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International Rectifier 10-K 2008

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TABLE OF CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K

(Mark One)    

ý

 

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

 

 

             For the fiscal year ended June 30, 2008

OR

o

 

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

 

 

             For the transition period from                             to                            

Commission file number 1-7935

INTERNATIONAL RECTIFIER CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  95-1528961
(IRS Employer
Identification No.)

233 Kansas Street
El Segundo, CA 90245
(Address of Principal Executive Offices)(Zip Code)

Registrant's telephone number, including area code: (310) 726-8000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $1.00   The New York Stock Exchange
Preferred Stock Purchase Rights   The New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

         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 ý No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         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 ý   Accelerated filer o

 

Non-accelerated filer o (Do not check if smaller reporting company)

 

Smaller reporting company o

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý

         The aggregate market value of the registrant's voting common stock, par value $1.00 per share, held by non-affiliates as of the last business day of the registrant's most recently completed second fiscal quarter was $2,418,855,115 (computed using the closing price of a share of Common Stock on December 28, 2007, reported by the New York Stock Exchange).

         There were 72,852,072 shares of the registrant's common stock, par value $1.00 per share, outstanding on September 5, 2008.


Table of Contents


TABLE OF CONTENTS

 
   

PART I

  2
 

ITEM 1.    BUSINESS

  2
 

ITEM 1A.    RISK FACTORS

  12
 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

  26
 

ITEM 2.    PROPERTIES

  26
 

ITEM 3.    LEGAL PROCEEDINGS

  27
 

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

  30

PART II

  32
 

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

  32
 

ITEM 6.    SELECTED FINANCIAL DATA

  33
 

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  35
 

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  55
 

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  58
   

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  59
   

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 2008, 2007 AND 2006

  61
   

CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2008 AND 2007

  62
   

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) FOR THE FISCAL YEARS ENDED JUNE 30, 2008, 2007 AND 2006

  63
   

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED JUNE 30, 2008, 2007 AND 2006

  64
   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  65
 

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

  121
 

ITEM 9A.    CONTROLS AND PROCEDURES

  121
 

ITEM 9B.    OTHER INFORMATION

  126

PART III

  127
 

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

  127
 

ITEM 11.    EXECUTIVE COMPENSATION

  129
 

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

  161
 

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  164
 

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

  164

PART IV

  166
 

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

  166
 

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS ENDED JUNE 30, 2008, 2007 AND 2006

  180

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EXPLANATORY NOTE

        During fiscal year 2008, the Audit Committee of our Board of Directors ("Audit Committee") completed an investigation (the "Investigation") into certain accounting and financial reporting matters. As a result of the issues identified in the Investigation, as well as issues identified in additional reviews and procedures conducted by management with the assistance of external advisors, the Audit Committee determined that neither our financial statements for the fiscal quarters ended September 30, 2003 through December 31, 2006 and for the fiscal years ended June 30, 2004 through June 30, 2006 nor management's reports on internal control over financial reporting for the fiscal years ended June 30, 2005 and 2006 should be relied upon because of certain accounting errors and irregularities in those financial statements and reports on internal control over financial reporting. Accordingly, we restated our previously issued financial statements for those periods. Restated financial information is presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, filed with the Securities and Exchange Commission ("SEC") on August 1, 2008, which also contains a description of the Investigation, the accounting errors and irregularities identified and the adjustments made as a result of the restatement.

        This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to expectations concerning matters that (a) are not historical facts, (b) predict or forecast future events or results, or (c) embody assumptions that may prove to have been inaccurate. These forward-looking statements involve risks, uncertainties and assumptions. When we use words such as "believe," "expect," "anticipate" or similar expressions, we are making forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give readers any assurance that such expectations will prove correct. The actual results may differ materially from those anticipated in the forward-looking statements as a result of numerous factors, many of which are beyond our control. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the factors discussed in the sections entitled "Risk Factors" and "Critical Accounting Policies and Estimates" within Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." All forward-looking statements attributable to us are expressly qualified in their entirety by the factors that may cause actual results to differ materially from anticipated results. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinion only as of the date hereof. We undertake no duty or obligation to revise these forward-looking statements. Readers should carefully review the risk factors described in this document as well as in other documents we file from time to time with the SEC.


PART I

ITEM 1.    BUSINESS

        International Rectifier Corporation ("IR" or the "Company") designs, manufactures and markets power management semiconductors. Power management semiconductors address the core challenges of power management, power performance and power conservation, by increasing system efficiency, allowing more compact end-products, improving features on electronic devices and prolonging battery life.

        We pioneered the fundamental technology for power metal oxide semiconductor field effect transistors ("MOSFETs") in the 1970s, and estimate that the majority of the world's planar power MOSFETs use our technology. Power MOSFETs are instrumental in improving the ability to manage power efficiently. Our products include power MOSFETs, high voltage analog and mixed signal integrated circuits ("HVICs"), low voltage analog and mixed signal integrated circuits ("LVICs"), digital integrated circuits ("ICs"), radiation-resistant ("RAD-Hard™") power MOSFETs, insulated gate

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bipolar transistors ("IGBTs"), high reliability DC-DC converters, PowerStage ("PS") modules, and DC-DC converter type applications.

        Our semiconductors are found in a wide variety of applications, such as:

Automotive Applications   Networking
Industrial Motors   Display
Consumer Electronics   Servers
Personal Computers   Game Stations
Household Appliances   Aerospace and Defense
Telecommunications    

        With the demand for energy usage increasing worldwide, governments and consumers alike are striving to conserve energy and demand more efficient uses of power in everything from computers to appliances to military aircraft to hybrid cars. According to iSuppli Corporation ("iSuppli"), a semiconductor industry market research company, the market for power management semiconductors for calendar year 2008 is approximately $27.6 billion, primarily in three areas: voltage regulation, power switching transistors and ICs.

        The information technology, industrial, consumer, aerospace and defense and automobile industries use power management semiconductors to promote energy efficiency and improve performance metrics. Power management semiconductors enable energy savings of up to 60 percent by delivering the power tailored for a particular electrical device, rather than delivering a constant stream of power. Additionally, high-density semiconductors are required to power highly sophisticated electronic devices, such as servers and storage, telecommunications, networking and cell phone infrastructure, desktop and laptop computers, and gaming devices.

Business Strategy and Segments

Business Strategy

        Since our introduction of the power MOSFET in the 1970's, we have improved the technology and design of our power management products while significantly expanding our offerings. Our mission has been to provide solutions that will continue to improve in their energy-efficient performance and reduce global energy consumption. Our business segments primarily address two key challenges.

        Our first challenge is energy savings, which we define as applications driven by a reduction of energy consumption. The main applications influenced by energy consumption are in automotive, motion control, lighting and display products, audio and visual products, and satellite and aerospace. Lowering the amounts of energy consumption of these applications can largely influence a buyer's decision as to whether or not to buy the product.

        Our second challenge is in promoting energy efficiency. For example, in data centers, high efficiency for enterprise servers, routers, switches and storage equipment needs to be delivered at very high power density. The smaller we can make our solutions, the more room remains for additional system functionality. Efficiency and power density are increasingly influencing the buyer's decision as to which solution to employ in their applications.

        As part of our strategy, we bring to our customers an experienced technical sales team that is recognized for its ability to assist customers in providing power management solutions for the customers' longer-term technology and product requirements. These technical sales teams are comprised of account managers and field application engineers. These teams interface with our customers and work closely with their designers to integrate our products to create greater energy efficiency. We have been known as an energy-efficient power management solutions company by consistently working with customers to deliver new technologies in advance of their needs and solutions

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that align our products with our customers' roadmap. To better understand and respond to our customers' longer-term needs, our technical sales teams often directly communicate information from customers to the respective marketing and design center teams who address their technological needs.

        With the world continuing its focus on energy conservation, we develop technologies that will advance the state of the art in energy-efficiency. Our technologies help address the following: thermal management, which is the management of the heat load within an application; high frequency, which is the challenge in our customer's applications of placing components closer together that use little energy; high voltage, which is the challenge of moving a high amount of energy within an application; and cost reduction, which is the challenge of combining elements in smaller and smaller chips at a low cost. We believe our products and technologies are very competitive in these areas in the relevant market segments in which we compete.

Segments

        As discussed in Part II, Item 8, Note 2, "Discontinued Operations and the Divestiture," we sold our Power Control Systems ("PCS") business ("PCS Business") to Vishay Intertechnology, Inc. ("Vishay") on April 1, 2007 (the "Divestiture"). Subsequent to the Divestiture in the fourth quarter of our fiscal year ended June 30, 2007, our Chief Operating Decision Maker, who is our Chief Executive Officer ("CEO"), redefined our business segments to better focus on the two key power management challenges, energy savings and energy efficiency. As a consequence, beginning in the fourth fiscal quarter ended June 30, 2007, we reported our financial segments based on how our CEO reviewed and allocated resources for the business and assessed the performance of our business managers. We now report in seven segments: Enterprise Power ("EP"), Power Management Devices ("PMD"), PS, Energy-Saving Products ("ESP"), Aerospace and Defense ("A&D"), Intellectual Property ("IP") and Transition Services ("TS").

        As part of the PCS Business sale to Vishay, we agreed to provide certain manufacturing and support services for up to three years following the closing date of the Divestiture, which is reported separately in the TS segment. The results of the PCS Business through the Divestiture closing date were reported in our prior Commodity Products ("CP") and Non-Aligned Products ("NAP") segments, consistent with prior years and in line with our business segment reporting prior to our reorganization and the redefinition of our business segments by our CEO. For the fiscal year ended June 30, 2007, the financial results of the former NAP segment were included in discontinued operations and prior period results were correspondingly reclassified. Financial results of the former CP segment were not included in discontinued operations, as we expect to have significant ongoing involvement based on the significance of the cash flows to be derived from the PCS transition services.

        In addition, as part of our reorganization, whereas previously power management MOSFETs were reported based on end market applications within the ESP segment and the previously reported Computing and Communication ("C&C") segment (which is now separated into the EP, PMD and PS segments), they are now reported within the PMD segment.

        Below is a description of our reportable segments:

    The PMD segment consists of our discrete power MOSFETs, excluding DirectFET® and IGBTs. These products are multi-market in nature and therefore add value across a wide-range of applications and markets. The PMD segment targets power supply, automotive, notebook and industrial and commercial battery-powered applications.

    The ESP segment includes our HVICs, digital control ICs, intelligent power switch ICs, micro-electronic relay ICs, motion control modules, high voltage DirectFET® and IGBTs. ESP targets solutions in variable-speed motion controls for washing machines, refrigerators, air conditioners, fans, pumps and compressors; advanced lighting products such as fluorescent lamps, high

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      intensity discharge lamps, cold cathode fluorescent tubes and light-emitting diodes; advanced automotive solutions such as diesel injection and electric-gasoline hybrids; and consumer applications such as plasma televisions, liquid crystal display ("LCD") TV and class D audio systems. These products provide multiple technologies to deliver completely integrated design platforms specific to these customers.

    The A&D segment includes our RAD-Hard™ power management modules, RAD-Hard™ power MOSFETs, RAD-Hard™ ICs, and other high-reliability power components that address power management requirements in satellites, launch vehicles, aircraft, ships, submarines and other defense and high-reliability applications. A&D's strategy is to apply multiple technologies to deliver highly efficient power delivery in applications that operate in harsh environments such as space, underwater and underground, and certain medical applications.

    The EP segment includes our LVICs (including XPhase® and SupIRBuck™) and DirectFET® Power MOSFETs. Products within the EP segment are focused on data center applications (such as servers, storage, routers and switches), and communication infrastructure equipment end markets. Generally, these products contain multiple differentiated technologies and are targeted to be combined as system solutions to our customers for their next generation applications that require a higher level of performance and technical service.

    The PS segment is solely comprised of our iPOWIR® product which is an optimized and versatile functional component that combines multiple power semiconductors, ICs, and passive elements into a single thermally enhanced package. The PS segment targets computers, switchers and routers, servers and game stations.

    The IP segment includes revenues from the sale of our technologies and manufacturing process know-how, in addition to the operating results of our patent licensing and settlements of claims brought against third parties. IP segment revenue is dependent on the unexpired portion of our licensed MOSFET patents. Some of our power MOSFET patents have expired in calendar year 2007 and the broadest expire in calendar year 2008. Certain of the licensed MOSFET patents remain in effect through 2010. With the expiration of our broadest MOSFET patents, most of our IP segment revenue ceased during the fourth quarter of fiscal year 2008; however, we continue, from time to time, to enter into opportunistic licensing arrangements that we believe are consistent with our business strategy. The strategy within the IP segment is to concentrate on creating and using our IP primarily for the design and development of new value-added products, along with opportunistic licensing.

    The TS segment consists of the operating results of the transition services, including wafer fabrication, assembly, product supply, test and other manufacturing related support services being supplied to Vishay as part of the Divestiture. The TS segment targets to substantially complete the transition services within three years following the consummation of the Divestiture.

    The CP segment is comprised primarily of older-generation power components that have widespread use throughout the power management industry, but are typically commodity in nature. We sold the business reported within CP to Vishay as part of the Divestiture on April 1, 2007, but continue to receive transition services revenue from Vishay in following periods as part of our TS segment.

        To realign our business segments in the fourth fiscal quarter ended June 30, 2007, we assessed our business strategy going forward after the Divestiture. As part of this analysis, we determined that approximately $5.9 million of equipment was impaired and recorded the impairment in our financial statements for our fiscal year ended June 30, 2007, based on the review of the discounted cash flow analyses of forecasted business to be derived as a result of our strategy.

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Products and Technology

        The following table summarizes the types of products and end-market applications for our product segments:

        Excluded from the table below are our TS and IP segments, which are comprised primarily of services provided to Vishay related to the Divestiture and royalties from patent licensing and technology claim settlements, respectively. The table also excludes the CP segment which was sold to Vishay as part of the Divestiture.

 
  Power Management
Devices
  Energy-Saving
Products
  Aerospace and
Defense
  Enterprise Power   PowerStage
Revenues                    
  2008   $373.9 million   $202.2 million   $152.9 million   $102.5 million   $63.2 million
  2007   $416.5 million   $225.3 million   $157.0 million   $87.5 million   $84.1 million
  2006   $370.0 million   $200.6 million   $131.1 million   $68.3 million   $8.0 million

Primary product function

 

Power conversion and management with the lowest RDS(on) and widest range of packages up to 250V for a diverse range of applications.

 

Integrated design platforms that enable customers to add energy-conserving features that help achieve lower operating energy costs and manufacturing bill of material costs.

 

Discrete components, complex hybrid power module assemblies and rugged DC-DC converters utilize leading-edge power technology which, together with demanding environmental specifications.

 

Optimized power management system solutions that deliver power density, efficiency and performance in enterprise power.

 

Optimized and versatile functional component combines multiple power semiconductors, ICs, and passive elements into a single thermally enhanced package.

Type of products

 

Trench HEXFET® MOSFETs, discrete HEXFET® MOSFETs, dual HEXFET® MOSFETs, FlipFET®,
FETKY®, hybrid HEXFET® MOSFETs

 

High voltage ICs, Digital control ICs, IRAM integrated power modules, Intelligent power switches, MER ICs, High Voltage DirectFET®s, IGBTs

 

RAD-Hard™ MOSFETs, power modules/hybrid solutions, motor controls, DC-DC converters

 

Low voltage ICs, DirectFET®s, SupIRBuck™, XPhase®

 

iP120x
iP200x

End applications

 

Automotive, computing, communications, motor control

 

Automotive, motor control appliances, industrial automation, lighting and display, audio video

 

Commercial and military aircraft, launch vehicles, satellites, military ships, missiles, undersea telecommunication, submarines, oil drilling, medical devices

 

Servers, storage networks, routers, and switches, infrastructure equipment

 

Computers, switches, routers, servers and game stations

Major original equipment manufacturers

 

Alcatel-Lucent, Emerson, Cisco, Delta, Motorola, Nortel, Power-One

 

Bosch, Electrolux, Grundfos, Hitachi, LG, Matsushita, Nagares, Osram, Samsung, Sanyo, Regal-Beloit, Whirlpool

 

Lockheed Martin, Space System Loral, L-3 Communications, BAE, Boeing, Honeywell, Astrium, Northrop-Grumman

 

Delta, Emerson, HP, IBM, Intel, Microsoft

 

Sony, Cisco

        For additional financial information concerning our segments, see Part II, Item 7, "Management's Discussion and Analysis—Revenues and Gross Margin."

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Manufacturing

        Semiconductor manufacturing involves two phases of production: wafer fabrication and assembly. Wafer fabrication requires a sequence of process steps that expose silicon wafers to chemicals that change their electrical properties. The chemicals are applied in patterns that define cells or circuits within numerous individual devices, termed "die" or "chips" on each wafer. Assembly is the sequence of production steps that divide the wafer into individual chips and enclose the chips in structures, termed "packages" which make them usable in a circuit. Power semiconductors generally use process technology and equipment already proven in the manufacturing of ICs.

        Our strategy is to build our products using a combination of internal factories and external contract manufacturers. We use our internal factories to manufacture our new products and products where we utilize proprietary technologies. We also manufacture our high volume products at our factories since we are able to achieve relatively high equipment utilization and competitive product costs. We use contract manufacturers in wafer fabrication and assembly for additional capacity and to manufacture certain of our older technology products. On industry standard products, our contract manufacturing partners are able to provide competitive costs through their economies of scale that they achieve from spreading their capacity across many customers.

        We currently have wafer fabrication and/or assembly facilities in California, Arizona, Massachusetts, Mexico and Wales, United Kingdom. In addition, we have equipment at or manufacturing supply agreements with subcontractors located in China, Israel, Korea, Malaysia, Philippines, Taiwan, Thailand, the United States and Vietnam. Our Newport, Wales facility provides wafer fabrication capacity for our most advanced mixed-signal, analog and MOSFET processes. Our wafer fabrication facility in Temecula, California is used primarily for MOSFET-related processes. We have a high-voltage power management IC wafer fabrication facility in El Segundo, California. We also have engaged foundry services for wafer fabrication abroad. Assembly operations for products used in the A&D applications are located in Leominster, Massachusetts; Santa Clara, California; and Tijuana, Mexico. Our high-volume assembly lines for power MOSFETs and IGBTs are located in our facility in Tijuana, Mexico. We also assemble power MOSFETs and other products in subcontracted facilities abroad. Our Mesa, Arizona facility provides specialty silicon epitaxial services both in-house and to third parties.

Marketing, Sales and Distribution

        Our sales organization consists of in-house sales employees, external sales representatives, in-house field application, manufacturing and quality engineers. The function of the sales organization is to identify energy-efficient opportunities within our key customer applications, assist our original equipment manufacturer ("OEM") customers in designing our products into their applications, and providing longer-term solutions based on our customers' technology and product requirements. In many circumstances, we sell our products to the contract manufacturer of the OEM. We also leverage our distribution partners whose larger sales force, account network, inventory programs and logistics services provide our customers with additional distribution options. In the fiscal year ended June 30, 2008, we derived 49.6 percent, 45.6 percent and 4.8 percent of our revenues from direct sales to the OEMs, our distributors, and contract manufacturers, respectively.

        The goal of our marketing organization is to consolidate specific inputs from our customers and competition with the information gathered from our internal research and development ("R&D"), in order to develop enhanced solutions that can address our customers' requirements. Our marketing activities include identifying the existing products that may be incorporated into our customers' products more effectively. Our marketing group also includes the determination that new solutions should be designed in order to exceed the capabilities of the products currently on the market.

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        For financial information about the results for our geographic areas for each of the last three fiscal years, refer to Part II, Item 8, Note 8, "Segment Information" of Notes to Consolidated Financial Statements. For the risks attendant to our foreign operations, see Part I, Item 1A, "Risk Factors—Our international operations expose us to material risks."

Customers

        Our devices are incorporated in subsystems and end products manufactured by other companies. Our customers include OEMs, distributors and contract manufacturers. No customer accounted for more than ten percent of our consolidated revenue for the fiscal year ended June 30, 2008. The majority of our products in our ongoing business segments, including those in the PMD, ESP, A&D, EP and PS segments, are sold directly to OEM customers or distributors. No single customer accounted for more than ten percent of the revenues in our other segments. However, for the fiscal year ended June 30, 2008, approximately 5.9 percent of our consolidated revenue was associated with the shipment of one product either directly to or through our distributors to one OEM.

        The transition services provided to Vishay related to the Divestiture amounted to approximately 6.1 percent of our total consolidated revenue in fiscal year 2008.

