid and re-borrowed during the term of the credit agreement. The obligations are guaranteed by two of our subsidiaries. All amounts owed under the credit agreement are due and payable on October 31, 2011. On November 16, 2009, we borrowed $15.0 million pursuant to the credit agreement. See Note 9, “Borrowing Arrangements” in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding the credit agreement.

     The Agreement also includes a $3.0 million letter of credit subfacility commencing in April 2010. See Note 16, “Commitment and Contingencies” in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding the terms of the subfacility.

     On December 5, 2009, we entered into a definitive agreement to acquire Zilog, Inc., or Zilog. Under the terms of the agreement, we will acquire all of the Zilog’s outstanding common shares for $3.5858 per share in cash and cash out its outstanding stock options for aggregate consideration of approximately $62.4 million. The acquisition is subject to the approval of Zilog shareholders and other customary closing conditions. The transaction is expected to be completed during the quarter ended March 31, 2010.

     Additionally, we maintain two defined benefit pension plans: one for the United Kingdom employees and one for German employees. These plans cover most of the employees in the United Kingdom and Germany. Benefits are based on years of service and the employees’ compensation. We deposit funds for these plans, consistent with the requirements of local law, with investment

management companies, insurance companies, trustees or accrue for the unfunded portion of the obligations. Both plans have been curtailed. As such, the plans are closed to new entrants and no credit is provided for additional periods of service. The total pension liability accrued for these plans at December 31, 2009 was $14.4 million.

     We believe that our cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our anticipated cash requirements for the next 12 months. Our liquidity could be negatively affected by a decline in demand for our products, increases in the cost of materials or labor, investments in new product development or one or more acquisitions. We use derivative contracts in the normal course of business to manage our foreign currency exchange and interest rate risks. We did not have any significant open derivative contracts at December 31, 2009. There can be no assurance that additional debt or equity financing will be available when required or, if available, can be secured on terms satisfactory to us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our market risk has not changed materially from the market risk disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

     Based on their evaluation as of December 31, 2009, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations. Furthermore, these controls and procedures were also effective to ensure that information required to be disclosed by us in this Quarterly Report on Form 10-Q was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Inherent Limitations on Effectiveness of Controls

     Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our procedures or our internal controls will prevent or detect all errors and all fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of our controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, have been detected.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     We currently are involved in a variety of legal matters that arise in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters will have a material adverse effect on our financial condition, results of operations and cash flows. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs.

ITEM 1A. RISK FACTORS

     In addition to the other information in this Quarterly Report on Form 10-Q, the following risk factors should be considered carefully in evaluating our business and us. Additional risks not presently known to us or that we currently believe are not serious may also impair our business and its financial condition.

     Fluctuations in demand for our products may harm our financial results and are difficult to forecast.

     Current uncertainty in global economic conditions poses a risk to the overall economy and to our business, as our customers may defer purchases in response to tighter credit and negative financial news, which could negatively affect product demand and other related matters. If demand for our products fluctuates as a result of economic conditions or otherwise, our revenues and gross margin could be harmed. Important factors that could cause demand for our products to fluctuate include:

	•		changes in business and economic conditions, including a downturn in the semiconductor industry and/or the overall economy;
	•		changes in consumer and business confidence caused by changes in market conditions, including changes in the credit market, expectations for inflation, and energy prices;
	•		competitive pressures, particularly pricing pressures;
	•		changes in customer product needs;
	•		changes in the level of customers’ components inventory; and
	•		strategic actions taken by our competitors.

     If product demand decreases, our manufacturing or assembly and test capacity could be underutilized, and we may be required to record an impairment on our long-lived assets including facilities and equipment, as well as intangible assets, which would increase our expenses. In addition, factory planning decisions may shorten the useful lives of long-lived assets, including facilities and equipment, and cause us to accelerate depreciation. These changes in demand for our products and in our customers’ product needs could have a variety of negative effects on our competitive position and our financial results and, in certain cases, may reduce our revenues, increase our costs, lower our gross margin percentage or require us to recognize impairments of our assets. In addition, if product demand decreases or we fail to forecast demand accurately, we could be required to write off inventory or record underutilization charges, which would have a negative impact on our gross margin.

     Our visibility regarding the future has declined.

     As economic uncertainty has increased, our customers have reduced their advance orders and issued orders with shorter lead times. This has reduced our visibility regarding future production and shipments, and related revenues. With such reduced visibility, our understanding regarding the direction and rate of change in our product markets has declined and the risks attendant to decisions based on estimates of future orders and shipments, such as the ordering of raw materials, the commencement of production and the appropriate levels of inventory, have increased.