        Our major distributors, based on revenue, include Arrow Electronics, Avnet, Future Electronics, Weikeng and Zenitron for the fiscal year ended June 30, 2008. Our major contract manufacturers included Celestica, Flextronics, Jabil, Sanmina-SCI and Solectron for the fiscal year ended June 30, 2008. Our major OEMs by revenue for our ongoing product segments for the fiscal year ended June 30, 2008 are as follows:

Segment:
  Customers

Power Management Devices

 

Alcatel-Lucent, Emerson, Cisco, Delta, Motorola, Nortel and Power-One

Energy-Saving Products

 

Bosch, Electrolux, Grundfos, Hitachi, LG, Matsushita, Nagares, Osram, Samsung, Sanyo, Regal-Beloit and Whirlpool

Aerospace and Defense

 

Lockheed Martin, Space System Loral, L-3 Communications, BAE, Boeing, Honeywell, Astrium and Northrop-Grumman

Enterprise Power

 

Delta, Emerson, HP, IBM, Intel and Microsoft

PowerStage

 

Sony and Cisco

        For financial information about geographic areas, please see Part I, Item 8, Note 8, "Segment Information."

Competition

        We encounter differing degrees of competition for our various products, depending upon the nature of the product and the particular market served. Generally, the semiconductor industry is highly competitive and subject to rapid price changes and product design changes. Several of our competitors are larger companies with greater financial resources. We believe that we differentiate from our competitors by our comprehensive line of power management products and our ability to combine these products into compact, cost-effective packages and system-level solutions. Our products compete with products manufactured by others on the basis of enabling capability, performance, reliability, quality, price, delivery time to customer and service (including technical advice and support).

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        Our major competitors for fiscal year ended June 30, 2008 are as follows:

Segment:
  Competitors

Power Management Devices

 

Fairchild, STMicroelectronics, ON Semiconductor and Infineon

Energy-Saving Products

 

STMicroelectronics, Infineon, NXP, Fairchild, Renesas, Toshiba, Mitsubishi

Aerospace and Defense

 

Interpoint, VICOR, VPT, MS Kennedy, Microsemi, Intersil, Linear Technology, STMicroelectronics

Enterprise Power

 

Intersil, ON Semiconductor, Renesas, Volterra, Infineon

PowerStage

 

Renesas, Toshiba, NXP

Research and Development

        Our R&D program focuses on power management ICs and power conversion functional components such as the advancement and diversification of our power MOSFET and IGBT switch product lines, as well as iPOWIR® and iRAM™ PS multi-chip modules. We have been developing and introducing some of the most advanced power management products and new architectures for the next-generation of applications, including new game stations, high-performance servers, hybrid vehicles and energy-efficient appliances. Our work with new technology platforms has led to our development of a gallium nitride-based power device technology platform for use in certain power conversion solutions. We continue to commit to R&D to generate new patents and other IP and concentrate on incorporating our technologies into our products. In the fiscal years ended June 30, 2008, 2007 and 2006, we spent $105.8 million (10.7 percent of revenue), $122.8 million (10.2 percent of revenue), and $104.1 million (10.3 percent of revenue), respectively, on R&D activities.

        Our design centers are located throughout the world, including the United States, the United Kingdom, Denmark, Italy and France. During fiscal year 2008, we continued to introduce advanced power management solutions that drive high performance computing and save energy across our served markets. These products also highlighted our focus on delivering integrated solutions and extensive applications support. Among them were a) tailored iMOTION™ integrated design platform for variable speed pumps, b) ICs and chipsets improving power density and efficiency in DC-DC applications found in high performance computers and servers, c) the continued expansion of our popular XPhase® and DirectFET® product families, d) ICs for Class D audio, electronic lighting ballasts and motor control, e) several "application-ready" reference designs for point-of-load DC/DC conversion, multi-channel Class D audio, lighting and motor control, f) our SmartRectifier™ ICs helping computer and consumer entertainment devices meet emerging system and standby power regulations, and g) radiation hardened DC-DC converter modules for space satellite power applications.

Intellectual Property

        We continue to make significant investments in developing and protecting our IP. In the past fiscal year, we added over 160 patents worldwide. We have approximately 500 issued unexpired U.S. patents and over 1,150 patent applications pending worldwide. We are also licensed to use certain patents owned by others. We have several registered trademarks in the United States and abroad, including the trademarks HEXFET® and DirectFET®. We believe that our IP contributes to our competitive advantage.

        We are committed to enforcing our patent rights, including through litigation if necessary. Through successful enforcement of our MOSFET patents over the past decade, we have historically entered into a number of license agreements, generated royalty income, and received substantial settlement payments.

        We report within the IP segment revenues from the sale and/or licensing of our technologies and manufacturing process know-how, in addition to reporting the operating results of our patent licensing

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and settlements of claims brought against third parties. In the fiscal years ended June 30, 2008, 2007 and 2006, we derived $30.5 million, $44.2 million and $38.8 million of royalty revenues, respectively. IP segment revenue is dependent on the unexpired portion of our licensed MOSFET patents, the continued enforceability and validity of those patents, the ability of our competitors to design around our MOSFET technology or develop competing technologies, and general market conditions. The continuation of such royalties is subject to a number of risks (see Part I, Item 1A, "Risk Factors—Our ongoing protection and reliance on our IP assets expose us to risks"). Some of the MOSFET patents that have generated royalties and settlements expired in calendar year 2007 and the broadest of them expire or will expire in calendar year 2008. Certain of the MOSFET patents remain in effect through 2010. With the expiration of our broadest MOSFET patents, most of our IP segment revenue has ceased during the fourth quarter of fiscal year 2008; however, we continue, from time to time, to enter into opportunistic licensing arrangements that we believe are consistent with our business strategy.

        Aside from our MOSFET technologies, our IP strategy has been to use our IP primarily for the design and development of a value-added family of products, and to defend those products in the marketplace. From time to time, we also engage in opportunistic licensing. In our IP segment, we concentrate our efforts on the licensing of technologies or fields of use that have application beyond our product groups or which no longer align with our long-term business strategies for our product groups. We also target certain technologies for licensing that we believe help establish our product platforms and structures as industry standards and thereby enhance the growth of our products in various end market applications.

Environmental Matters

        Federal, state, local and foreign laws and regulations impose various restrictions and controls on the storage, use and discharge of certain materials, chemicals and gases used in semiconductor manufacturing processes, and on the operation of our facilities and equipment. We believe we use reasonable efforts to maintain a system of compliance and controls for these laws and regulations. Despite our efforts and controls, from time to time, issues may arise with respect to these matters. However, we do not believe that general compliance with such laws and regulations as now in effect will have a material adverse effect on our results of operations, financial position or cash flows.

        Additionally, under some of these laws and regulations, we could be held financially responsible for remedial measures if properties are contaminated or if waste is sent to a landfill or recycling facility that becomes contaminated. Also, we may be subject to common law claims if released substances damage or harm third parties. We cannot make assurances that changes in environmental laws and regulations will not require additional investments in capital equipment and the implementation of additional compliance programs in the future, which could have a material adverse effect on our results of operations, financial position or cash flows, as could any failure by us to comply with environmental laws and regulations.

        As part of the environmental review process, we provided certain disclosures of potential permit violations and other matters to local environmental authorities with respect to our Mesa, Arizona and Temecula, California facilities. We have taken steps to correct the alleged deficiencies. However, during the fiscal quarter ended September 30, 2007, we received a notification of proposed penalty in Mesa, Arizona from local environmental authorities in the amount of approximately $2.4 million, which we settled for $98,500 in December 2007. We have not yet been assessed any penalties with respect to the disclosures made for our Temecula, California facility. Additionally, during negotiations for the Divestiture, chemical compounds were discovered in the groundwater underneath one of our former manufacturing plants in Italy. We have advised appropriate governmental authorities and are awaiting further reply to our inquiries, with no current orders or directives on the matter outstanding from the governmental authorities.

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        IR and Rachelle Laboratories, Inc. ("Rachelle"), a former operating subsidiary of ours that discontinued operations in 1986, were each named a potentially responsible party ("PRP") in connection with the investigation by the United States Environmental Protection Agency ("EPA") of the disposal of allegedly hazardous substances at a major superfund site in Monterey Park, California ("OII Site"). Certain PRPs who settled certain claims with the EPA under consent decrees filed suit in Federal Court in May 1992 against a number of other PRPs, including us, for cost recovery and contribution under the provisions of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). We have settled all outstanding claims that have arisen against us out of the OII Site. No claims against Rachelle have been settled. We have taken the position that none of the wastes generated by Rachelle were hazardous.

        Counsel for Rachelle received a letter dated August 2001 from the U.S. Department of Justice, directed to all or substantially all PRPs for the OII Site, offering to settle claims against such parties for all work performed through and including the final remedy for the OII Site. The offer required a payment from Rachelle in the amount of approximately $9.3 million in order to take advantage of the settlement. Rachelle did not accept the offer.

        It remains the position of Rachelle that its wastes were not hazardous. Our insurer has not accepted liability, although it has made payments for defense costs for the lawsuit against us. We have made no accrual for potential loss, if any; however, an adverse outcome could have a material adverse effect on our results of operations or cash flows.

        We received a letter in June 2001 from a law firm representing UDT Sensors, Inc. ("UDT") relating to environmental contamination (chlorinated solvents such as trichlorethene) purportedly found in UDT's properties in Hawthorne, California. The letter alleges that we operated a manufacturing business at that location in the 1970's and/or 1980's and that we may have liability in connection with the claimed contamination. We have made no accrual for any potential losses since there has been no assertion of specific facts on which to form the basis for determination of liability.

        In November 2007, we were named as one of approximately 100 defendants in Angeles Chemical Company, Inc. et al. v. Omega Chemical PRP Group, LLC et al., No. EDCV07-1471 (TJH)(JWJx) (C.D. Cal.) (the "Angeles Case"). Angeles Chemical Company, Inc. and related entities ("Plaintiffs") own or operate a facility (the "Angeles Facility") which is located approximately one and a half miles downgradient of the Omega Chemical Superfund Site (the "Omega Site") in Whittier, California. Numerous parties, including us, allegedly disposed of wastes at the Omega Site. Plaintiffs claim that contaminants from the Omega Site migrated in groundwater from the Omega Site to the Angeles Facility, thereby causing damage to the Angeles Facility. In addition, they claim that the EPA considers them to be responsible for the groundwater plume near the Angeles Facility which Plaintiffs contend was caused by disposal activities at the Omega Site. Plaintiffs filed claims based on CERCLA, nuisance and trespass and also seek declaratory relief. Plaintiffs seek to require the defendants to investigate and cleanup the contamination and to recover damages. We previously entered into a settlement with other parties associated with the Omega Site pursuant to which we paid those entities money in exchange for an agreement to defend and indemnify us with regard to certain environmental claims (the "Omega Indemnification"). In that agreement, it was estimated that our volumetric share of wastes sent to the Omega Site was in the range of 0.08%. We believe that much, if not all of the risks associated with the Angeles Case should be covered by the Omega Indemnification. In addition, we have tendered the complaint to several of our insurance carriers who have agreed to defend under a reservation of rights. Therefore, we do not expect our out-of-pocket defense costs to be significant. In addition, in light of the Omega Indemnification, the potential for insurance coverage, and the fact that our volumetric share of Omega Site wastes was less than 0.1%, we do not believe that an adverse judgment against us would be material.

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Employees

        As of June 30, 2008, we employed approximately 5,100 people, approximately 4,100 of which were employed in North America, 700 in Europe and 300 in Asia Pacific and Japan. As of June 30, 2008, none of our U.S. employees had collective bargaining agreements and we consider our relations with our employees to be good. In some jurisdictions outside the United States, from time to time, employees may be covered by certain statutory, special or other arrangements, like work councils, that may seek benefits for covered personnel. We believe our relationships with such organizations are good.

Available Information

        We file with the SEC, pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, as amended ("Exchange Act"), annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished. These reports may be accessed at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information about us. The SEC's Internet address is http://www.sec.gov.

        Our Internet address is http://www.irf.com. We make available free of charge through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

        We also make available, free of charge, through our corporate governance website, our corporate charter, Bylaws, Corporate Governance Guidelines, charters of the committees of our Board of Directors, code of ethics and other information and material, including information about how to contact our Board of Directors, our committees and their members. To find this information and materials, visit our corporate governance section of our website at www.irf.com.

        Information made available on our website is not incorporated by this reference into this report.

Section 303A.12 of New York Stock Exchange Listed Company Manual Disclosure

        Pursuant to Rule 303A.12(A) of the New York Stock Exchange ("NYSE") Listed Company Manual, we submitted to the NYSE last year a Section 303A.12(a) CEO Certification as required by such rule. We are filing with the SEC the CEO and Chief Financial Officer (Acting) ("Acting CFO") certifications, without qualification, required under Section 302 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") as to this Form 10-K with respect to our 2008 fiscal year.

ITEM 1A.    RISK FACTORS

Statement of Caution Under the Private Securities Litigation Reform Act of 1995

        This Annual Report on Form 10-K Report includes some statements and other information that are not historical facts but are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. The materials presented can be identified by the use of forward-looking terminology such as "anticipate," "believe," "estimate," "expect," "may," "should," "view," or "will" or the negative or other variations thereof. We caution that such statements are subject to a number of uncertainties, and actual results may differ materially. Factors that could affect our actual results include those set forth below under "Factors that May Affect Future Results" and other uncertainties disclosed in our reports filed from time to time with the SEC. Unless required by law, we undertake no obligation to publicly update or revise any forward looking statements, to reflect new information, future events or otherwise.

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Factors That May Affect Future Results

        Pending and future governmental inquiries may adversely affect us, the trading prices of our securities and our ability to access the capital markets.

        During the course of the Investigation led by our Audit Committee and following its completion, our representatives met with representatives of the SEC, the Internal Revenue Service ("IRS"), the Office of the U.S. Attorney and other governmental officials to keep them advised as to the course of the Investigation. We continue to share information with the SEC and other governmental officials and are currently responding to subpoenas for records from the SEC. Adverse developments in connection with requests by the SEC or other governmental agencies, could negatively impact us and divert our resources and the focus of our management team from our ordinary business operations. In addition, we may incur significant expenses associated with responding to these investigations (including substantial fees of lawyers and other professional advisors and potential obligations to indemnify current and former officers and directors who may be subject to such investigation(s)), and we may be required to pay criminal or civil fines, consent to injunctions on future conduct or suffer other penalties, any of which could have a material adverse effect on us. It is also possible that the existence, findings and outcome of these inquiries may have a negative impact on lawsuits that are pending or may be filed against us, the trading prices of our securities and our ability to access the capital markets. See Part I, Item 3, "Legal Proceedings" for a more detailed description of these proceedings.

        Changes in end-market demand, due to downturns in the highly cyclical semiconductor industry, the sharp correction in the housing market and/or the significant fluctuations of oil prices, could affect our operating results and the value of our business.

        The semiconductor industry is highly cyclical and the value of our business may decline during the down portion of these cycles. During fiscal years 2008 and 2007, we have experienced a decline in end-market demand for our products as a result of the sharp correction in the housing market and the significant fluctuations of oil prices. Our revenue and gross margin are dependent on the level of corporate and consumer spending in various information technology and energy-saving end-market applications. If our projections of these expenditures fail to materialize, our operating results could be adversely impacted. To the extent these market conditions persist for a prolonged period of time, our business, financial condition and results of operations could be significantly harmed.

        In addition, we may experience significant changes in our profitability as a result of variations in sales, changes in product mix sought by customers, seasonality, price competition for orders and the costs associated with the introduction of new products and start-up of new facilities and additional capacity lines. The markets for our products depend on continued demand with the product technological platforms and in the mix we plan for and produce in the information technology, consumer, industrial, A&D and automotive markets. Changes in the demand mix, needed technologies and these end markets may adversely affect our ability to match our products, inventory and capacity to meet customer demand and could adversely affect our operating results and financial condition.

        The semiconductor business is highly competitive and increased competition could adversely affect the price of our products and otherwise reduce the value of an investment in our Company.

        The semiconductor industry, including the sectors in which we do business, is highly competitive. Competition is based on price, product performance, technology platform, product availability, quality, reliability and customer service. Price pressures often emerge as competitors attempt to gain a greater market share by lowering prices or by offering a more desirable technological solution. Pricing and other competitive pressures can adversely affect our revenue and gross margin, and hence, our profitability. We also compete in various markets with companies of various sizes, many of which are larger and have greater financial and other resources than we have, and thus they may be better able to

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withstand adverse economic or market conditions. In addition, companies not currently in direct competition with us may introduce competing products in the future.

        New technologies could result in the development of new products and a decrease in demand for our products, and we may not be able to develop new products to satisfy changes in demand.

        Our failure to develop new technologies or react to changes in existing technologies could materially delay our development of new products, which could result in decreased revenue and a loss of market share to our competitors. Rapidly changing technologies and industry standards, along with frequent new product introductions, characterize the semiconductor industry. As a result, we must devote significant resources to R&D. Our financial performance depends on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. During fiscal year 2008, we recognized significant revenues from the sale of certain PS product to one end customer. If our competitors were to develop a solution around our technology, the future viability of this product could be materially adversely impacted.

        We cannot assure you that we will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner, or that products or technologies developed by others will not render our products or technologies obsolete or noncompetitive. A fundamental shift in technologies in our product markets could have a material adverse effect on our competitive position within the industry. In addition, to remain competitive, we must continue to reduce die sizes and improve manufacturing yields. We cannot assure you that we can accomplish these goals.

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

        Our future financial performance and success are largely dependent on our ability to implement our recently announced three-phase growth strategy, consisting of business stabilization, operational optimization and growth acceleration. We cannot assure you that we will be able to successfully implement our business strategy or that implementing our strategy will sustain or improve our results of operations in the future.

        Our ongoing protection and reliance on our IP assets expose us to risks and continued levels of revenue in our IP segment is subject to our ability to (i) maintain current licenses, (ii) licensee and market factors not within our control and (iii) our ability to obtain new licenses.

        We have traditionally relied on our patents and proprietary technologies. Patent litigation settlements and royalty income substantially contribute to our financial results. Enforcement of our IP rights is costly, risky and time consuming. We cannot assure you that we can successfully continue to protect our IP rights, especially in foreign markets. Certain of our key MOSFET patents expired during calendar year 2007 with the broadest expiring in calendar year 2008. Certain of our MOSFET patents will remain in effect through 2010. We expect that with the expiration of our key MOSFET patents, most of our royalty revenue ceased during the fourth quarter of fiscal year 2008; however, from time to time, we continue to enter into opportunistic licensing arrangements that we believe are consistent with our business strategy.

        Our royalty income is also largely dependent on the following factors: remaining coverage under unexpired MOSFET patents; the continuing introduction and acceptance of products that are not covered by our patents; the defensibility and enforceability of our patents; changes in our licensees' unit sales, prices or die sizes; the terms, if any, upon which expiring license agreements are renegotiated; and our ability to obtain revenue from new licensing opportunities. Market conditions and mix of licensee products, as well as sales of non-infringing devices can significantly adversely affect royalty

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income. We also cannot guarantee that we can obtain new licenses to offset reductions in royalties from existing licenses. While we try to predict the effects of these factors and efforts, often there are variations or factors that can significantly affect results different from that predicted. Accordingly, we cannot guarantee that our predictions of our IP segment revenue will be consistent with actual results. We also cannot guarantee that our royalty income will continue at levels consistent with prior periods. Any decrease in our royalty income could have a material adverse effect on our operating results and financial condition.

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

        Our future success and competitive position may depend in part upon our ability to obtain or maintain certain proprietary technologies used in our principal products, which is achieved in part by defending and maintaining the validity of our patents and defending claims by our competitors of IP infringement, and at times asserting IP claims against third parties. We license certain patents owned by others. We are currently a defendant in IP claims, have asserted IP claims against others and we could become subject to other lawsuits in which it is alleged that we have infringed upon the IP rights of others.

        Our involvement in existing and future IP litigation could result in significant expense, adversely affect sales of the challenged product or technologies and divert the efforts of our technical and management personnel, whether or not such litigation is resolved in our favor. If any such infringements exist, arise or are claimed in the future against us, we may be exposed to substantial liability for damages and may need to obtain licenses from the patent owners, discontinue or change our processes or products or expend significant resources to develop or acquire non-infringing technologies. We cannot assure you that we would be successful in such efforts or that such licenses would be available under reasonable terms or that we would be successful in our claims against third parties. Our failure to develop or acquire non-infringing technologies, to obtain licenses on acceptable terms or the occurrence of related litigation itself or our failure to be successful in litigation could have a material adverse effect on our operating results and financial condition.

        If some OEMs do not design our products into their equipment or convert design or program wins to actual sales, for whatever reasons, including uncertainties regarding our Company, a portion of our revenue may be adversely affected.

        A "design-win" or program award from a customer does not guarantee that the design or program win will become future sales to that customer. For example, in our PS segment, we have announced new design or program wins in next generation game stations, and our other segments have had other design or program wins. We also are unable to guarantee that we will be able to convert these design or program wins, or any wins, into sales for the life of any particular program, or at all, or that the revenue from such wins would be significant. We also cannot guarantee that we will achieve the same level of design or program wins as we have in the past, or at all. Uncertainties regarding our Company, including uncertainties regarding pending litigation (see Part I, Item 3, "Legal Proceedings") or uncertainties regarding the Divestiture and ongoing disputes with Vishay could affect our ability to achieve design-wins or sales therefrom. Without design or program wins from OEMs, we would only be able to sell our products to these OEMs as a second source, if at all. Once an OEM designs another supplier's semiconductor into one of its product platforms, it is more difficult for us to achieve future design or program wins with that OEM's product platform because changing suppliers involves significant cost, time, effort and risk. Achieving a design or program win with a customer also does not ensure that we will receive significant revenue from that customer.

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        Delays in initiation of new production at our more advanced facilities, implementing new production processes or resolving problems associated with technical equipment malfunctions could adversely affect our manufacturing efficiencies.

        Our manufacturing efficiency will be an important factor in our future profitability, and we cannot assure you that we will be able to maintain or increase our manufacturing efficiency to the same extent as our competitors. Our manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified in an effort to improve yields and product performance. Impurities, defects or other difficulties in the manufacturing process can lower yields.

        In addition, as is common in the semiconductor industry, we have at times experienced difficulty in beginning production at new facilities or in effecting transitions to new manufacturing processes. As a consequence, we have experienced delays in product deliveries and reduced yields. We may experience manufacturing problems in achieving acceptable yields, experience product delivery delays, and/or quality issues in the future, as a result of, among other things, capacity constraints, construction delays, upgrading or expanding existing facilities or changing our process technologies, any of which could result in a loss of future revenue. Our operating results could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if revenue does not increase proportionately.

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

        Our manufacturing operations depend upon obtaining adequate supplies of materials, parts and equipment, including silicon, mold compounds and leadframes, on a timely basis from third parties. Our results of operations could be adversely affected if we were unable to obtain adequate supplies of materials, parts and equipment in a timely manner from our third party suppliers or if the costs of materials, parts or equipment increase significantly. From time to time, suppliers may discontinue products, extend lead times, limit supplies or increase prices due to capacity constraints or other factors. We have a limited number of suppliers or sole suppliers for some materials, parts and equipment, and any interruption could materially impair our operations and adversely affect our customer relations.

        We manufacture a substantial portion of our wafer product at our Temecula, California and Newport, Wales facilities. Any disruption of operations at those facilities could have a material adverse effect on our business, financial condition and results of operations.

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

        Our products are typically sold at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated. Although we maintain quality control systems, we ship large quantities of semiconductor devices to a wide range of customers around the world, for use in a variety of high profile and critical applications. In the ordinary course of our business, we receive claims for some of these products that are defective, or that do not perform to published specifications. Since a defect or failure in our products could give rise to failures in the end products that incorporate them (and consequential claims for damages against our customers from their customers depending on applicable law and contract), we often need to defend against claims for damages that are disproportionate to the revenue and profit we receive from the products involved. In addition, our ability to reduce such liabilities may be limited by the laws or the customary business practices of the countries where we do business. Even in cases where we do not believe we have legal liability for such claims, we may choose to pay for them to retain a customer's business or goodwill or to settle claims to

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avoid protracted litigation. Our results of operations and business would be adversely affected as a result of significant alleged quality or performance issues in our products, or if we are required or choose to pay for the damages that result.

        Although we currently have product liability and other types of insurance, we have certain deductibles and exclusions to such policies and may not have sufficient insurance coverage. We also may not have sufficient resources to satisfy all possible product liability or other types of product claims. In addition, in our A&D segment, we are sometimes subject to government procurement regulations and other laws that could result in costly investigations and other legal proceedings as a consequence of allegedly defective products or other actions. Any perception that our products are defective would likely result in reduced sales of our products, loss of customers and harm to our business and reputation.

        Our reliance on subcontractors to assemble certain of our parts as a lower cost alternative may expose us to business risks.

        Some of our products are assembled and tested by third party subcontractors. We have used subcontractors to assemble certain of our parts as a lower cost alternative to in-house manufacturing. We review these subcontractors' references and historical manufacturing experience prior to the engagement of their services, and require oversight over their quality and assurance processes for the production of our inventory. However, if we fail to adequately or completely review the subcontractors' historical or current manufacturing processes, the quality of our parts could be subject to higher failure rate, which could adversely impact our reputation and the growth of future business with the customers as a result.

        We have an existing dispute with one of our subcontractors over quality matters involving assembled product, and there can be no assurance that other disputes would not arise. In some instances, we do not have long-term assembly agreements with our assembly contractors. As a result, we do not have immediate control over our product delivery schedules or product quality. Due to the amount of time often required to qualify assemblers and testers and the high cost of qualifying multiple parties for the same products, we could experience delays in the shipment of our products if we are forced to find alternative third parties to assemble or test them. Any product delivery delays in the future could have a material adverse effect on our operating results and financial condition. Our operations and ability to satisfy customer obligations could be adversely affected if our relationships with these subcontractors were disrupted or terminated.

        Execution of our growth strategy exposes us to additional risks.

        Our growth strategy includes a number of changes to the manner in which we conduct business, including, among other things, the implementation of a number of cost reductions, and consolidation and rationalization of suppliers and our distribution channels. We have previously accepted the return of inventory in certain circumstances and experienced lower sales volume with certain distribution partners as we awaited the sale of channel inventory to end customers. Continued execution on our strategy could expose us to additional costs, the return of additional inventory and reduced sales to distributors. All of these risks could have an adverse impact on our results of operations.

        We maintain a backlog of customer orders that is subject to cancellation, reduction or delay in delivery schedules, which may result in lower than expected revenue and gross profit.

        With certain exceptions related to products within our A&D segment, we manufacture primarily pursuant to purchase orders for current delivery or to forecast, rather than pursuant to long-term supply contracts. The semiconductor industry is subject to rapid changes in customer outlooks or unexpected build ups of inventory in the supply channel as a result of shifts in end-market demand

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generally or in the mix of that demand. Accordingly, many of these purchase orders or forecasts may be revised or canceled without penalty. As a result, we must commit resources to the manufacturing of products, and a specific mix of products, without any advance purchase commitments from customers. Our inability to sell products after we devote significant resources to build them could have a material adverse effect on our levels of inventory (the value of our inventory), our revenue and our operating results generally. Additionally, cancellation or significant reduction in significant customer programs, like those for next generation game station or servers, could materially affect our ability to achieve our revenue and gross profit targets.

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

        We build and maintain inventory in order to meet our historic and projected needs, but cannot guarantee that the inventory we build will be adequate or the right mix of products to meet market demand. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary materials, and build the proper mix and amount of inventory, otherwise our revenue and gross margin may be adversely affected. Additionally, if we produce or have produced inventory that does not meet current or future demand, we may determine at some point that certain of the inventory may only be sold at a discount or may not be sold at all, resulting in the reduction in the carrying value of our inventory and a material adverse effect on our financial condition and operating results.

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

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

        Our distribution channel partners may return inventory which could negatively impact our financial results.

        Many of our distributors have some rights to return inventory under their stock rotation programs or may return inventory with our approval or other circumstances. In addition, as part of our growth strategy, we have, from time to time, accepted, and may in the future accept, additional returns. If these channel partners return a large amount of inventory, our operating results could be impacted by lower revenue and higher costs associated with inventory write-offs.

        We receive a significant portion of our revenue from a relatively small number of customers and distributors.

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

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        We may fail to attract or retain the qualified technical, sales, marketing and managerial personnel, and key executive officers required to operate our business successfully.

        Our future success depends, in part, upon our ability to attract and retain highly qualified technical, sales, marketing and managerial personnel, and key executive officers. Personnel with the necessary semiconductor expertise are scarce and competition for personnel with these skills is intense. We cannot assure you that we will be able to retain existing key technical, sales, marketing and managerial employees, and key executive officers or that we will be successful in attracting, assimilating or retaining other highly qualified technical, sales, marketing and managerial personnel and key executive officers in the future.

        We have experienced significant turnover in some of our senior management positions. In fiscal year 2008, our Board of Directors has appointed a new CEO and Acting CFO. We will need to implement procedures to ensure continuity of management in crucial areas, including the oversight of our financial reporting systems, financial controls and corporate governance practices. There can be no assurance that future changes in senior management personnel will not adversely affect our efforts in this regard. Similarly, there is no assurance that we will be able to retain any of our existing key personnel, or attract, assimilate and retain the additional personnel needed to support our business, especially in light of publicity concerning our Audit Committee-led Investigation, the recent restatement of our financial statements and related matters, and unsolicited, nonbinding offers to purchase the outstanding shares of our Company from a third party (including the public announcement by that party of its intention to commence a tender offer, to nominate three individuals for election as directors at our 2007 annual meeting, and to seek certain amendments to our Bylaws). If we are unable to retain existing key employees or are unsuccessful in attracting new highly qualified employees, our business, financial condition and results of operations could be materially and adversely affected.

        We have identified material weaknesses in our internal control over financial reporting, which could impact our ability to report our results of operations and financial condition accurately and in a timely manner.

        As required by Section 404 of the Sarbanes-Oxley Act, we have conducted an assessment of our internal control over financial reporting, identified material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was not effective as of June 30, 2008. For a detailed description of these material weaknesses, see Part II, Item 9A, "Controls and Procedures." Each of our material weaknesses results in more than a remote likelihood that a material misstatement in our financial statements will not be prevented or detected. As a result, we must perform extensive additional work to obtain reasonable assurance regarding the reliability of our financial statements. Even with this additional work, given the material weaknesses identified, including the number of continuing manual journal entries, the lack of integrated financial systems, the significant turnover of our finance organization personnel, and use of consultants to augment our accounting staff, there is a risk of additional errors not being prevented or detected, which could result in additional restatements. In addition, it is possible that in the future other material weaknesses may be identified. All of these factors continue to increase the time and cost involved in preparing our financial statements and to undermine the credibility of such statements.

        We have extensive work remaining to remedy the material weaknesses in our internal control over financial reporting.

        We are in the process of developing and implementing certain remediation efforts for the identified material weaknesses, and this work will continue during fiscal year 2009. There can be no assurance as to when these remediation efforts will be fully developed, when they will be implemented, when they will be completed and the aggregate cost of implementation. Until our remedial efforts are completed, we will continue to devote significant time and attention to these efforts. If we do not

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complete our remediation in a timely fashion, or at all, there will also continue to be an increased risk that we will be unable to timely file future periodic reports with the SEC and that our future financial statements could contain errors that will be undetected.

        We have been named as a defendant in a class action and other lawsuits that may adversely affect our financial condition, results of operations and cash flows.

        We and certain of our former and current executive officers and directors are defendants in several securities class action and other lawsuits. These lawsuits are described in Part I, Item 3, "Legal Proceedings." Our attention may be diverted from our ordinary business operations by these lawsuits and we may incur significant expenses associated with the defense of these lawsuits (including substantial fees of lawyers and other professional advisors and potential obligations to indemnify current and former officers and directors who may be parties to such action). Depending on the outcome of these lawsuits, we may be required to pay material damages and fines, consent to injunctions on future conduct, or suffer other penalties, remedies or sanctions. The ultimate resolution of these matters could have a material adverse effect on our results of operations, financial condition, liquidity, our ability to meet our debt obligations and, consequently, negatively impact the trading price of our common stock.

        Our continuing obligations under the transaction documents for the Divestiture and claims by Vishay could adversely affect our operating results.

        As part of the Divestiture, we have agreed to provide certain transition services related to the divested business and assets, including certain manufacturing, sales and marketing and administrative support services for a period of up to three years. Such services are not provided at levels of profitability commensurate with other aspects of our business and may be subject to unforeseen factors or other obligations or events which could adversely affect our profitability and operating results. Additionally, we have entered into a tax matters agreement that provides, among other things, that we will indemnify Vishay against certain tax liabilities that may arise, on certain terms and conditions.

        Additionally, Vishay has advised us of certain claims under the transaction documents related to the Divestiture including claims regarding the adjustment of net working capital for the PCS Business, claims involving chemicals found in the groundwater at our former manufacturing plant in Italy, and certain product quality claims relating to periods at or prior to the consummation of the Divestiture. Vishay has also asserted that it is considering possible claims against us in connection with certain portions of the PCS Business, among them, allegations regarding business forecasts. Vishay has additionally notified us that it intends to seek recission of the Divestiture. While we do not believe that Vishay's claims have merit and intend to defend our position vigorously, there can be no assurance that Vishay would not bring one or more additional claims. Continuing covenants could involve changes to various aspects of our business or could involve costs or additional claims, and such matters, if resolved against us, could adversely affect our financial condition and results of operations.

        Continuing negative publicity and publicity generally may adversely affect our business.

        As a result of the Audit Committee-led Investigation, the fiscal year 2007 restatement of our financial statements and related matters as discussed herein, we have been the subject of negative publicity. We have also been the subject of recent publicity regarding unsolicited, nonbinding offers to purchase all outstanding shares of our Company by a third party (including the public announcement by that party of its intention to commence a tender offer, to nominate three individuals for election as directors at our 2007 annual meeting, and to seek certain amendments to our Bylaws). This publicity may have an effect on the terms under which some customers, lenders, landlords and suppliers are willing to continue to do business with us and could affect our financial performance and financial condition. We also believe that certain of our employees perceive themselves to be operating under

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stressful conditions, which may cause them to terminate their employment or, if they remain, result in reduced morale that could adversely affect our business. Continuing publicity also could have a material adverse effect on our business.

        Potential indemnification obligations and limitations of our current and former director and officer liability insurance could adversely affect us.

        Several of our current and former directors, officers and employees are the subject of lawsuits and may become the subject of additional lawsuits. Under Delaware law, our charter documents and certain indemnification agreements, we may have an obligation to indemnify our current and former officers and employees and directors in relation to these matters on certain terms and conditions. Some of these indemnification obligations may not be covered by our directors' and officers' insurance policies. If we incur significant uninsured indemnity obligations, this could have a material adverse effect on our business, results of operations, financial condition and cash flows.

        Final outcomes from various tax audits are difficult to predict and an unfavorable resolution may negatively impact our financial results.

        From time to time, various taxing authorities audit our tax returns. We have identified various errors relating to our accounting for income taxes for the fiscal years 2001 through 2007. In particular, we identified errors in our intercompany transfer pricing practices and our accounting for certain types of foreign-earned income and distributions, deferred tax accounts, temporary differences, certain foreign currency gains and losses, and certain provisions related to tax effecting the elimination of profit-in-ending inventory. Tax authorities in various jurisdictions in which we operate may choose to audit our tax returns, either as originally filed or, in some cases, as amended, and matters related to our prior intercompany transfer pricing adjustments are or may be a matter of interest in connection with an investigation by the IRS and/or other taxing authorities. Although we have provided for the estimated tax liabilities, which have been included in the determination of our financial results, we cannot predict with certainty whether the amount of taxes, interest and/or penalties that may be assessed by the relevant tax authorities following the completion of any such audits (or investigations) will approximate the amount we have estimated. Accordingly, unpredicted unfavorable settlements of one or more tax audits (or investigations) may require additional use of cash and may materially and adversely impact our financial position or results of operations.

        Changes in our effective tax rate may have an adverse effect on our results of operations.

        Our future effective tax rates may be adversely affected by a number of factors, including the jurisdictions in which profits are determined to be earned and taxed and the intercompany pricing related to those profits; the resolution of issues arising from tax audits with various tax authorities; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes; changes in available tax credits; changes in share-based compensation expense; changes in tax laws or the interpretation of such tax laws (including transfer pricing guidelines); changes in generally accepted accounting principles ("GAAP"); or the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.

        In addition, we have made certain judgments regarding the realizability of our deferred tax assets. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), the carrying value of the net deferred tax assets is based on our assessment whether it is more likely than not that we will generate sufficient future taxable income in the relevant jurisdictions to realize these deferred tax assets, after considering all available positive and negative evidence. If our assumptions and estimates change in the future given unforeseen changes in market conditions, tax laws or other factors, the valuation allowances established may be increased,

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resulting in increased income tax expense. Conversely, if we are ultimately able to use all or a portion of the deferred tax assets for which a valuation allowance has been established, the related portion of the valuation allowance will be released to reduce income tax expense or goodwill, or credit additional paid-in capital, as applicable.

        Our A&D segment is subject to governmental regulation that exposes us to additional risks.

        Our A&D segment manufactures and sells certain products that are subject to U.S. export control laws and regulations. The A&D segment also manufactures and sells products that are sold directly or indirectly to the U.S. government and may subject us to certain government procurement regulations, investigations or review. While we maintain a system of control of such products and compliance with such laws and regulations, we cannot provide absolute assurance that these controls will always be effective. There are also inherent limitations on the effectiveness of controls, including the failure of human judgment. If we fail to maintain an effective system of control or are otherwise found non-compliant with applicable laws and regulations, violations could lead to governmental investigations, fines, penalties and limitations on our ability to export product, all of which could have a material affect on our results.

        Quality control and similar standards are applicable to our facilities and the facilities of our contractors in which certain products of our A&D segment are manufactured, and these standards are subject to compliance review by certain U.S. Government agencies. Our use of third-party facilities meeting such standards is subject to negotiation of satisfactory agreements with those parties and if we cannot reach such agreements, our A&D segment may experience production constraints and its revenues may be materially reduced.

        Our business depends, in part, upon the efforts of third parties, which we cannot control.

        We rely on our collaborative partners to manufacture certain of our products. Although we believe that parties to any such arrangements would have an economic motivation to succeed in performing their contractual responsibilities, the amount and timing of resources to be devoted to these activities may not be within our control. There can also be no assurance that these parties or any future parties will perform their obligations as expected which could have a material adverse affect on our financial condition and results of operations.

        The price of our common stock has fluctuated widely in the past and may fluctuate widely in the future.

        Our common stock, which is traded on the NYSE, has experienced and may continue to experience significant price and volume fluctuations that could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in financial results, earnings below analysts' estimates and financial performance and other activities of other publicly traded companies in the semiconductor industry could cause the price of our common stock to fluctuate substantially. In addition, in recent periods, our common stock, the stock market in general and the market for shares of semiconductor industry-related stocks in particular have experienced extreme price fluctuations which have often been unrelated to the operating performance of the affected companies. Any similar fluctuations in the future could adversely affect the market price of our common stock.

        In the past, following periods of volatility in the market price of a company's securities, stockholders have often instituted class action securities litigation against those companies. We can provide no assurance that our share price will remain stable on a going-forward basis.

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        There can be no assurance that we will have sufficient capital resources to make necessary investments in manufacturing technology and equipment.

        The semiconductor industry is capital intensive. Semiconductor manufacturing requires a constant upgrading of process technology to remain competitive, as new and enhanced semiconductor processes are developed which permit smaller, more efficient and more powerful semiconductor devices. We maintain certain of our own manufacturing, assembly and test facilities, which have required and will continue to require significant investments in manufacturing technology and equipment. We are also attempting to add the appropriate level and mix of capacity to meet our customers' future demand. There can be no assurance that we will have sufficient capital resources to make necessary investments in manufacturing technology and equipment. Although we believe that anticipated cash flows from operations, existing cash reserves and other equity or debt financings that we may obtain will be sufficient to satisfy our future capital expenditure requirements, there can be no assurance that this will be the case or that alternative sources of capital will be available to us on favorable terms or at all.

        Our investments in certain securities expose us to market risks.

        We invest excess cash in marketable securities consisting primarily of commercial paper, corporate notes, corporate bonds, collateral-backed mortgage obligations and governmental securities. During fiscal years 2008 and 2007, we have seen a sharp decline in the value of our collateral-backed mortgage obligations and certain other securities. If the negative market conditions continue we may not be able to hold these investments to maturity or may have to dispose of the investments while they are at a loss position, which could have a materially adverse impact on our results of operations, financial position and cash flows.

        We also hold as strategic investments the common stock of three publicly traded foreign companies, one of which is closely held. We have seen significant market fluctuations in the value of these equity investments. If we wished to dispose of certain shares of our investments during a market decline, we may be unable to dispose the shares immediately due to the illiquid nature of the investments and incur significant losses as a result.

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

        We have established procedures for the review and monitoring of the credit worthiness of our customers and/or significant amounts owing from customers. However, from time to time, we may find that, despite our efforts, one or more of our customers become insolvent or face bankruptcy proceedings (Delphi is currently one such customer). Such events could have an adverse effect on our operating results if our receivables applicable to that customer become uncollectible in whole or in part, or if our customers' financial situation result in reductions in whole or in part of our ability to continue to sell our products or services to such customers at the same levels or at all.

        Large potential environmental liabilities may adversely impact our financial position, results of operations and cash flows.