     The recent financial crisis could negatively affect our business, results of operations and financial condition.

     The recent financial crisis affecting the banking system and financial markets have resulted in a tightening in the credit markets and low level of liquidity for many companies. There could be a number of effects from the credit crisis on our business, including insolvency of key suppliers resulting in product delays and inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies.

     Our operating results fluctuate significantly because of a number of factors, many of which are beyond our control.

     Given the nature of the markets in which we participate, we cannot reliably predict future revenues and profitability, and unexpected changes may cause us to adjust our operations. Large portions of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs. Thus, small declines in revenues could seriously negatively affect our operating results in any given quarter. Our operating results may fluctuate significantly from quarter to quarter and year to year. For example, comparing fiscal 2002 to fiscal 2001, net revenues fell by 25.6% and net income fell by 85.7%. Further, from fiscal 2005 to fiscal 2006 and from fiscal 2008 to fiscal 2009, net income in one year shifted to net loss in the next year. Some of the factors that may affect our quarterly and annual results are:

	•		the reduction, rescheduling or cancellation of orders by customers;
	•		fluctuations in timing and amount of customer requests for product shipments;
	•		changes in the mix of products that our customers purchase;
	•		loss of key customers;
	•		the cyclical nature of the semiconductor industry;
	•		competitive pressures on selling prices;
	•		damage awards or injunctions as the result of litigation;
	•		market acceptance of our products and the products of our customers;
	•		fluctuations in our manufacturing yields and significant yield losses;
	•		difficulties in forecasting demand for our products and the planning and managing of inventory levels;
	•		the availability of production capacity;
	•		the amount and timing of investments in research and development;
	•		changes in our product distribution channels and the timeliness of receipt of distributor resale information;
	•		the impact of vacation schedules and holidays, largely during the second and third fiscal quarters of our fiscal year; and
	•		the amount and timing of costs associated with product returns.

     As a result of these factors, many of which are difficult to control or predict, as well as the other risk factors discussed in this Quarterly Report on Form 10-Q, we may experience materially adverse fluctuations in our future operating results on a quarterly or annual basis.

     Our gross margin is dependent on a number of factors, including our level of capacity utilization.

     Semiconductor manufacturing requires significant capital investment leading to high fixed costs including depreciation expense. We are limited in our ability to reduce fixed costs quickly in response to any shortfall in revenues. If we are unable to utilize our manufacturing, assembly and testing facilities at a high level, the fixed costs associated with these facilities will not be fully absorbed, resulting in lower gross margins. Increased competition and other factors may lead to price erosion, lower revenues and lower gross margins for us in the future.

     We order materials and commence production in advance of anticipated customer demand. Therefore, revenue shortfalls may also result in inventory write-downs.

     We typically plan our production and inventory levels based on our own expectations for customer demand. Actual customer demand, however, can be highly unpredictable and can fluctuate significantly. In response to anticipated long lead times to obtain inventory and materials, we order materials and production in advance of customer demand. This advance ordering and production may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize. This risk has

increased in recent periods, as economic conditions have declined. For example, additional inventory write-downs occurred in the quarter ended March 31, 2009.

     Our backlog may not result in future revenues.

     Customer orders typically can be cancelled or rescheduled without penalty to the customer. As a result, our backlog at any particular date is not necessarily indicative of actual revenues for any succeeding period. A reduction of backlog during any particular period, or the failure of our backlog to result in future revenues, could harm our results of operations.

     Our international operations expose us to material risks.

     For the nine months ended December 31, 2009, our product sales by region were approximately 29.8% in the United States, approximately 33.2% in Europe and the Middle East, approximately 32.3% in Asia Pacific and approximately 4.7% in Canada and the rest of the world. We expect revenues from foreign markets to continue to represent a significant portion of total revenues. We maintain significant operations in Germany and the United Kingdom and contracts with suppliers and manufacturers in South Korea, Japan and elsewhere in Europe and Asia Pacific. Some of the risks inherent in doing business internationally are:

	•		foreign currency fluctuations;
	•		longer payment cycles;
	•		challenges in collecting accounts receivable;
	•		changes in the laws, regulations or policies of the countries in which we manufacture or sell our products;
	•		trade restrictions;
	•		cultural and language differences;
	•		employment regulations;
	•		limited infrastructure in emerging markets;
	•		transportation delays;
	•		seasonal reduction in business activities;
	•		work stoppages;
	•		labor and union disputes;
	•		terrorist attack or war; and
	•		economic or political instability.