        Federal, state, foreign and local laws and regulations impose various restrictions and controls on the discharge of materials, chemicals and gases used in our semiconductor manufacturing processes, and on the operation of our facilities and equipment. We believe we use reasonable efforts to maintain a system of compliance and controls for these laws and regulations. However, we cannot provide absolute assurance that these controls will always be effective or that issues with respect to these matters will not from time to time occur. There are also inherent limitations on the effectiveness of controls, including the failure of human judgment.

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        Under some laws and regulations, we could be held financially responsible for remedial measures if our properties are contaminated or if we send waste to a landfill or recycling facility that becomes contaminated, even if we did not cause the contamination. Under other laws, we may be subject to fines and penalties if facilities or equipment are not operated in technical compliance with permit conditions or if required reports are not timely filed with applicable agencies. Also, we may be subject to common law claims if we release substances that damage or harm third parties. Further, we cannot assure you that changes in environmental laws or regulations will not require additional investments in capital equipment or the implementation of additional compliance programs in the future. Additionally, if we were to divest additional facilities, such facilities may undergo further environmental review and investigation which may lead to previously unknown environmental liabilities. Any present or prior failure to comply with environmental laws or regulations could subject us to serious liabilities and could have a material adverse effect on our operating results and financial condition.

        Our liquidity may be subject to the availability of a credit facility upon acceptable terms and conditions.

        We have the $150.0 million credit facility with a group of banks under which our ability to draw has been suspended pending the banks review of our current financial reporting and the presence of no default. There can be no assurance that the suspension will be removed or that the credit facility will not be terminated or modified to impose more onerous terms.

        Our international operations expose us to material risks.

        We expect revenue from foreign markets to continue to represent a significant portion of total revenue. We maintain or contract with significant operations and equipment in foreign countries, including wafer fabrication and product assembly. Among others, the following risks are inherent in doing business internationally: changes in, or impositions of, legislative or regulatory requirements, including tax laws in the United States and in the countries in which we manufacture or sell our products; trade restrictions; transportation delays; work stoppages; economic and political instability; war; terrorism; and foreign currency fluctuations.

        In addition, certain of our operations and products are subject to restrictions or licensing under U.S. export laws. If such laws or the implementation of these restrictions change, or if in the course of operating under such laws we become subject to claims, we cannot assure you that such factors would not have a material adverse effect on our financial condition and operating results.

        In addition, it is more difficult in some foreign countries to protect our products or IP rights to the same extent as is possible in the United States. Therefore, the risk of piracy or misuse of our technology and products may be greater in these foreign countries. Although we have not experienced any material adverse effect on our operating results as a result of these and other factors, we cannot assure you that such factors will not have a material adverse effect on our financial condition and operating results in the future.

        Unfavorable currency exchange rate fluctuations could adversely affect us.

        As a result of our foreign operations, we have sales, expenses, assets and liabilities that are denominated in foreign currencies. For example,

    some of our manufacturing costs are denominated in Japanese Yen, European Union Euro, British Pound and other foreign currencies; and

    sales of our products are denominated in Japanese Yen, European Union Euro, British Pound and other foreign currencies; and

    some property, plant and equipment purchases are denominated in Japanese Yen, European Union Euro, British Pound and other foreign currencies.

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        Consequently, movements in exchange rates could cause our net sales and expenses to fluctuate, affecting our profitability and cash flows. We use foreign currency forward contracts to reduce our exposure to foreign currency exchange rate fluctuations. The objective of these contracts is to reduce the impact of foreign currency exchange rate movements on our operating results. We do not use these contracts for speculative or trading purposes. We cannot assure you that these activities will be successful in reducing our foreign currency exchange rate exposure. Failure to do so could have a material adverse effect on us.

        Some of our facilities are located near major earthquake fault lines or high brush fire danger areas.

        Our corporate headquarters, one of our manufacturing facilities, one of our research facility and certain other critical business operations are located near major earthquake fault lines. In addition, one of our major manufacturing facilities is located in a high brush fire danger area. We could be materially and adversely affected in the event of a major earthquake or brush fire. Although we maintain the applicable insurance policies, we can give you no assurance that we have obtained or will maintain sufficient insurance coverage.

        Certain general economic and business factors not specific to the semiconductor industry that are largely out of our control may adversely affect our results of operations.

        We may experience a number of general economic and business factors, many of which are beyond our control. These factors include interest rates, recession, inflation, exchange rates, consumer credit availability, consumer debt levels, tax rates and policy, unemployment trends and other matters that influence consumer confidence and spending. Unfavorable changes in any of these factors or in other business and economic conditions affecting our customers could increase our costs or impose practical limits on pricing, any of which could lower our profit margins and have a material adverse affect on our financial condition and results of operations.

        Our reported results can be affected adversely and unexpectedly by the implementation of new, or changes in the interpretation of existing, accounting principles generally accepted in the United States of America.

        Our financial reporting is subject to GAAP, and GAAP is subject to change over time. If new rules or interpretations of existing rules require us to change our financial reporting, our reported results of operations and financial condition could be affected substantially, including requirements to restate historical financial reporting.

        Terrorist attacks, such as those that took place on September 11, 2001, or threats or occurrences of other terrorist activities whether in the United States or internationally may affect the markets in which our common stock trades, the markets in which we operate and our profitability.

        Terrorist attacks, such as those that took place on September 11, 2001, or threats or occurrences of other terrorist or related activities, whether in the United States or internationally, may affect the markets in which our common stock trades, the markets in which we operate and our profitability. Future terrorist or related activities could affect our domestic and international sales, disrupt our supply chains and impair our ability to produce and deliver our products. Such activities could affect our physical facilities or those of our suppliers or customers, and make transportation of our supplies and products more difficult or cost prohibitive. Due to the broad and uncertain effects that terrorist attacks have had on financial and economic markets generally, we cannot provide any estimate of how these activities might affect our future results.

        Natural disasters, whether in the United States or internationally, may affect the markets in which our common stock trades, the markets in which we operate and our profitability.

        Natural disasters, whether in the United States or internationally, may affect the markets in which our common stock trades, the markets in which we operate and our profitability. Such events could affect our domestic and international sales, disrupt our supply chains, and impair our ability to produce

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and deliver our products. While we do not have facilities located near the affected areas, such activities could affect physical facilities, primarily for raw materials and process chemicals and gases of our suppliers or customers, and make transportation of our supplies and products more difficult or cost prohibitive. Due to the broad and uncertain effects that natural events have had on financial and economic markets generally, we cannot provide any estimate of how these activities might affect our future results.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        As of the date of this Annual Report on Form 10-K, there are no unresolved Staff comments regarding our previously filed periodic or current reports under the Exchange Act.

ITEM 2.    PROPERTIES

        We maintain manufacturing and office facilities around the world. Our manufacturing facilities, design centers and business offices as of September 5, 2008, are in the following locations:

Location
  Owned   Leased   Semiconductor
Fabrication
  Assembly/
Module
Manufacturing
  Design
Center
  Business
Office

El Segundo, California (U.S.A.)

  X   X   X       X   X

Temecula, California (U.S.A.)

  X       X           X

Santa Clara, California (U.S.A.)

      X       X   X    

Irvine, California (U.S.A.)

      X           X    

Mesa, Arizona (U.S.A.)

  X       X            

Durham, North Carolina (U.S.A.)

      X           X    

Leominster, Massachusetts (U.S.A.)

  X           X   X    

St. Paul, Minnesota (U.S.A.)

      X   X            

North Kingstown, Rhode Island (U.S.A.)

      X           X    

Tijuana, Mexico

  X           X       X

Oxted, England (U.K.)

  X               X    

Reigate, England (U.K.)

      X               X

Newport, Wales (U.K.)

  X       X            

Skovlunde, Denmark

      X           X    

Provence, France

      X           X    

Neu Isenburg, Germany

      X               X

Pavia, Italy

      X           X    

Singapore

      X               X

Shanghai, China

      X               X

Shenzhen, China

      X               X

Seoul, Korea

      X               X

Tokyo, Japan

      X               X

        Our manufacturing facilities in Santa Clara, California and Leominster, Massachusetts are dedicated for use by the A&D business segment. With the exception of the facilities at these two locations, the rest of our fabrication and assembly facilities are shared by the PMD, ESP, A&D, EP, and PS segments. The IP segment generally operates out of our El Segundo, California business office. Our Temecula, California and Tijuana, Mexico facilities include certain manufacturing and production activities related to the TS segment, and the sale of the PCS Business to Vishay as part of the Divestiture (see also Part II, Item 8, Note 2, "Discontinued Operations and the Divestiture").

        We believe our facilities are adequate for current and anticipated near-term operating needs. During the fiscal quarter ended June 30, 2008, we operated at approximately 70 percent, down from

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over 87 percent at the end of the June 30, 2007 fiscal year, of our worldwide in-house wafer fabrication and assembly manufacturing capacities, without considering subcontract or foundry capacity. The decline in operating capacity primarily reflects the build up of inventory to meet anticipated demand which is slow to materialize, and shifting capacity to the production of more complex products.

        In the third quarter of fiscal year 2008, we adopted a plan for the closure of our Oxted, England facility and our El Segundo, California R&D fabrication facility. We expect the closure and exiting of these two facilities to be completed by the end of the second quarter of fiscal year 2010.

        In addition to the facilities listed above, we have sales or technical support offices located in Canada, China, Denmark, Finland, France, Germany, Hong Kong, India, Italy, Japan, Mexico, the Philippines, Russia, Singapore, South Korea, Sweden, Switzerland, Taiwan, the United Kingdom and the United States.

ITEM 3.    LEGAL PROCEEDINGS

        We are involved in certain legal matters that arise in the ordinary course of business. Based on information currently available, management does not believe that the ultimate resolution of such ordinary course matters have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, our business, financial condition, results of operations or cash flows could be materially and adversely affected. In addition:

         International Rectifier Securities Litigation.    Following our disclosure on April 9, 2007 that our Audit Committee was conducting the internal Investigation into certain revenue recognition matters, a series of putative class action lawsuits was filed against us in the United States District Court for the Central District of California. The complaints were filed on behalf of a putative class of purchasers of our stock from October 27, 2005 through April 9, 2007 ("Original Class Period"), and named as defendants our Company and certain of its present and former officers and directors. The complaints alleged violations of Sections 10(b) and 20(a) of the Exchange Act arising out of alleged accounting irregularities at our Japan subsidiary. On July 22, 2007, the court consolidated all of the actions under the caption In re International Rectifier Corporation Securities Litigation, No. CV 07-02544-JFW (VBKx) (C.D. Cal.), and appointed the Massachusetts Laborers' Pension Fund and the General Retirement System of the City of Detroit (together, "Lead Plaintiffs") as co-lead plaintiffs.

        On January 14, 2008, Lead Plaintiffs filed a Consolidated Class Action Complaint ("CAC"). The CAC purported to extend the Original Class Period by nearly two years, from July 31, 2003 to August 29, 2007, and added claims based upon our disclosures that certain former officers improperly allocated operating expenses as restructuring charges, improperly assigned tax liability from higher to lower tax jurisdictions and improperly accounted for tax benefits associated with the granting of stock options. The CAC named as defendants several of our former officers, but did not name any of our past or present directors except Eric Lidow and Alex Lidow. On March 6, 2008, defendants filed motions to dismiss the CAC. On May 23, 2008, the Court issued an order granting defendants' motions to dismiss, without prejudice, on the ground that Lead Plaintiffs failed to plead detailed facts sufficient to give rise to a strong inference of defendants' scienter. The Court has permitted Lead Plaintiffs to file an amended complaint on or before October 17, 2008.

         Derivative Litigation.    On August 1, 2008, a partial derivative lawsuit captioned Mayers v. Lidow, No. BC395652, was filed in the Superior Court of the State of California for the County of Los Angeles. The complaint asserts derivative claims, purportedly on behalf of our Company, against certain of our former officers, and current and former directors, alleging breach of fiduciary duty, unjust enrichment and violations of Section 25402 of the California Corporations Code in connection with the matters reported in our recent public filings with the SEC. The derivative claims seek damages, disgorgement and imposition of a constructive trust against the individual defendants

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purportedly for the benefit of our Company. The complaint also seeks injunctive relief against the current Board of Directors under a provision of Delaware law that permits shareholders to ask the Court of Chancery to require, in its discretion, a company to hold an annual shareholders' meeting. The complaint does not seek monetary relief against our Company. IR intends to move for dismissal of these claims on the grounds that plaintiff does not have standing to proceed derivatively on the behalf of the corporation.

         Litigation Arising from Vishay Proposal.    On August 15, 2008, shortly after our disclosure that Vishay had made an unsolicited, non-binding proposal to acquire all our outstanding shares for $21.22 per share in cash, a purported class action complaint captioned Hui Zhao v. International Rectifier Corporation, No. BC396461, was filed in the Superior Court of the State of California for the County of Los Angeles. The complaint names as defendants our Company and all current directors and alleges that the Vishay proposal is unfair and that our directors breached their fiduciary duties in connection with the proposed acquisition by failing to properly value our Company and, if they accept the offer, by failing to maximize our Company's value through steps such as the solicitation of alternate offers. The action seeks to enjoin defendants from agreeing to the Vishay proposal or, alternatively, to rescind a merger with Vishay if it were ultimately consummated, as well as an award of attorneys' fees and costs. Five other substantively identical complaints seeking the same relief also have been filed in the same court: United Union of Roofers, Waterproofers & Allied Workers Local Union No. 8 v. International Rectifier Corp., No. BC396490 (filed Aug. 19, 2008); Gerber v. International Rectifier Corporation, No. BC 396678 (filed Aug. 20, 2008); Hay Ly v. International Rectifier Corporation, No. BC 396679 (filed Aug. 20, 2008); Soyugenc v. International Rectifier Corp., No. BC396855 (filed Aug. 22, 2008); and Guttman v. International Rectifier Corp., No. BC396818 (filed Aug. 22, 2008). The lawyers that filed the Zhao complaint also filed the complaints in Gerber, Ly, and Soyugenc. On August 22, 2008, United Union of Roofers, Waterproofers & Allied Workers Local Union No. 8 ("United Union") filed a motion for consolidation and for appointment as lead plaintiff. In support of its motion, United Union argues that each action asserts similar claims, that United Union is the only institutional plaintiff, and that United Union's attorneys are qualified to serve as lead counsel for the class. We expect to join United Union's motion for consolidation but likely will take no position as to the appointment of lead plaintiff.

        On August 29, 2008, within hours of our announcement that we had rejected the August 15, 2008 proposal made by Vishay to purchase all of our Company's outstanding shares, a partial derivative complaint captioned City of Sterling Heights Police Fire Retirement System v. Dahl, No. BC397326, was filed in the Superior Court of the State of California for the County of Los Angeles. The complaint names as defendants all of our current directors and alleges that the directors breached their fiduciary duties by rejecting the Vishay offer and by failing to negotiate a higher price in connection with that offer. In addition to the claim for breach of fiduciary duty, which plaintiff brings both derivatively and purportedly on behalf of a class of investors, plaintiff also alleges derivative claims for abuse of control, gross mismanagement, and waste. The complaint seeks an injunction requiring the Board of Directors to appoint a committee of independent directors to consider strategic alternatives for our Company and invalidating any defensive measures the Board of Directors might take in connection with this or any other offer.

        None of these actions seeks damages against our Company. We believe that the actions are without merit. We expect to seek to consolidate the actions and intend to oppose them vigorously.

        On September 10, 2008, Vishay made an unsolicited proposal to acquire all our outstanding shares at a price of $23.00 per share, and announced its intention to commence a tender offer to purchase all of our shares. In addition, it gave notice of its intention: (a) to nominate three individuals for election as Class I directors at the 2007 Annual Meeting scheduled for October 10, 2008 ("2007 Annual Meeting"), and (b) to present at that meeting proposals to amend our Bylaws. Vishay's proposed Bylaw amendments provide: (x) that the meeting to elect our Class II directors be held by December 21,

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2008; (y) that any adjournment of a stockholders' meeting at which a quorum is present must be approved by a majority of the shares present at the meeting in person or by proxy; and (z) for an amendment to the Bylaws to repeal any new Bylaws and Bylaw amendments adopted by the Board of Directors between February 29, 2008 and the 2007 Annual Meeting unless approved by holders of a majority of the outstanding shares of the Company.

        On the same date, Vishay also commenced an action in the Delaware Court of Chancery (the "Delaware Action") against us and our current directors seeking, among other things: (a) to compel a meeting of shareholders on or before December 21, 2008 to elect Class II directors to fill the positions of those whose terms expire in 2008; (b) a declaration that proposed amendments to our Bylaws are valid under Delaware law and our Certificate of Incorporation; and (c) a mandatory injunction requiring us to present such proposed amendments for a vote at the 2007 Annual Meeting. The Delaware Action does not seek damages against us. We believe that the Delaware Action is without merit and intend to oppose it vigorously.

         Governmental Investigations.    We are cooperating fully with investigators from the SEC Division of Enforcement, the IRS and the U.S. Attorneys' Office regarding matters relating to the Audit Committee-led Investigation and other matters described in Part II, Item 8, Note 2, "Restatements of Consolidated Financial Statements," of our Annual Report on Form 10-K for fiscal year 2007 filed with the SEC on August 1, 2008. We have responded to subpoenas for records from the SEC; and we will continue to cooperate with these investigators regarding their investigation into these matters.

         IXYS Litigation.    On June 22, 2000, we filed International Rectifier Corporation v. IXYS Corporation, Case No. CV-00-06756-R, in the United States District Court for the Central District of California. Our complaint alleges that certain IXYS Corporation ("IXYS") MOSFET products infringe our U.S. Patent Nos. 4,959,699, 5,008,725, and 5,130,767. On August 17, 2000, IXYS filed an answer and counterclaim, and, on February 14, 2001, amended its answer and counterclaim, denying infringement and alleging patent invalidity and unenforceability. After proceedings, including a jury trial on damages, in the District Court and an initial appeal, a jury trial on infringement and damages was held commencing September 6, 2005. The jury found that IXYS was infringing certain claims of Patent No. 4,959,699 and awarded us $6.2 million in damages through September 30, 2005. On September 14, 2006, the District Court entered the final judgment and permanent injunction based on the jury verdict. IXYS again appealed (with a notice of appeal filed after the deadline for doing so). The Federal Circuit lifted its temporary stay, and the permanent injunction was in effect until it terminated with the expiration of the '699 patent in September 2007. The matter was argued to the Federal Circuit on January 7, 2008. In an opinion issued February 11, 2008, the Federal Circuit ruled against us and reversed the judgment. The proceedings are now at an end, subject only to the possibility that the Supreme Court will review the case on writ of certiorari. We filed a petition for such a writ in July 2008.

         Angeles v. Omega.    In November 2007, we were named as one of approximately 100 defendants in Angeles Chemical Company, Inc. et al. v. Omega Chemical PRP Group, LLC et al., No. EDCV07-1471(TJH)(JWJx) (C.D. Cal.). The Plaintiffs own or operate the Angeles Facility which is located approximately one and a half miles downgradient of the Omega Site in Whittier, California. Numerous parties, including us, allegedly disposed of wastes at the Omega Site. Plaintiffs claim that contaminants from the Omega Site migrated in groundwater from the Omega Site to the Angeles Facility, thereby causing damage to the Angeles Facility. In addition, they claim that the EPA considers them to be responsible for the groundwater plume near the Angeles Facility which Plaintiffs contend was caused by disposal activities at the Omega Site. Plaintiffs filed claims based on CERCLA, nuisance and trespass and also seek declaratory relief. Plaintiffs seek to require the Defendants to investigate and cleanup the contamination and to recover damages. We previously entered into a settlement with other parties associated with the Omega Site pursuant to which we paid those entities money in exchange for an agreement to defend and indemnify us with regard to certain environmental claims. In

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that agreement, it was estimated that our volumetric share of wastes sent to the Omega Site was in the range of 0.08%. We believe that much, if not all of the risks associated with the Angeles Case should be covered by the Omega Indemnification. In addition, we have tendered the complaint to several of our insurance carriers who have agreed to defend under a reservation of rights. Therefore, we do not expect our out of pocket defense costs to be significant. In addition, in light of the Omega Indemnification, the potential for insurance coverage, and the fact that our volumetric share of Omega Site wastes was less than 0.1%, we do not believe that an adverse judgment against us would be material.

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

        Not applicable.

Additional Item. Executive Officers of the Registrant

        The non-employee Chairman of the Board and executive officers of IR as of the date of this Annual Report on Form 10-K are:

Name
  Age   Position

Richard J. Dahl

    57   Chairman of the Board

Oleg Khaykin

    43   President and Chief Executive Officer

Donald R. Dancer

    57   Executive Vice President and Chief Administrative Officer

Peter B. Knepper

    59   Chief Financial Officer (Acting)

Michael Barrow

    54   Executive Vice President and Chief Operations Officer

Tim Bixler

    41   Vice President, Secretary and General Counsel

        Richard J. Dahl has been a director since February 2008. He was appointed Chairman of the Board on May 1, 2008. Mr. Dahl has served as director of the NYSE-listed DineEquity, Inc. (and formerly IHOP Corporation) since 2004, where he presides as Chairman of the Audit Committee. From 2002 to 2007, Mr. Dahl held various executive level positions with the Dole Food Company, Inc. ("Dole"), most recently as President and Chief Operating Officer from 2004 to 2007, and served as a member of its Board of Directors. Prior to his work at Dole, Mr. Dahl was President and Chief Operating Officer of Bank of Hawaii Corporation.

        Oleg Khaykin joined us in March 2008 as President and CEO. He was appointed a director promptly following March 1, 2008. Prior to joining us, Mr. Khaykin was Chief Operating Officer for Amkor Technology, Inc., which he joined in 2003 as Executive Vice President of Strategy and Business Development. Prior to his work at Amkor Technology, Inc., Mr. Khaykin held various positions of increasing leadership at Conexant Systems Inc. ("Conexant") and its spin-off, Mindspeed Technologies Inc., from 1999 to 2003, where he most recently served as Vice President of Strategy and Business Development. Before joining Conexant, Mr. Khaykin was with the Boston Consulting Group.

        Donald R. Dancer joined us in August 2002 as Vice President, Secretary and General Counsel. He was promoted to Executive Vice President in November 2005. He served as acting CEO from August 2007 to February 2008. Mr. Dancer was appointed as Executive Vice President and Chief Administrative Officer in March 2008, and he retained the positions of General Counsel and Secretary on an interim basis. Prior to joining IR, Mr. Dancer served 22 years in various senior legal positions with the General Electric Company ("General Electric") and most recently was General Counsel for GE Industrial Systems Solutions.

        Peter B. Knepper has been assisting us since January 2008 as a partner with Tatum LLC ("Tatum") and since April 16, 2008 he has served as Acting CFO. He has advised and held senior financial

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management positions with several prominent corporations including interim CFO from January to June 2006 at MDI, Inc., a publicly traded company, and Executive Vice President and CFO for Key3Media Group, Inc. from March 2000 through June 2003. Prior to Key3Media Group, Inc., Mr. Knepper served for 10 years as Senior Vice President and CFO of Ticketmaster Group, Inc.

        Michael Barrow joined us in April 2008 as Executive Vice President and Chief Operations Officer. Prior to joining IR, Mr. Barrow most recently served as Senior Vice President of the Flip Chip and Wafer Level Business Unit for Amkor Technology, Inc., where Mr. Barrow served in various positions since late 2003. Prior to his work at Amkor Technology, Inc., Mr. Barrow served 12 years in various leadership roles at Intel Corporation ("Intel"), most recently as Technology General Manager of Intel's Communications Group.

        Tim Bixler joined us in July 2008 as Vice President, Secretary and General Counsel. Prior to joining us, Mr. Bixler most recently served as Senior Business Counsel of the Homeland Protection Business of General Electric, which he joined in 2001 as Business Counsel for GE Plastics. Prior to his work at General Electric, Mr. Bixler served as General Counsel for eMD.com and also served as counsel for Ashland Inc./APAC, Inc. Mr. Bixler also spent three years at the law firm of Arnall, Golden & Gregory.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

        Our common stock is traded on the NYSE under the symbol "IRF." There were 1,385 holders of record of our common stock as of September 5, 2008. On September 5, 2008, the closing price of the common stock on the NYSE was $21.36. Stockholders are urged to obtain current market quotations for the common stock. For equity compensation plan information, please refer to Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."

        As of our fiscal year ended June 30, 2008, 13.8 million common stock shares are reserved for issuance under our stock option plans, of which 9.4 million stock options and restricted stock units are outstanding and 4.4 million are available for future grants. As of the fiscal year ended June 30, 2008, 8.6 million stock option and restricted stock units are exercisable at an average exercise price of $40.58.

Dividends

        No cash dividends have been declared to stockholders during the past three years, and we do not expect to declare cash dividends in the foreseeable future. The payment of dividends is within the discretion of our Board of Directors, and will depend upon, among other things, our earnings, financial condition, capital requirements, and general business conditions. In addition, our bank credit agreement currently includes covenants putting limitations on certain dividend payments.

Stock Prices

        The following table contains stock sales prices for each quarter of fiscal years 2008 and 2007:

 
  First Quarter   Second Quarter   Third Quarter   Fourth Quarter  
Fiscal Year
  High   Low   High   Low   High   Low   High   Low  

2008

  $ 39.50   $ 30.77   $ 35.54   $ 31.67   $ 33.97   $ 20.63   $ 25.30   $ 19.76  

2007

    38.75     32.38     41.37     33.50     43.95     37.00     38.80     34.11  

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Stock Performance

        The following graph compares the cumulative total stockholder return of our common stock during the last five fiscal years with (i) the cumulative total return of the Standard and Poor's 500 Stock Index and (ii) the cumulative total return of the Standard and Poor's High Technology Composite Index. The comparison assumes $100 was invested on June 30, 2003 in our common stock and in each of the foregoing indices and the reinvestment of dividends through fiscal year ended June 30, 2008. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

GRAPHIC

 
  End of Fiscal Year  
 
  2003   2004   2005   2006   2007   2008  

International Rectifier

  $ 100   $ 135   $ 170   $ 140   $ 133   $ 71  

S&P 500 Index

    100     114     121     129     153     130  

S&P 500 Index Information Technology

    100     121     118     118     148     137  

ITEM 6.    SELECTED FINANCIAL DATA

        The following tables include selected summary financial data for each of our last five fiscal years and include adjustments to reflect the Divestiture and the classification of the results of our previously reported NAP segment sold as part of the Divestiture as discontinued operations. See Part II, Item 8, Note 2, "Discontinued Operations and the Divestiture," to Notes to Consolidated Financial Statements. Our selected financial data as of and for our fiscal years ended June 30, 2008, 2007, 2006, 2005 and 2004 should be read in conjunction with Part II, Item 8, "Financial Statements and Supplementary

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Data," and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A").

 
  Fiscal Year Ended June 30,  
Statements of Operations Data
  2008   2007   2006   2005   2004  

(In thousands, except per share data)

                               

Revenues

  $ 984,830   $ 1,202,469   $ 1,014,800   $ 1,050,514   $ 935,973  

Cost of sales

    662,007     741,111     588,934     568,538     549,415  
                       
 

Gross profit

    322,823     461,358     425,866     481,976     386,558  

Selling and administrative expense

    293,168     212,088     196,766     174,721     158,083  

Research and development expense

    105,812     122,794     104,102     99,399     84,037  

Impairment of goodwill

    32,624                  

Amortization of acquisition-related intangible assets

    4,656     1,889     3,330     3,976     3,739  

Asset impairment, restructuring and other charges (credits)

    3,080     10,398     87     (1,964 )   10,083  

Gain on royalty settlement

                2,650     7,800  
                       
 

Operating (loss) income

    (116,517 )   114,189     121,581     208,494     138,416  

Other expense (income), net

    19,423     (6,257 )   (15,786 )   (1,581 )   (487 )

Interest (income) expense, net

    (29,093 )   (16,036 )   (6,784 )   1,194     1,033  
                       

(Loss) income from continuing operations before income taxes

    (106,847 )   136,482     144,151     208,881     137,870  

(Benefit from) provision for income taxes

    (44,205 )   62,995     93,987     104,113     46,897  
                       

(Loss) income from continuing operations

    (62,642 )   73,487     50,164     104,768     90,973  

Income (loss) from discontinued operations, net of taxes

        4,255     (13,654 )   (19,774 )   (15,019 )
                       

Net (loss) income

  $ (62,642 ) $ 77,742   $ 36,510   $ 84,994   $ 75,954  
                       

Net (loss) income per common share:

                               
 

Basic:

                               
   

(Loss) income from continuing operations

  $ (0.86 ) $ 1.01   $ 0.71   $ 1.55   $ 1.39  
   

Income (loss) from discontinued operations

        0.06     (0.20 )   (0.29 )   (0.23 )
                       
   

Net (loss) income per share

  $ (0.86 ) $ 1.07   $ 0.51   $ 1.26   $ 1.16  
                       
 

Diluted:

                               
   

(Loss) income from continuing operations

  $ (0.86 ) $ 1.01   $ 0.70   $ 1.47   $ 1.33  
   

Income (loss) from discontinued operations

        0.06     (0.19 )   (0.26 )   (0.22 )
                       
   

Net (loss) income per share

  $ (0.86 ) $ 1.07   $ 0.51   $ 1.21   $ 1.11  
                       

Balance Sheet Data

                               

Total cash, cash equivalents, restricted cash and investments

  $ 745,236   $ 1,317,528   $ 1,092,628   $ 940,720   $ 836,209  

Total assets

    1,874,912     2,647,405     2,510,461     2,222,001     2,021,382  

Long-term debt, less current maturities

            617,540     547,259     560,020  

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the other sections of this Annual Report on Form 10-K, including Part I, Item 1, "Business;" Part II, Item 6, "Selected Financial Data;" and Part II, Item 8, "Financial Statements and Supplementary Data." Except for historic information contained herein, the matters addressed in this MD&A constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Exchange Act, as amended. Forward-looking statements may be identified by the use of terms such as "anticipate," "believe," "expect," "intend," "project," "will," and similar expressions. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed under the heading "Statement of Caution Under the Private Securities Litigation Reform Act of 1995," in Part I, Item 1A, "Risk Factors" and elsewhere in this Annual Report on Form 10-K, that could cause actual results to differ materially from those anticipated by us. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Annual Report or to reflect actual outcomes.

Introduction

        During fiscal year 2008, our Audit Committee completed the Investigation into certain accounting and financial reporting matters. As a result of the issues identified in that Investigation, as well as issues identified in additional reviews and procedures conducted by management with the assistance of external advisors, the Audit Committee determined that neither our financial statements for the fiscal quarters ended September 30, 2003 through December 31, 2006 and for the fiscal years ended June 30, 2004 through June 30, 2006 nor management's reports on internal control over financial reporting for the fiscal years ended June 30, 2005 and 2006 should be relied upon because of certain accounting errors and irregularities in those financial statements and reports on internal control over financial reporting. Accordingly, we restated our previously issued financial statements for those periods. Restated financial information is presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, filed with the SEC on August 1, 2008, which also contains a description of the Investigation, the accounting errors and irregularities identified and the adjustments made as a result of the restatement.

        As of the fiscal year ended June 30, 2007, our segments were revised to reflect how our CEO viewed us subsequent to the sale of our PCS Business. For more information regarding the Divestiture of our PCS Business, refer to Part II, Item 8, Note 2, "Discontinued Operations and the Divestiture" to the Consolidated Financial Statements. For more information regarding our segments, refer to Part II, Item 8, Note 8, "Segment Information."

Overview

        IR designs, manufactures and markets power management semiconductors. Power management semiconductors address the core challenges of power management, power performance and power conservation, by increasing system efficiency, allowing more compact end-products, improving features on electronic devices and prolonging battery life.

        We pioneered the fundamental technology for power MOSFETs in the 1970s, and estimate that the majority of the world's planar power MOSFETs use our technology. Power MOSFETs are instrumental in improving the ability to manage power efficiently. Our products include power MOSFETs, HVICs, LVICs, ICs, RAD-Hard™ power MOSFETs, IGBTs, high reliability DC-DC converters, PS modules, and DC-DC converter type applications.

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        On April 1, 2007, the last day of our fiscal quarter ended March 31, 2007, we completed the Divestiture and the resulting sale of our PCS Business to Vishay for $339.6 million, including $14.5 million of restricted cash temporarily held in escrow to cover indemnity obligations, if any, and approximately $49.4 million of net cash retained from the assets of the entities being sold. Since the consummation of the Divestiture, a number of matters have developed, as discussed in Part II, Item 8, Note 2, "Discontinued Operations and the Divestiture," that raised uncertainties under applicable accounting standards and guidance as to the determination of the gain on the Divestiture. Consequently, we have continued to defer recognition of the gain from continuing operations of $112.6 million as of June 30, 2008. However, we recognized the loss from discontinued operations of $4.3 million in fiscal year 2007.

        A number of disputes have arisen between Vishay and us regarding the Divestiture which remain ongoing as of the date of this report. (See Part II, Item 8, Note 12, "Commitments and Contingencies"). We cannot reasonably determine when these disputes will be resolved.

        As part of the Divestiture, we agreed to license certain of our technology and trademarks related to the PCS Business to Vishay. In addition, we agreed to transfer certain of our technology related to the PCS Business to Vishay and Vishay, in turn, agreed to license back to us the technology it acquired in connection with the Divestiture on a non-exclusive, perpetual and royalty free basis. As part of the Divestiture, we also entered into certain transition services agreements ("TSAs") for the sale and purchase of certain products, wafer and packaging services, factory planning, quality, material movement and storage, manufacturing and other support services, for up to three years following the closing date of the Divestiture.

        The Divestiture included essentially two components of our business. We have reported one of these components, our former NAP segment, as a discontinued operation in our accompanying financial statements. The other and larger component, our former CP segment, was not presented as a discontinued operation due to the significance of our ongoing involvement relating to our TSAs with Vishay.

        Subsequent to the Divestiture in the fourth fiscal quarter ended June 30, 2007, our CEO redefined our business segments to better focus on the two key power management challenges, energy savings and energy efficiency. Beginning in the fourth fiscal quarter ended June 30, 2007, we reported our financial segments based on how our CEO reviewed and allocated resources for the business and assessed the performance of our business managers. We now report in seven segments: EP, PMD, PS, ESP, A&D, IP and TS.

        As part of the PCS Business sale to Vishay, we agreed to provide certain manufacturing and support services for up to three years following the closing date of the Divestiture, which is reported separately in the TS segment. The results of the PCS Business through the Divestiture date were previously reported in the CP and NAP segments, consistent with prior years and in line with our business segment reporting prior to our reorganization and the redefinition of our business segments by our CEO. As outlined above, for the fiscal year ended June 30, 2007, the financial results of the NAP segment were included in discontinued operations and prior period results were correspondingly reclassified to conform to current period presentation. Financial results of the CP segment were not included in discontinued operations. In addition, as part of our reorganization, whereas previously, power management MOSFETs were reported based on end market applications within the ESP segment and our previously reported C&C segment (which has now been separated into EP, PMD and PS segments), they are now reported within the PMD segment.

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Results of Operations

        The following table sets forth certain items included in selected financial data as a percentage of revenues (in millions, except percentages):

 
  Fiscal Year Ended June 30,  
 
  2008   2007   2006  

Revenues

  $ 984.8     100.0 % $ 1,202.5     100.0 % $ 1,014.8     100.0 %

Cost of sales

    662.0     67.2     741.1     61.6     588.9     58.0  
                           
 

Gross profit

    322.8     32.8     461.4     38.4     425.9     42.0  

Selling and administrative expense

    293.1     29.8     212.1     17.6     196.8     19.4  

Research and development expense

    105.8     10.7     122.8     10.2     104.1     10.3  

Impairment of goodwill

    32.6     3.3                  

Amortization of acquisition-related intangible assets

    4.7     0.5     1.9     0.2     3.3     0.3  

Asset impairment, restructuring and other charges

    3.1     0.4     10.4     0.9     0.1     0.0  
                           
 

Operating (loss) income

    (116.5 )   (11.9 )   114.2     9.5     121.6     12.0  

Other expense (income), net

    19.4     2.0     (6.3 )   (0.5 )   (15.8 )   (1.5 )

Interest income, net

    (29.1 )   (3.0 )   (16.0 )   (1.3 )   (6.8 )   (0.7 )
                           
 

(Loss) income from continuing operations before income taxes

    (106.8 )   (10.9 )   136.5     11.3     144.2     14.2  

(Benefit from) provision for income taxes

    (44.2 )   (4.5 )   63.0     5.2     94.0     9.3  
                           
 

(Loss) income from continuing operations

    (62.6 )   (6.4 )   73.5     6.1     50.2     4.9  

Income (loss) from discontinued operations, net of taxes

            4.3     0.4     (13.7 )   (1.3 )
                           
 

Net (loss) income

  $ (62.6 )   (6.4 )% $ 77.8     6.5 % $ 36.5     3.6 %
                           

Fiscal Year 2008 Compared with Fiscal Year 2007

Revenues and Gross Margin

        Revenue for the fiscal year ended June 30, 2008 was $1.0 billion, compared to $1.2 billion in the prior fiscal year ended June 30, 2007. During fiscal year 2008, revenues decreased by 18.1 percent compared to fiscal year 2007. This year-over-year revenue decrease occurred mostly due to fiscal year 2007 having three quarters of the PCS Business compared to none in 2008, the expiration of our broadest royalty-producing patents in the fourth quarter of fiscal year 2008, and expected reductions in our channel inventory. During fiscal year 2008, we focused on reducing our channel inventories particularly in the fourth quarter. Since we recognize revenue upon shipment to our channel partners, this initiative reduced our revenue compared to fiscal year 2007. Furthermore, we exited fiscal year 2007 with revenue declining in the second half of the fiscal year. This trend continued to materialize in fiscal year 2008 as we saw declines in most of our segments. However, we did experience year-on-year strength in data center-related products, including enterprise servers and workstations in the EP segment. Other segments also declined due to an overall market weakness resulting from decreased consumer spending and a downturn in the housing market.

        Gross margin declined to 32.8 percent for fiscal year ended June 30, 2008, from 38.4 percent in the prior fiscal year. During the fiscal year ended June 30, 2008, our gross margin was negatively impacted by lower factory utilization in fiscal year 2008 compared to 2007 as volumes declined due to lower revenue, planned inventory reductions and a draw down in our channel inventory. Furthermore, the Divestiture resulted in a lower base of revenue over which to absorb indirect manufacturing costs, and we did not complete a commensurate reduction in these costs. In fiscal year 2008, our gross margin

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decreased as our TS revenue was $40.9 million higher than fiscal year 2007 with minimal or no gross margin attributed to that revenue. We also had $13.7 million lower gross margin due to lower IP revenue as our broadest royalty-producing patents expired. These items that negatively impacted gross margin in fiscal year 2008 were partially offset by lower inventory write-offs compared to fiscal year 2007. During fiscal year 2008, we recorded inventory charges totaling $29.8 million associated with a) products we deemed to be in excess of demand or obsolete and no longer plan to support totaling $18.2 million, b) die component inventory that we determined to be in excess of demand totaling $9.6 million, c) write-offs of $1.4 million related to channel inventory returns and d) quality issues of $0.6 million. During fiscal year 2007, we recorded inventory charges totaling $45.3 million including a) products we deemed to be in excess of demand or obsolete and no longer plan to support totaling $25.7 million, b) quality issues in game station products totaling $10.9 million and c) excess equipment spare parts inventory of $8.7 million.

        Revenue from our ongoing operating segments, which include the PMD, ESP, A&D, EP, PS and IP segments, decreased to $925.2 million for the fiscal year ended June 30, 2008, from $1,014.5 million for the fiscal year ended June 30, 2007, due to a draw down of inventory in the channel, the expiration of our broadest royalty-producing patents and the overall market decline. Ongoing segment revenues increased to 93.9 percent of our consolidated revenue for the fiscal year ended June 30, 2008, from 84.4 percent for fiscal year 2007. Gross profit margin for these segments was 34.9 percent for the fiscal year ended June 30, 2008 and 42.5 percent for the prior fiscal year ended June 30, 2007. The gross profit decline was due to lower factory utilization, a lower base of revenue over which to absorb indirect manufacturing costs, the expiration of our broadest royalty-producing patents and the reduction of manufacturing volumes associated with the draw down of inventory in the channel.

        Revenue and gross margin by reportable segments are as follows (in thousands, except percentages):

 
  June 30, 2008   June 30, 2007  
Business Segment
  Revenues   Percentage
of Total
  Gross
Margin
  Revenues   Percentage
of Total
  Gross
Margin
 

Power Management Devices

  $ 373,947     38.0 %   21.2 % $ 416,464     34.6 %   33.7 %

Energy-Saving Products

    202,239     20.5     37.1     225,250     18.7     47.7  

Aerospace and Defense

    152,855     15.5     50.4     157,008     13.1     51.2  

Enterprise Power

    102,484     10.4     43.5     87,535     7.3     52.0  

PowerStage

    63,197     6.4     25.4     84,070     7.0     15.5  

Intellectual Property

    30,490     3.1     100.0     44,171     3.7     100.0  
                           
 

Ongoing segments total

    925,212     93.9     34.9     1,014,498     84.4     42.5  

Transition Services

    59,618     6.1     0.4     18,730     1.6     7.5  

Commodity Products

                169,241     14.0     17.1  
                           

Consolidated total

  $ 984,830     100.0 %   32.8 % $ 1,202,469     100.0 %   38.4 %
                           

        PMD segment revenue for the fiscal year ended June 30, 2008 decreased by 10.2 percent from the fiscal year ended June 30, 2007, due to reductions in channel inventories and softening in the general market. Gross margin for the PMD segment declined to 21.2 percent for the fiscal year ended June 30, 2008, from 33.7 percent in the prior fiscal year, primarily due to lower average selling price, lower factory utilization from lower revenue and lower manufacturing overhead absorption due to the Divestiture.

        ESP revenue decreased by 10.2 percent for the fiscal year ended June 30, 2008, from the fiscal year ended June 30, 2007. The revenue decrease was caused by a decline in general purpose HVICs due to a reduction of inventory levels at distributors and general softening market demand. Gross margin for the ESP segment was 37.1 percent for the fiscal year ended June 30, 2008, compared to

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47.7 percent in the prior fiscal year. The large volume decline in general purpose ICs reduced factory utilization and negatively impacted gross margin. In addition, production costs were higher due to lower manufacturing overhead absorption due to the Divestiture.

        A&D revenue for the fiscal year ended June 30, 2008 decreased by 2.6 percent from the prior fiscal year ended June 30, 2007. The decline in revenue was driven by a significant draw down in channel inventories and softening demand in our military replenishment programs. Strength in new markets for medical devices, fiber-optic communications and oil drilling systems partially mitigated the overall revenue decline. Gross margin for the A&D segment declined to 50.4 percent for the fiscal year ended June 30, 2008, from 51.2 percent in the prior fiscal year. The draw down in channel inventories impacted overall gross margins as these products were higher than average margin products.

        EP revenue for the fiscal year ended June 30, 2008 increased by 17.1 percent from the prior fiscal year ended June 30, 2007, due to increased demand in data center-related products, including enterprise servers and workstations in the EP segment. Gross margin for the EP segment decreased to 43.5 percent for the fiscal year ended June 30, 2008, from 52.0 percent in the prior fiscal year. The gross margin was impacted by higher production costs in fiscal year 2008 due to under utilization of factory capacity and lower manufacturing overhead absorption due to the Divestiture. Gross margins were also negatively impacted by $0.9 million of higher inventory write-offs in fiscal year 2008 versus 2007 associated with products we deemed obsolete and no longer plan to support and die component inventory that we determined to be in excess of demand.

        PS revenue for fiscal year ended June 30, 2008 decreased by 24.8 percent from the prior fiscal year ended June 30, 2007, mainly due to lower sales of game station products, as game station redesigns using new generation central processing units/graphics processing units ("CPU/GPUs") which require lower levels of power processing use fewer of our iPOWIR® components. Gross margin for the PS segment increased to 25.4 percent for the fiscal year ended June 30, 2008, from 15.5 percent in the prior fiscal year, due to $10.9 million of inventory write-offs related to quality issues in game station parts in fiscal year 2007 that did not repeat in fiscal year 2008. This gross margin improvement was partially offset by $1.8 million of inventory related charges in fiscal year 2008 associated with products we deemed obsolete and no longer plan to support, die component inventory that we determined to be in excess of demand and equipment spare parts.

        IP revenue was $30.5 million for the fiscal year ended June 30, 2008 compared to $44.2 million for the prior fiscal year. The decrease is due to the expiration of our broadest MOSFET patents in the fourth quarter of fiscal year 2008.

        TS revenue was $59.6 million in fiscal year ended June 30, 2008 compared to $18.7 million in fiscal year ended June 30, 2007. The revenue increase was due to having four quarters of TS revenue in fiscal year 2008 compared to one in the prior year. TS revenue consisted of new manufacturing and related services provided to Vishay. As part of the PCS sale agreements, we supply manufacturing services to Vishay at approximately our cost. TS revenue is expected to continue for up to three years from the date of the Divestiture, which was April 1, 2007.

Selling and Administrative Expense

        For the fiscal year ended June 30, 2008, selling and administrative expense was $293.1 million (29.8 percent of revenue), compared to $212.1 million (17.6 percent of revenue) in the prior fiscal year ended June 30, 2007. Fiscal year 2008 selling and administrative expense included an increase of $87.6 million of legal, audit and consulting costs associated with the Audit Committee-led Investigation, reconstruction of the financial results at our Japan subsidiary, and restatements of multiple periods of consolidated financial statements. The Audit Committee-led Investigation and the financial restatements have continued through fiscal year 2008 and as of June 30, 2008, these costs totaled $104.8 million with $96.2 million recorded in fiscal year 2008 and $8.6 million recorded in fiscal year

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2007. These costs, combined with consulting expenses in support of preparing our Annual Report on Form 10-K for our fiscal year 2008, are expected to total more than $125.0 million of which approximately $20.0 million relates to the first quarter of fiscal year 2009.

        Excluding costs associated with the Audit Committee-led Investigation, there was a $6.6 million decrease in selling and administrative expense from fiscal years 2007 to 2008. This decrease in selling and administrative expenses mainly due to cost reductions following the Divestiture was partially offset by stock option charges increasing from $8.6 million in fiscal year 2007 to $9.0 million in fiscal year 2008.

Research and Development Expense

        For the fiscal year ended June 30, 2008 and 2007, R&D expense was $105.8 million and $122.8 million (10.7 percent and 10.2 percent of revenue, respectively). The reason for the decline in R&D spending was primarily due to headcount reductions associated with lower revenue following the Divestiture. We realized year-over-year cost savings of $1.6 million relating to facility closures in Oxted, England and El Segundo, California. In the third quarter of fiscal year 2008, we adopted a plan for the closure of these facilities. The cost associated with closing and exiting these facilities and severance costs are expected to total approximately $13.8 million. Of this amount, approximately $12.2 million represents the cash outlay related to this initiative in future periods. We expect the closure and exiting of these two facilities to be completed by the end of the second quarter of fiscal year 2010. We continue to concentrate our R&D activities on developing new platform technologies, as well as our power management ICs and the advancement and diversification of our HEXFET®, power MOSFET and IGBT product lines. We have been developing and introducing some of the most advanced power management products and new architectures for the next generation of applications, including new game stations, industrial electronic motors, digital televisions, high-performance servers, hybrid vehicles and energy-efficient appliances. Additionally stock option charges decreased from fiscal year 2007 to fiscal year 2008 by $2.5 million.

Impairment of Goodwill

        In the fourth quarter of fiscal year 2008, we assessed our goodwill for impairment. Our assessment considered current economic conditions and trends, estimated future operating results, anticipated future economic conditions and technology. After completing the first step in the Goodwill impairment analysis, we concluded that the Goodwill in the PS and PMD segments should be impaired. Several factors led to a reduction in forecasted cash flows, including, among others, lower than expected performance in our PS segment, and softening demand and pricing for our products in the PMD segment. Based on the results of the annual assessment of goodwill for impairment, the net book value of two of our reporting units, PMD and PS, exceed their estimated fair value determined using a discounted cash flow analysis. Our initial assessment of our IP segment in the fourth quarter of fiscal year 2008 also indicated a potential impairment for this segment. However, subsequent to this analysis, we signed an extension to an existing license agreement which improved our forecasted cash flows for the IP segment, and we determined that no goodwill impairment would be required. We performed the second step of the impairment test to the PMD and PS segments and recorded goodwill impairment charges of $28.7 million relating to PMD and $3.9 million relating to PS.

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Asset Impairment, Restructuring and Other Charges

        The following table sets forth the charges we recorded in the fiscal years ended June 30, 2008, 2007, and 2006 related to our restructuring initiatives (in thousands):

 
  2008   2007   2006  

Reported in cost of sales

  $   $ 1,001   $ 3,444  
               

Reported in asset impairment, restructuring and other charges:

                   
 

Asset impairment

  $   $ 5,878   $ 397  
 

Severance

    2,670     5,073     (690 )
 

Other charges

    410     620     3,194  
               
 

Subtotal

    3,080     11,571     2,901  

Discontinued operations

        (1,173 )   (2,814 )
               

Total asset impairment, restructuring and other charges

  $ 3,080   $ 10,398   $ 87  
               

The December 2002 Initiative

        In December 2002, we announced a restructuring initiative to better reposition ourselves for market conditions at the time and de-emphasize our commodity business. Our restructuring plans included consolidating and closing certain manufacturing sites in designated facilities and discontinuing production in other facilities that could not support more advanced technology platforms or products. In addition, we sought to implement initiatives to lower overhead costs across our support organizations. As of December 31, 2006, these restructuring activities were substantially completed. The following illustrates the charges we recorded in the fiscal years ended June 30, 2007 and 2006, related to our December 2002 restructuring initiative (in thousands):

 
  2008   2007   2006  

Reported in cost of sales

  $   $ 1,001   $ 2,918  
               

Reported in asset impairment, restructuring and other charges:

                   
 

Asset impairment

  $   $   $ 91  
 

Severance

        111     (932 )
 

Other charges

        475     2,499  
               

Total asset impairment, restructuring and other charges

  $   $ 586   $ 1,658  
               

        Charges recorded as an element of cost of sales in 2007 and 2006 represent costs from the closure of our assembly line in Krefeld, Germany and the move of those manufacturing activities to our facility in Swansea, Wales. The principal elements of those costs related to startup and transition costs, including:

    Manufacturing inefficiencies and cost overruns during the transition period;

    Expedited inbound and outbound air shipping charges during the transition period; and,

    Training and transition expenses for the Swansea workforce.

        Severance credits in fiscal year 2006 represent reversals of our severance accruals stemming from downward changes in our estimates of our ultimate severance liability under the December 2002 initiative. In 2006, the credit of $0.9 million is principally comprised of a downward revision of $1.6 million in our severance accrual as we completed an initiative to consolidate certain A&D manufacturing operations. This amount was partly offset by severance expense of $0.7 million mainly relating to our Mexico facility.

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        Other charges reflect the costs to relocate equipment related to the consolidation and closing of certain of our manufacturing sites and to discontinue production at designated facilities. In 2006, we incurred $2.5 million principally related to contract termination costs and plant closure costs. These costs were principally incurred in connection with the relocation of operations from our Krefeld facility to our Swansea facility.

The PCS Divestiture Initiative

        During the fiscal year ended June 30, 2007, in anticipation of the sale of the PCS Business, which represented about one-fourth of our business, we reviewed our overall manufacturing and support organizations and began to implement various cost-cutting measures. Our actions included terminating approximately 100 employees who were part of the PCS Business, but ultimately not hired by Vishay. As part of the employee terminations, we recorded $5.0 million in restructuring-related severance charges for the fiscal year ended June 30, 2007. The following illustrates the charges we recorded in the fiscal years ended June 30, 2007 and 2006 related to our PCS restructuring initiative (in thousands):

 
  2008   2007   2006  

Reported in cost of sales

  $   $   $ 526  
               

Reported in asset impairment, restructuring and other charges:

                   
 

Asset impairment

  $   $ 5,878   $  
 

Severance

        4,962     240  
 

Other charges

        158     457  
               

Total asset impairment, restructuring and other charges

  $   $ 10,998   $ 697  
               

        We recorded $5.9 million in asset impairment charges during fiscal year 2007 relating to certain property, plant and equipment not acquired by Vishay in connection with the Divestiture.

Other Activities and Charges

        From time to time, we also undertake and execute other smaller scale restructuring initiatives at our local sites. The following illustrates the charges (credits) we recorded in the fiscal years ended June 30, 2008, 2007 and 2006 related to our other restructuring activities (in thousands):

 
  2008   2007   2006  

Reported in cost of sales

  $   $   $  
               

Reported in asset impairment, restructuring and other charges (credits):

                   
 

Asset impairment

  $   $   $ 306  
 

Severance

    2,670         2  
 

Other charges (credits)

    410     (13 )   238  
               

Total asset impairment, restructuring and other charges (credits)

  $ 3,080   $ (13 ) $ 546  
               

        In the third quarter of fiscal year 2008, we adopted a plan for the closure of our Oxted, England facility and our El Segundo, California R&D fabrication facility. The costs associated with closing and exiting these facilities and severance costs are expected to total approximately $13.8 million. Of this amount, approximately $12.2 million represents the cash outlay related to this initiative in future periods. In fiscal year 2008, severance charges consisted of $1.2 million related to the closure of our Oxted facility and $1.5 million related to our El Segundo facility. We expect the closure and exiting of these two facilities to be completed by the end of the second quarter of fiscal year 2010.

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Other Income and Expense

        Other expense (income) was $19.4 million and $(6.3) million for the fiscal years ended June 30, 2008 and 2007, respectively. The change is primarily due to investment impairment charges of $8.4 million in the second half of fiscal year 2008, a charge for debt retirement of $5.7 million in the first quarter of fiscal year 2008, a write off of $3.6 million related to our investment in the common stock of a non-publicly traded company in the fourth quarter of fiscal year 2008 and lower gains on foreign exchange transactions. Other expense (income) primarily includes foreign currency fluctuations, dividend income from our equity investments and investment impairments.

        In the fiscal year ended June 30, 2007, we recognized foreign currency exchange gains of $3.8 million compared to a minimal loss in the fiscal year ended June 30, 2008.

Interest Income and Expense

        Interest income was $33.0 million and $54.6 million for the fiscal years ended June 30, 2008 and 2007, respectively, reflecting higher prevailing interest rates on lower average cash and investments balances during the fiscal year 2008 due primarily to the repayment of the $550.0 million convertible subordinated notes ("Notes") on July 16, 2007, the $74.0 million payment of income taxes, and the payment of Investigation-related expenses throughout the fiscal year of $96.2 million, offset by cash from operations.

        Interest expense was $3.9 million and $38.6 million for the fiscal years ended June 30, 2008 and 2007, respectively, primarily reflecting a lower interest expense due to the repayment of the Notes on July 16, 2007.

Income Taxes

        The rate of tax from continuing operations was (41.4) percent and 46.1 percent for the fiscal years ended June 30, 2008 and 2007, respectively. The rate for the fiscal year ended June 30, 2008 was higher than the expected U.S. federal statutory tax rate of 35 percent primarily from the availability of carrying back current operating losses, the release of tax contingencies largely related to certain penalties, R&D and foreign tax credits, and lower statutory rates in certain jurisdictions, which were partially offset by the impairment of goodwill, deemed foreign distributions, and an increase in tax contingencies. The rate for the fiscal year ended June 30, 2007 was higher than the expected U.S. federal statutory tax rate of 35 percent primarily from actual and deemed foreign distributions, an increase in penalties and interest, transfer pricing adjustments resulting in double taxation, and state taxes; partially offset by the tax benefit from the Divestiture, the benefit of R&D and foreign tax credits.

Fiscal Year 2007 Compared with Fiscal Year 2006

Revenues and Gross Margin

        Revenue for the fiscal year ended June 30, 2007 was $1.2 billion, compared to $1.0 billion in the prior fiscal year ended June 30, 2006. During fiscal year 2007, revenues increased by 18.5 percent compared to fiscal year 2006. The Divestiture was consummated on April 1, 2007; therefore, the year-over-year revenue increase occurred even though fiscal year 2007 included only three quarters of the PCS Business compared to four quarters of the PCS Business in 2006. Although full year revenue growth was strong, we exited fiscal year 2007 with revenue declining in the second half of the fiscal year. This revenue decline was due to an overall market decline resulting from decreased consumer spending, a downturn in the housing market, and higher distributor channel inventories. In addition to the market conditions, we experienced higher than expected product returns resulting from quality issues with certain next-generation game station products.

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        Gross margin declined to 38.4 percent for fiscal year ended June 30, 2007, from 42.0 percent in the prior fiscal year. Our fiscal year 2007 gross profit was negatively impacted by a write-off of $45.3 million of inventory including a) $25.7 million of inventory for products we deemed to be in excess of demand or obsolete and no longer plan to support, b) $10.9 million related to quality issues in game station products and c) $8.7 million related to the write-off of excess equipment spare parts inventory, compared to a $5.5 million Japan-related inventory write-off and an excess and obsolescence write off of $8.2 million in fiscal year 2006. In fiscal year 2007, we also incurred higher than normal production costs primarily due to increased qualification expenses from the introduction of new products used in next-generation game stations and servers. These costs were partially offset by favorable utilization of our other factories as we built inventory in the second half of fiscal year 2007.

        Revenue from our ongoing operating segments, which include the PMD, ESP, A&D, EP, PS and IP segments, increased to $1,014.5 million for the fiscal year ended June 30, 2007, from $816.7 million for the fiscal year ended June 30, 2006, reflecting growth in all segments, as further described below. These revenues increased to 84.4 percent of our consolidated revenue for the fiscal year ended June 30, 2007, from 80.5 percent for fiscal year 2006. Gross profit margin for these segments was 42.5 percent for the fiscal year ended June 30, 2007 and 46.8 percent for the prior fiscal year ended June 30, 2006. The gross profit declined mostly due to inventory write-offs mentioned above.

        Revenue and gross margin by reportable segments are as follows (in thousands, except percentages):

 
  June 30, 2007   June 30, 2006  
Business Segment
  Revenues   Percentage
of Total
  Gross
Margin
  Revenues   Percentage
of Total
  Gross
Margin
 

Power Management Devices

  $ 416,464     34.6 %   33.7 % $ 369,974     36.5 %   36.6 %

Energy-Saving Products

    225,250     18.7     47.7     200,607     19.8     52.5  

Aerospace and Defense

    157,008     13.1     51.2     131,062     12.9     48.1  

Enterprise Power

    87,535     7.3     52.0     68,280     6.7     54.4  

PowerStage

    84,070     7.0     15.5     7,962     0.8     36.0  

Intellectual Property

    44,171     3.7     100.0     38,839     3.8     100.0  
                           
 

Ongoing segments total

    1,014,498     84.4     42.5     816,724     80.5     46.8  

Transition Services

    18,730     1.6     7.5              

Commodity Products

    169,241     14.0     17.1     198,076     19.5     21.9  
                           

Consolidated total

  $ 1,202,469     100.0 %   38.4 % $ 1,014,800     100.0 %   42.0 %
                           

        PMD segment revenue for the fiscal year ended June 30, 2007 increased by 12.6 percent from the fiscal year ended June 30, 2006, reflecting growth in multiple end markets, including desktop and laptop computers, associated consumer electronics, and industrial and commercial battery-powered applications. Gross margin for the PMD segment declined to 33.7 percent for the fiscal year ended June 30, 2007, from 36.6 percent in the prior fiscal year, primarily due to a $7.4 million excess equipment spare parts inventory write-off and a $2.8 million inventory write-off related to an older technology that we no longer support.

        ESP revenue increased by 12.3 percent for the fiscal year ended June 30, 2007, reflecting growth in consumer spending for energy-efficient appliances and digital televisions partially offset by second half of 2007 lower demand for general purpose high voltage ICs that are primarily sold through our distribution channels. Gross margin for the ESP segment was 47.7 percent for the fiscal year ended June 30, 2007, compared to 52.5 percent in the prior fiscal year. The decrease was primarily due to declining demand for high margin, high voltage ICs, a decline in price of IGBTs, increased manufacturing costs from lower factory utilization, a $0.9 million inventory write-off related to products we no longer support and a $0.8 million write-off associated with excess equipment spare parts inventory.

        A&D revenue for the fiscal year ended June 30, 2007 increased by 19.8 percent from the prior fiscal year ended June 30, 2006, reflecting first half of fiscal year 2007 growth in commercial and

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military surveillance satellite programs coupled with commercial aircraft programs. Gross margin for the A&D segment increased to 51.2 percent for the fiscal year ended June 30, 2007, from 48.1 percent in the prior fiscal year, reflecting manufacturing and design efficiencies, along with a strong demand for our space-grade products, partially offset by $3.3 million of inventory write-offs for older A&D programs that we no longer support.

        EP revenue for fiscal year ended June 30, 2007 increased by 28.2 percent from the prior fiscal year ended June 30, 2006, due to first half of 2007 strength in data center-related products, including enterprise servers and workstations in the EP segment. Gross margin for the EP segment decreased to 52.0 percent for the fiscal year ended June 30, 2007, from 54.4 percent in the prior fiscal year. Gross margin declined primarily due to a write-off of $2.2 million of low voltage IC inventory that we no longer sell.

        PS revenue for fiscal year ended June 30, 2007 increased $76.1 million from the prior fiscal year ended June 30, 2006, due to a significant increase in the demand for our game station products. Although we benefited from large growth in fiscal year 2007 from game station demand, we are expecting this demand to decline in fiscal year 2008 due to game station redesigns using new generation CPU/GPUs which require lower levels of power processing and therefore use fewer of our iPOWIR® components. Gross margin for the PS segment decreased to 15.5 percent for the fiscal year ended June 30, 2007, from 36.0 percent in the prior fiscal year, reflecting $10.9 million in inventory write-offs related to quality issues in game station parts and a $0.9 million write-off of excess and obsolete inventory and equipment spare parts, and a lower average selling price on the latest generation game station parts.

        IP revenue was $44.2 million for the fiscal year ended June 30, 2007 compared to $38.8 million for the prior fiscal year. The increase reflects opportunistic licensing of non-MOSFET technology. We expect that with the expiration of our broadest MOSFET patents in 2008, most of our IP segment revenue will cease in the fourth quarter of fiscal year 2008, and our gross profit will be adversely impacted accordingly; however, we plan to continue to enter into opportunistic licensing arrangements that we believe are consistent with our business strategy.

        TS revenue consisted of the new manufacturing and related services provided to Vishay beginning in the fourth fiscal quarter ended June 30, 2007. As part of the Divestiture, we agreed to supply these services to Vishay at negotiated prices that are at or below our cost for up to three years following the closing date of the Divestiture. In addition, Vishay agreed to supply certain die products to us, subject to certain terms in connection with the Divestiture. The fair value of these transition agreements was recorded at $20.0 million for the transition services we provide to Vishay and $3.4 million for the transition services Vishay provides to us. We expect the gross profit for the TS segment to be near zero.

        For the fiscal year ended June 30, 2007, CP revenue was $169.2 million compared to $198.1 million in the fiscal year ended June 30, 2006. The decline reflects the discontinuation of the CP business upon its sale to Vishay on April 1, 2007. As a consequence of the timing of this sale, fiscal year 2006 includes four quarters of CP revenue while fiscal year 2007 includes three quarters of CP revenue. Gross margin for the CP segment decreased to 17.1 percent for the fiscal year ended June 30, 2007, from 21.9 percent in the prior fiscal year, reflecting a lower average selling price due to competitive demand.

Selling and Administrative Expense

        For the fiscal year ended June 30, 2007, selling and administrative expense was $212.1 million (17.6 percent of revenue), compared to $196.8 million (19.4 percent of revenue) in the prior fiscal year ended June 30, 2006. Fiscal year 2007 selling and administrative expense included $8.6 million of legal, audit and consulting costs associated with the Audit Committee-led Investigation, reconstruction of the financial results at our Japan subsidiary, and restatements of multiple periods of consolidated financial statements.

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        Excluding costs associated with the Audit Committee-led Investigation, the selling and administrative expense increase from fiscal years 2006 to 2007 was primarily due to $6.5 million of increased legal expenses and $6.3 million of higher stock option compensation charges. Additionally, there was an increase in selling expense and commission reflecting variable costs on higher revenue and increased investment in information technology infrastructure. This increase in selling and administrative expense was partially offset in the fourth quarter of fiscal year 2007 by cost reductions following the Divestiture.

Research and Development Expense

        For the fiscal year ended June 30, 2007 and 2006, R&D expense was $122.8 million and $104.1 million (10.2 percent and 10.3 percent of revenue, respectively), primarily reflecting increased spending for new platform technology, increased investment in A&D product development, and an increased stock compensation charge of $3.1 million. Our R&D program focuses on power management ICs and the advancement and diversification of our HEXFET®, power MOSFET and IGBT product lines. We have been developing and introducing some of the most advanced power management products and new architectures for the next generation of applications, including new game stations, industrial electronic motors, digital televisions, high-performance servers, hybrid vehicles and energy-efficient appliances.

Stock Option Plan Modifications

        Our employee stock option plan typically provides terminated employees a period of thirty days from date of termination to exercise their vested stock options. In certain circumstances, we have extended that thirty-day period for a period consistent with the plan. In accordance with SFAS No. 123 (Revised 2004) "Share-Based Payment" ("SFAS No. 123(R)"), the extension of the exercise period was deemed to be a modification of stock option terms. Additionally, certain of these modified awards have been classified as liability awards within other accrued expenses. Accordingly, at the end of each reporting period, we determine the fair value of those awards and recognize any change in fair value in our consolidated statements of operations in the period of change until the awards are exercised, expire or are otherwise settled. As a result of these modifications and the mark-to-market adjustments of the liability awards included in other accrued expenses, we recorded a charge of $5.9 million for the fiscal year ended June 30, 2007 that was classified in cost of sales and operating expense.

Asset Impairment, Restructuring and Other Charges

        Refer to "Fiscal Year 2008 Compared with Fiscal Year 2007—Asset Impairment, Restructuring and Other Charges" above for the information about our restructuring charges.

The Divestiture

        On April 1, 2007, we sold our PCS Business to Vishay for $339.6 million, including $14.5 million of restricted cash temporarily held in escrow to cover indemnity obligations, if any, and the net cash retained from the assets of the entities being sold totaling approximately $49.4 million. As discussed in Part II, Item 8, Note 2, "Discontinued Operations and the Divestiture," in fiscal year 2007 we deferred recognition of the gain from continuing operations of $116.1 million. However, we did recognize in fiscal year 2007 a loss from discontinued operations of $4.3 million.

Other Income and Expense

        Other (income) expense was $(6.3) million and $(15.8) million for the fiscal years ended June 30, 2007 and 2006, respectively. In the fiscal year ended June 30, 2007, we recognized foreign currency exchange gains of $3.8 million.

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        In the fiscal year ended June 30, 2006, we recognized $13.6 million of gain from the sale of a portion of our equity investment in Nihon Inter Electronics Corporation ("Nihon"), a related party (see Part II, Item 8, Note 14, "Related Party Transactions").

Interest Income and Expense

        Interest income was $54.6 million and $33.2 million for the fiscal years ended June 30, 2007 and 2006, respectively. The increase in income reflected higher prevailing interest rates and a higher average cash and investments balance during the fiscal year 2007.

        Interest expense was $38.6 million and $26.4 million for the fiscal years ended June 30, 2007 and 2006, respectively. The increase in current period expense primarily reflected a higher effective interest rate payable on our Notes outstanding, which were subsequently paid at maturity on July 16, 2007 (see Part II, Item 8, Note 5, "Bank Loans and Long-Term Debt").

Income Taxes

        The tax rate on income from continuing operations was 46.1 percent and 65.2 percent for the fiscal years ended June 30, 2007 and 2006, respectively. The rate for the fiscal year ended June 30, 2007 was higher than the expected U.S. federal statutory tax rate of 35 percent primarily from actual and deemed foreign distributions, an increase in penalties and interest, transfer pricing adjustments resulting in double taxation, and state taxes; partially offset by the tax benefit from the Divestiture, the benefit of R&D and foreign tax credits, and the benefit of export incentives. The tax provision for the fiscal year ended June 30, 2006 was higher than the expected U.S. federal statutory rate of 35 percent primarily from transfer pricing adjustments resulting in double taxation, additional tax expense associated with the distribution of earnings previously treated as permanently reinvested and the special dividend repatriation from certain controlled foreign subsidiaries under the American Jobs Creation Act of 2004, and an increase in penalties and interest, which was partially offset by the benefit of R&D and foreign tax credits, lower statutory rates in certain foreign jurisdictions, and the benefit of export incentives. Due to errors in our transfer pricing related to intercompany transactions, we filed amended income tax returns in Singapore for fiscal years 2004 through 2006 claiming tax refunds and asserted a claim for tax refunds for fiscal years 2001 and 2003. The benefit of these claims has not been recognized in our restated financial statements because the likelihood that the Singapore tax authority will refund these amounts is not probable. Consequently, we have recorded both U.S. federal income tax and Singapore income tax with respect to certain intercompany transactions in these fiscal years. The effective tax rates were based on tax law in effect at June 30, 2007 and 2006, respectively.

        We also recognized a tax benefit of $18.1 million in connection with the Divestiture of which $11.7 million was attributed to discontinued operations.

Discontinued Operations

        The amounts and disclosures in this Annual Report on Form 10-K present the result of reclassifying the operating results of our NAP segment to Discontinued Operations, net of applicable income taxes, for all reporting periods presented.

        On April 1, 2007, we completed the Divestiture and the resulting sale of our PCS Business to Vishay for $339.6 million. We received $339.6 million in cash in the month following closing, including $14.5 million of restricted cash temporarily held in escrow to cover indemnity obligations, if any, and approximately $49.4 million of net cash retained from the assets of the entities being sold. As discussed in Part II, Item 8, Note 2, "Discontinued Operations and the Divestiture," we deferred in fiscal year 2007 recognition of the gain from continuing operations of $116.1 million. However, we did recognize in fiscal year 2007 a loss from discontinued operations of $4.3 million.

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        The Divestiture included essentially two components of our business. We have reported one of these components, our former NAP segment, as a discontinued operation in our accompanying financial statements. Our former NAP segment included certain modules, rectifiers, diodes and thyristors used in the automotive, industrial, welding and motor control applications. The other and larger component, our former CP segment, was not presented as a discontinued operation due to the significance of our ongoing involvement due to our TSAs with Vishay.

        The following table summarizes results from Discontinued Operations for the periods indicated (in thousands, except per share data):

 
  Fiscal Year Ended
June 30,
 
 
  2007   2006  

Revenues

  $ 85,060   $ 110,190  

Cost of sales

    75,176     100,010  
           
 

Gross profit

    9,884     10,180  

Selling and administrative expense

    8,101     9,756  

Research and development expense

    3,862     6,266  

Amortization of acquisition-related intangible assets

    320     920  

Asset impairment, restructuring and other charges

    1,173     2,814  
           

Operating loss from discontinued operations, before taxes

    (3,572 )   (9,576 )

Operating loss on sale of discontinued operations, before taxes

    (4,262 )    
           

Operating loss from discontinued operations and loss on sale of discontinued operations, before taxes

    (7,834 )   (9,576 )

Income tax benefit (provision)

    12,089     (4,078 )
           

Income (loss) from discontinued operations, net of taxes

  $ 4,255   $ (13,654 )
           

Income (loss) from discontinued operations, per common share:

             

Basic

  $ 0.06   $ (0.20 )
           

Diluted

  $ 0.06   $ (0.19 )
           

Average common shares outstanding—basic

    72,421     70,914  
           

Average common shares and potentially dilutive securities outstanding—diluted

    72,933     71,753  
           

        Included in the determination of Net income for fiscal year 2007, we have, in connection with the Divestiture transaction, recorded a tax benefit of $18.1 million, of which $11.7 million was attributed to discontinued operations.

Liquidity and Capital Resources

        At June 30, 2008, we had $725.9 million of total cash (excluding $19.4 million of restricted cash), cash equivalents and investments, consisting of available-for-sale fixed income and investment-grade securities. As of the fiscal years ended June 30, 2008 and 2007, fair market values of our mortgage-backed and asset-backed securities were $168.2 million (23.2 percent of cash and cash equivalents, short-term and long-term investments) and $209.2 million (16.1 percent of cash and cash equivalents, short-term and long-term investments), respectively (see Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" for discussions about our investment strategy.) In fiscal year 2008, we recorded an $8.4 million charge for an other-than-temporary impairment relating to certain available-for-sale securities as a result of declines in their fair market values through June 30, 2008.

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        Total cash, cash equivalents, and investments at the end of each year were as follows (in thousands):

 
  Fiscal Year Ended June 30,  
 
  2008   2007  

Cash and cash equivalents

  $ 320,464   $ 853,040  

Investments

    405,419     449,896  
           
 

Total cash, cash equivalents, and investments

  $ 725,883   $ 1,302,936  
           

        Our cash flows were as follows (in thousands):

 
  Fiscal Year Ended June 30,  
 
  2008   2007   2006  

Cash flows provided by operating activities

  $ 36,400   $ 185,418   $ 136,438  

Cash flows (used in) provided by investing activities

    (12,687 )   271,792     (170,859 )

Cash flows (used in) provided by financing activities

    (554,950 )   (90,507 )   153,097  

Effect of exchange rates

    (1,339 )   3,430     4,253  
               

Net (decrease) increase in cash and cash equivalents

  $ (532,576 ) $ 370,133   $ 122,929  
               

        During the fiscal year ended June 30, 2008, operating activities generated cash flow of $36.4 million compared to $185.4 million generated in the prior fiscal year ended June 30, 2007. Non-cash increase to cash flow from operations during the fiscal year ended June 30, 2008 included $82.9 million of depreciation and amortization, $32.6 million of goodwill impairment, $29.8 million in inventory write-downs, and $11.1 million of stock compensation expense. Changes in operating assets and liabilities decreased cash by $42.7 million, primarily attributed to decreases in accrued taxes and other accrued liabilities, offset by decreases in trade accounts receivable, inventories and prepaids and other receivables.

        Cash used in investing activities during the fiscal year ended June 30, 2008 consisted primarily of $41.8 million of capital equipment purchases. Proceeds from sale or maturities of investments were $342.3 million, offset by $311.1 million of cash used to purchase investments. As of June 30, 2008, we had purchase commitments for capital expenditures of approximately $3.3 million. We intend to fund capital expenditures and working capital requirements through cash and cash equivalents on hand, anticipated cash flow from operations and available credit facilities.

        Cash used in financing reflected primarily the repayments of the Notes and foreign accounts receivable financing facilities. On July 16, 2007, we funded the payment at maturity of our Notes due on July 16, 2007. The funding included a final interest payment of $11.7 million. In connection with the final maturity and payment of the Notes, we recorded a debt retirement charge of $5.7 million from the concurrent termination of related interest rate swap transactions during the first fiscal quarter ended September 30, 2007 (see also Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" and Part II, Item 8, Note 4, "Derivative Financial Instruments").

        In June 2006, our subsidiary in Singapore entered into a Credit Agreement with Bank of America, N.A. ("BoA"). Pursuant to the Credit Agreement, BoA loaned $81.0 million to the Singapore subsidiary, bearing interest at the rate of London Interbank Offered Rate ("LIBOR") plus 1.0 percent and maturing on June 26, 2008. In conjunction with the Credit Agreement, we entered into a guaranty in favor of BoA to guarantee the payment and performance of obligations by its Singapore subsidiary.

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In January 2007, our subsidiary in Singapore made a prepayment of $26.0 million on the loan, and in May 2007, the Singapore subsidiary prepaid the remaining balance on the loan of $55.0 million.

        We had been a party to a three-year syndicated multi-currency revolving credit facility led by BNP Paribas (the "BNP Facility") that expired in November 2006. The BNP Facility provided a credit line of $150.0 million, of which up to $150.0 million could have been used for standby letters of credit. At June 30, 2006, we had $30.3 million in foreign loans and $25.0 million in letters of credit outstanding under the BNP Facility.

        We had four accounts receivable financing facilities in Japan which we either cancelled or let expire as of June 30, 2008.

        On November 6, 2006, we entered into a new five-year multi-currency revolving credit facility with a syndicate of lenders including JPMorgan Chase Bank ("JPM"), BoA, HSBC Bank USA, and Deutsche Bank AG (the "Facility"), to replace the BNP Facility. The Facility expires in November 2011 and provides a credit line of $150.0 million with an option to increase the Facility limit to $250.0 million. Up to $75.0 million of the Facility may be used for standby letters of credit and up to $10.0 million may be used for swing-line loans. The Facility bears interest at (i) local currency rates plus (ii) a margin between 0.0 percent and 0.25 percent for base rate advances and a margin between 0.875 percent and 1.25 percent for Euro-currency rate advances, based on our senior leverage ratio. Other advances bear interest as set forth in the credit agreement. The annual commitment fee for the Facility ranges between 0.175 and 0.25 percent of the unused portion of the total Facility, depending upon our senior leverage ratio. The Facility also contains certain financial and other covenants, with which we were in compliance at June 30, 2008. We pledged as collateral shares of certain of our subsidiaries.

        The Facility has been amended by (together, the "Facility Amendments"): an Amendment No. 1 to the Facility dated May 4, 2007, an Amendment No. 2 to the Facility dated June 27, 2007, an Amendment No. 3 to the Facility dated September 13, 2007, an Amendment No. 4, to the Facility dated December 14, 2007 and an Amendment No. 5, to the Facility dated March 17, 2008. Pursuant to these Facility Amendments, our lenders agreed that we would not be deemed in default with respect to certain representations, warranties, covenants and reporting requirements during a period ending not later than July 31, 2008. In addition, pursuant to the Facility Amendments, the lenders had no obligation to make any extensions of credit under the Facility (other than the renewal of currently outstanding letters of credit in existing amounts) until, among other things, the lenders have received our audited consolidated financial statements, reasonably satisfactory to the lenders, and no other default (as defined in the Facility) exists. As set forth in the Facility Amendments, we agreed to provide cash collateral for the outstanding letters of credit under the Facility and paid amendment fees to the lenders. We intend to reinstate the Facility following the satisfaction of the necessary conditions, but there can be no assurance that we will be successful (see Part I, Item 1A, "Risk Factors—Our liquidity may be subject to the availability of a credit facility upon acceptable terms and conditions"). Although we are not able to access the Facility except for the renewal of outstanding letters of credit, we believe we have sufficient cash, cash equivalents, cash investments and cash flows from operations to meet current foreseeable working capital and other operating cash requirements.

        On July 30, 2008, we and the lender parties to the Facility amended the Facility by Amendment No. 6 that extends the current accommodation through November 30, 2008 and provides that thirty (30) days after the lenders' receipt of and reasonable satisfaction with the form and substance of our current filings with the SEC and if we are in a position to satisfy the other applicable conditions of the Facility, the lenders shall notify us in writing either (i) that extensions of credit are available under the Facility to us or (ii) that the Facility must be amended on such further terms and conditions as reasonably requested by such lenders. Pending the receipt of such notice and, if applicable, execution of such further amendment to the Facility, we are not able to access the Facility. The Amendment

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provides that failure by us to provide full cash collateral for the approximately $4.3 million of letters of credit currently outstanding will result in termination of the Amendment.

        As further disclosed in Part II, Item 8, Note 4, "Derivative Financial Instruments," we had entered into a five-year foreign exchange forward contract in May 2006 with BNP Paribas (the "Forward Contract") for the purpose of reducing the effect of exchange rate fluctuations on forecasted intercompany purchases by our Japan subsidiary. Under the terms of the Forward Contract, we were required to exchange 507.5 million Yen for $5.0 million on a quarterly basis starting in June 2006 and expiring in March 2011. In December 2007, we terminated the Forward Contract and received $2.8 million of cash as part of the settlement. In accordance with SFAS No. 133 Implementation Issue No. G3 "Cash Flow Hedges, Discontinuation of a Cash Flow Hedge," ("SFAS No. 133") the net gain at the Forward Contract's termination date will continue to be reported in other comprehensive income and recognized over the originally specified time period through March 2011, until it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter.

        In connection with certain tax matters described in Part II, Item 8, Note 9, "Income Taxes," we prepared and filed in September 2007 amended U.S. federal tax returns for the fiscal years 2004 through 2006. In conjunction with the filing of these amended tax returns and extensions related to U.S. federal and state income tax returns for the fiscal year ended June 30, 2007, we remitted income taxes and interest in the aggregate amount of $74.0 million to the IRS and state taxing agencies. Upon filing the amended returns and paying the interest due on the indicated underpayment of tax, we released during the first quarter of fiscal year 2008, from accrued income taxes, $13.7 million of accrued penalty and related interest for the underpayment of income taxes due for the fiscal years 2004 to 2006 that we determined would have been payable in those years and paid approximately $44.3 million in taxes and $4.2 million for accrued interest on those taxes. We also paid, in the first quarter of fiscal year 2008, the IRS and state taxing agencies approximately $25.5 million upon the filing of fiscal year 2007 extensions. Additionally, during fiscal year 2008, we filed Forms 3115 to change certain tax accounting methods with respect to the fiscal years ended June 30, 2001 through June 30, 2006. As a consequence of filing the Forms 3115, we reversed, throughout fiscal year 2008, approximately $1.2 million of accrued penalties and related interest for the fiscal years ended June 30, 2001 through June 30, 2006.

        We are pursuing refunds for income taxes we believe to have overpaid in certain jurisdictions and have recorded in the financial statements a $15.2 million tax benefit. In certain other jurisdictions, we cannot determine that the realization of the tax refunds of $59.3 million is probable and as such, we have not recognized them as income tax benefits in its financial statements. We have determined that we have overpaid $49.0 million of income taxes (which is included in the $59.3 million) in Singapore as a result of changes in our transfer pricing of intercompany transactions.

        We have determined that in fiscal year 2009 we will file amended U.S. federal income tax returns and consequently will pay approximately $14.2 million in taxes and $13.2 million in related interest and penalties to the IRS in connection with uncertain tax positions recorded for fiscal years 2001 through 2003.

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Contractual Obligations

        Our contractual obligations, including the income taxes payable described above, as of the fiscal year ended June 30, 2008, are as follows (in thousands):

 
   
  Payments Due by Period  
Contractual Obligations
  Total   Less than
1 Year
  1 - 2
Years
  2 - 3
Years
  3 - 4
Years
  4 - 5
Years
  5 Years &
Thereafter
 

Taxes payable

  $ 52,090   $ 30,943   $ 21,147   $   $   $   $  

Operating leases

    24,363     8,110     6,589     5,420     1,893     1,281     1,070  

Capital equipment purchase commitments

    3,334     3,334                      

Other purchase commitments

    22,425     7,876     4,353     2,811     2,742     2,672     1,971  
                               
 

Total contractual obligations

  $ 102,212   $ 50,263   $ 32,089   $ 8,231   $ 4,635   $ 3,953   $ 3,041  
                               

Off-Balance Sheet Arrangements

        Apart from the operating lease obligations and purchase commitments discussed above, we do not have any off-balance sheet arrangements as of the fiscal years ended June 30, 2008 and 2007.

Recent Accounting Pronouncements

        Information set forth under Part II, Item 8, Note 1, "Business, Basis of Presentation and Summary of Significant Accounting Policies—Recent Accounting Pronouncements" is incorporated herein by reference.

Critical Accounting Policies and Estimates

        The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on the results of our operations. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Although we have based our estimates on the latest available historical information as well as known or foreseen trends, we cannot guarantee that we will continue to experience the same pattern in the future. If the historical data and assumptions we used to develop our estimates do not properly reflect future activity, our net sales, gross profit, net income and earnings per share could be materially and adversely impacted. We also have other policies that we consider key accounting policies.

Revenue Recognition and Allowances

        In accordance with Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," we recognize revenue when evidence of an arrangement exists, pricing is fixed or determinable, collection is reasonably assured, and delivery or performance of service has occurred. We recognize revenue based on established terms and conditions with our customers, which are generally upon shipment for product sales. Certain of our customers' contracts contain substantive acceptance provisions. In such circumstances, we recognize revenue in accordance with specific contract acceptance provisions, in most instances upon customer inspection or upon delivery of proof of conformance to customer specifications.

        Certain distributors and other customers have limited rights of returns and price protection programs. Revenue on product sales made through these distributors and customers are not recognized until revenue recognition criteria are met. We estimate and establish allowances for expected product returns in accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists," and

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reduce revenues and cost of sales for estimated product returns in the same period that the related revenue is recorded. The estimation of future returns is based on historical sales returns, analysis of credit memo data, and other factors known at the time. We also record accruals for price protection programs and stock rotation rights. The estimation process is based on historical data and other known factors. Each quarter, we reevaluate our estimates to assess the adequacy of our recorded allowances and adjust the amounts as necessary.

        We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Factors affecting our allowance for doubtful accounts include historical and anticipated customer default rates of the various aging categories of accounts receivable and financing receivables. The expense associated with the allowance for doubtful accounts is recognized as selling and administrative expense.

Inventories

        Inventories are stated at the lower of cost (generally first-in, first-out) or market. Inventories are reviewed for excess and obsolescence based upon demand forecasts within a specific time horizon and reserves are established accordingly. If actual market demand differs from our forecasts, our financial position, results of operations and cash flows may be materially impacted. Manufacturing costs deemed to be abnormal, such as idle facility expense, excessive spoilage, double freight, and re-handling costs are charged as cost of sales in the current period, rather than capitalized as part of ending inventory, in accordance with SFAS No. 151, "Inventory Costs an Amendment of ARB No. 43, Chapter 4." If the actual costs of production, including materials, labor and overhead costs, differ significantly from our forecasts, our gross margin and inventory may be materially impacted.

Income Taxes

        On July 1, 2007, we adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109" ("FIN 48"). Under FIN 48, differences between the amounts recognized in the consolidated financial statements prior to the adoption of FIN 48 and the amounts reported as a result of adoption are to be accounted for as a cumulative effect adjustment recorded to retained earnings. The adoption of FIN 48 had no material impact on the consolidated financial statements. Consistent with the provisions of FIN 48, we have reclassified $21.1 million of income tax liabilities (including interest and penalties) from accrued income taxes to other long-term liabilities in the consolidated balance sheet during the fourth quarter of fiscal year 2008 because it was determined that payment of cash is not anticipated within one year of the balance sheet date.

        Deferred income taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted rates in effect during the year in which the differences are expected to reverse. This process requires estimating both our geographic mix of income and our current tax exposures in each jurisdiction where we operate. These estimates involve complex issues, require extended periods of time to resolve, and require us to make judgments, such as anticipating the positions that we will take on tax returns prior to our actually preparing the returns and the outcomes of disputes with tax authorities. We are also required to determine deferred tax assets and liabilities and the recoverability of deferred tax assets. Realization of deferred tax assets is dependent upon generating sufficient taxable income, carryback of losses, offsetting deferred tax liabilities, and the availability of tax planning strategies. Valuation allowances are established for the deferred tax assets that we believe do not meet the "more likely than not" criteria established by SFAS No. 109. Judgments regarding future taxable income may be revised due to changes in market conditions, tax laws, or other factors. If our assumptions and estimates change in the future, the valuation allowances established may be increased, resulting in increased income tax expense. Conversely, if we are ultimately able to use all or a portion of the deferred tax assets for which a valuation allowance has

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been established, the related portion of the valuation allowance will be released to reduce income tax expense or goodwill, or credit additional paid-in capital, as applicable. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities recorded in our tax provision. We recognize any interest and penalties associated with income taxes in accrued income taxes.

        We recognize certain tax liabilities for anticipated tax audit findings in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which additional taxes would be due, in accordance with FIN 48. If the audit findings result in actual taxes owed more or less than what we had anticipated, our income tax expense would be increased or decreased, accordingly, in the period of the determination.

        As of June 30, 2008, U.S. income taxes have not been provided on approximately $79.3 million of undistributed earnings of foreign subsidiaries since we consider these earnings to be invested indefinitely. Determination of the amount of unrecognized deferred tax liabilities for temporary differences related to investments in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable.

Impairment of Long-Lived Assets, Intangibles and Goodwill

        We evaluate the carrying value of goodwill in the fourth quarter of each fiscal year. In evaluating goodwill, a two-step goodwill impairment test is applied to each reporting unit as prescribed by SFAS No. 142, "Goodwill and Other Intangible Assets." We identify our reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. In the first step of the impairment test, we estimate the fair value of the reporting unit. If the fair value of the reporting unit is less than the carrying value of the reporting unit, we perform the second step which compares the implied fair value of the reporting unit with the carrying amount of that goodwill and write down the carrying amount of the goodwill to the implied fair value.

        The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. The fair value of our reporting units is determined using the income approach. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows that the reporting unit is expected to generate over its remaining life. In the application of the income approach, we are required to make estimates of future operating trends and judgments on discount rates and other variables. Actual future results related to assumed variables could differ from these estimates. Based on our annual impairment test in the fourth quarter, we determined that goodwill was impaired as of the fiscal year ended June 30, 2008 and recognized an impairment charge of $32.6 million. See Part II, Item 8, Note 1, "Business, Basis of Presentation and Summary of Significant Accounting Policies," for a description of the goodwill impairment.

        In estimating the fair value of the businesses with recognized goodwill for the purposes of our annual or periodic analyses, we make estimates and judgments about the future cash flows of our businesses. Although the cash flow forecasts are based on assumptions that are consistent with the plans and estimates we use to manage the underlying businesses, there is significant judgment in determining the cash flows attributable to these businesses. To the extent our forecasted income and cash flows do not materialize or there are significant changes to other variables, we may be required to write down additional goodwill in the future.

        We evaluate the recoverability of long-lived assets and other intangible assets whenever events and circumstances indicate that the carrying value of such assets may not be recoverable, in accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." Asset impairment expense is recorded in operating income.

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Stock-Based Compensation

        We account for stock-based compensation in accordance with the provisions of SFAS No. 123(R). Under SFAS No. 123(R), we estimate the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense attributed is based on an estimated forfeiture rate, which is updated as appropriate. We determine forfeiture rates of the stock options based on our historical exercise and termination data, unvested options' original life time remaining to vest and whether these options were held by our officers and directors. We apply the SAB No. 107, "Share-Based Payment" simplified "plain-vanilla" method to determine the expected life in valuing our stock options to the extent that we cannot rely on our historical exercise data as a result of the amendments to the 2000 Incentive Plan ("2000 Plan") which changed the expiration and vesting terms of the stock option awards. We use market implied volatility of options with similar terms for valuing our stock options. We believe implied volatility is a better indicator of expected volatility because it is generally reflective of both historical volatility and expectations of how future volatility will differ from historical volatility. The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Changes in these assumptions could materially impact reported results in future periods.


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to financial market risks, including fluctuations in interest rates, foreign currency exchange rates and market value risk related to our investments, including mortgage-backed securities. We use derivative financial instruments primarily to mitigate these risks and as part of our strategic investment program. In the normal course of business, we also face risks that are either non-financial or non-quantifiable. Such risks principally include country risk, credit risk and legal risk and are not discussed or quantified in the following analyses, as well as risks set forth in Part I, Item 1A under the heading "Factors that May Affect Future Results."

Interest Rates

        Our financial assets and liabilities subject to interest rate risk are investments and revolving credit facilities. The primary objective of our investments in debt securities is to preserve principal while maximizing yields. To achieve this objective, the returns on our investments in fixed-rate debt are generally based on the three-month LIBOR.

        In December 2001, we entered into an interest rate swap transaction (the "December 2001 Transaction") with JPM, to modify our effective interest payable with respect to $412.5 million of our $550.0 million outstanding convertible debt due on July 16, 2007 (the "Debt") (see Part II, Item 8, Notes 4, "Derivative Financial Instruments," and 5, "Bank Loans and Long-Term Debt"). In April 2004, we entered into an interest rate swap transaction (the "April 2004 Transaction") with JPM to modify the effective interest payable with respect to the remaining $137.5 million of the Debt. At the inception of the April 2004 Transaction, interest rates were lower than that of the Debt and we believed that interest rates would remain lower for an extended period of time. During the fiscal years ended June 30, 2007 and 2006, these arrangements increased interest expense by $7.7 million and $1.6 million, respectively.

        The above interest rate swap transactions qualified as fair value hedges under SFAS No. 133. To test effectiveness of the hedges, regression analyses were performed quarterly comparing the changes in fair value of the swap transactions and the Debt. The fair values of the swap transactions and the Debt were calculated quarterly as the present value of the contractual cash flows to the expected maturity date, where the expected maturity date was based on probability-weighted analyses of interest rates

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relating to the five-year LIBOR curve and our stock prices. For the fiscal years ended June 30, 2007 and 2006, the hedges were highly effective, where the mark-to-market adjustments of the December 2001 Transaction and April 2004 Transaction were significantly offset by the mark-to-market adjustments on the Debt, and the ineffective portion did not have a material impact on earnings. The market value of the swap liabilities was $1.4 million at June 30, 2007.

        In April 2002, we entered into an interest rate contract (the "Contract") with an investment bank, Lehman Brothers ("Lehman"), to reduce the variable interest rate risk of the December 2001 Transaction. The notional amount of the Contract was $412.0 million, representing approximately 75 percent of the Debt. Under the terms of the Contract, we had the option to receive a payout from Lehman covering our exposure to LIBOR fluctuations between 5.5 percent and 7.5 percent for any four designated quarters. The Contract had no market value at June 30, 2007 as the LIBOR was below 5.5 percent and this was the last quarter that the Contract option could be elected. Mark-to-market gains (losses) of $(0.6) million for fiscal year ended June 30, 2007 and $0.5 million for the fiscal year ended June 30, 2006, were charged to interest expense.

        On July 16, 2007, concurrent with the Debt's maturity, the December 2001 Transaction and April 2004 Transaction with JPM and the Contract with Lehman terminated. For the fiscal year 2008, we recorded a $5.7 million charge related to termination of the Debt and the related derivatives (see also Part II, Item 8, Note 4, "Derivative Financial Instruments").

Foreign Currency Exchange Rates

        We generally hedge currency risks of non-U.S.-dollar-denominated investments in debt securities with offsetting currency borrowings, currency forward contracts, or currency interest rate swaps. Gains and losses on these non-U.S.-currency investments would generally be offset by corresponding losses and gains on the related hedging instruments, resulting in negligible net exposure.

        A significant amount of our revenue, expense, and capital purchasing transactions are conducted on a global basis in several foreign currencies. At various times, we have currency exposure related to the British Pound Sterling, the Euro and the Japanese Yen. Considering our specific foreign currency exposures, we have exposure to the Japanese Yen, since we have significant Yen-based revenues without material Yen-based manufacturing costs. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, we have established revenue, expense and balance sheet transaction risk management programs. Currency forward contracts and currency options are generally utilized in these hedging programs. Our hedging programs reduce, but do not always entirely eliminate, the impact of currency exchange rate movements.

        In May 2006, we entered into the Forward Contract with BNP Paribas for the purpose of reducing the effect of exchange rate fluctuations on forecasted intercompany purchases by our Japan subsidiary. We had designated the Forward Contract as a cash flow hedge. Under the terms of the Forward Contract, we were required to exchange 507.5 million Yen for $5.0 million on a quarterly basis starting in June 2006 and expiring in March 2011. The market value of the Forward Contract was $7.3 million and $1.2 million at June 30, 2007 and 2006, respectively, and was included in other assets. The mark-to-market gains included in other comprehensive income were $5.6 million and $0.8 million, net of tax, for the fiscal years ended June 30, 2007 and 2006, respectively. In December 2007, we terminated the Forward Contract and received $2.8 million of cash as part of the settlement. In accordance with SFAS No. 133 Implementation Issue No. G3 "Cash Flow Hedges, Discontinuation of a Cash Flow Hedge," the net gain at the Forward Contract's termination date will continue to be reported in other comprehensive income and recognized over the originally specified time period through March 2011, until it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter.

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        We had approximately $39.0 million, $80.6 million and $48.0 million in notional amounts of forward contracts not designated as accounting hedges under SFAS No. 133 at June 30, 2008, 2007 and 2006, respectively. Net realized and unrealized foreign-currency gains (losses) recognized in earnings were $(0.03) million, $3.8 million and $2.3 million for the fiscal years ended June 30, 2008, 2007, and 2006, respectively.

Market Value Risk

        We carry certain assets at fair value. Generally, for assets that are reported at fair value we use quoted market prices or valuation models that utilize market data inputs to estimate fair value. In certain cases quoted market prices or market data inputs may not be readily available or availability could be diminished due to market conditions. In those cases, different assumptions could result in significant changes in valuation.

        At June 30, 2008, we had $725.9 million of total cash, cash equivalents and investments, consisting of available-for-sale fixed income and investment-grade securities. We manage our total portfolio to encompass a diversified pool of investment-grade securities. Our investment policy is to manage our total cash and investment balances to preserve principal and maintain liquidity while maximizing the returns on the investment portfolio. To the extent that our marketable portfolio of investments continues to have strategic value, we typically do not attempt to reduce or eliminate our market exposure. For securities that we no longer consider strategic, we evaluate legal, market, and economic factors in our decision on the timing of disposal. We may or may not enter into transactions to reduce or eliminate the market risks of our investments in marketable securities. Based on our investment portfolio and interest rates at June 30, 2008, a 100 basis point increase or decrease in interest rates would result in an annualized decrease or increase of approximately $6.4 million, respectively, in the fair value of the investment portfolio. Changes in interest rates may affect the fair value of the investment portfolio; however, unrealized gains or losses are not recognized in net income unless the investments are sold or the loss is considered to be other than temporary. In fiscal year 2008, the fair values of certain investments declined and through June 30, 2008 we recognized $8.4 million in other-than-temporary impairment relating to certain available-for-sale securities.

        We hold as strategic investments the common and preferred stock of three publicly traded foreign companies, one of which is a closely held equity security. One of the investments is Nihon, a related party as further disclosed in Part II, Item 8, Note 14, "Related Party Transactions." The value of these investments are subject to market fluctuations, which if adverse, could have a material adverse effect on our financial position and if untimely sold due to illiquidity or otherwise at the down turn, could have a material adverse effect on its operating results. We also have an investment in the common stock of a non-publicly traded company which is recorded at cost and included in other long-term assets. During the fourth quarter of fiscal year 2008, we assessed this investment for impairment. Based on this analysis, we recorded an impairment charge of $3.6 million representing substantially all of the recorded cost basis of this investment. The estimate of fair value is based on best available information or other estimates determined by management.

        The carrying values of the equity investments included in other long-term assets at June 30, 2008 and 2007 were $29.2 million and $48.0 million, respectively, compared to their purchase cost at June 30, 2008 and 2007 of $24.9 million and $26.5 million, respectively. For the fiscal years ended June 30, 2008 and 2007, we recorded unrealized loss of $15.9 million and $8.7 million, respectively, and was included, net of taxes, in other comprehensive income. The carrying values of these equity investments are subject to market fluctuations, which if adverse, could have a material adverse effect on our financial position and if untimely sold due to illiquidity or otherwise at the down turn, could have a material adverse effect on our operating results. Although the carrying values of these investments have declined significantly, we do not anticipate that we will dispose of these strategic investments for a loss within the near term.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and Financial Statement Schedule

 
  Page  

Report of Independent Registered Public Accounting Firm

    59  

Financial Statements

       
 

Consolidated Statements of Operations for the Fiscal Years Ended June 30, 2008, 2007 and 2006

    61  
 

Consolidated Balance Sheets as of June 30, 2008 and 2007

    62  
 

Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Fiscal Years Ended June 30, 2008, 2007 and 2006

    63  
 

Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2008, 2007 and 2006

    64  
 

Notes to Consolidated Financial Statements

    65  

Supporting Financial Statement Schedule:

       

Schedule No.

 

Page

 

II. Valuation and Qualifying Accounts and Reserves for the Fiscal Years Ended June 30, 2008, 2007 and 2006

    180  

        Schedules other than those listed above have been omitted since they are either not required, not applicable, or the required information is shown in the Consolidated Financial Statements or related Notes.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of International Rectifier Corporation

        In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of International Rectifier Corporation and its subsidiaries (the Company) at June 30, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting related to the 1) control environment, 2) controls over the completeness and accuracy of period-end financial reporting, 3) controls over the proper periodic recognition of revenue, 4) controls to ensure the completeness and accuracy over processing and recording of accounts payable and accrued liabilities, and 5) controls over the accounting for income taxes existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in "Management's Report on Internal Control Over Financial Reporting" appearing under Part II, Item 9A, "Controls and Procedures." We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 consolidated financial statements and our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company's management is responsible for these financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        As discussed in Note 1 to the consolidated financial statements, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109," effective July 1, 2007.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal

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control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
September 15, 2008

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INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 
  Fiscal Year Ended June 30,  
 
  2008   2007   2006  

Revenues

  $ 984,830   $ 1,202,469   $ 1,014,800  

Cost of sales

    662,007     741,111     588,934  
               
 

Gross profit

    322,823     461,358     425,866  

Selling and administrative expense

    293,168     212,088     196,766  

Research and development expense

    105,812     122,794     104,102  

Impairment of goodwill

    32,624          

Amortization of acquisition-related intangible assets

    4,656     1,889     3,330  

Asset impairment, restructuring and other charges

    3,080     10,398     87  
               
 

Operating (loss) income

    (116,517 )   114,189     121,581  

Other expense (income), net

    19,423     (6,257 )   (15,786 )

Interest income, net

    (29,093 )   (16,036 )   (6,784 )
               

(Loss) income from continuing operations before income taxes

    (106,847 )   136,482     144,151  

(Benefit from) provision for income taxes

    (44,205 )   62,995     93,987  
               
 

(Loss) income from continuing operations

    (62,642 )   73,487     50,164  
 

Income (loss) from discontinued operations, net of taxes (Note 2)

        4,255     (13,654 )
               
 

Net (loss) income

  $ (62,642 ) $ 77,742   $ 36,510  
               

Net (loss) income per common share:

                   

Basic:

                   
 

(Loss) income from continuing operations

  $ (0.86 ) $ 1.01   $ 0.71  
 

Income (loss) from discontinued operations

        0.06     (0.20 )
               

Net (loss) income per share

  $ (0.86 ) $ 1.07   $ 0.51  
               

Diluted:

                   
 

(Loss) income from continuing operations

  $ (0.86 ) $ 1.01   $ 0.70  
 

Income (loss) from discontinued operations

        0.06     (0.19 )
               

Net (loss) income per share

  $ (0.86 ) $ 1.07   $ 0.51  
               

Average common shares outstanding—basic

    72,819     72,421     70,914  
               

Average common shares and potentially dilutive securities outstanding—diluted

    72,819     72,933     71,753  
               

The accompanying notes are an integral part of this statement.

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INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 
  June 30,  
 
  2008   2007  

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

  $ 320,464   $ 853,040  
 

Restricted cash

    4,341      
 

Short-term investments

    101,739     113,901  
 

Trade accounts receivable, net of allowances of $6,525 for 2008 and $8,401 for 2007

    105,384     152,820  
 

Inventories

    175,856     219,723  
 

Current deferred tax assets

    13,072     11,087  
 

Prepaid expenses and other receivables

    43,993     63,451  
           
   

Total current assets

    764,849     1,414,022  

Restricted cash

    15,012     14,592  

Long-term investments

    303,680     335,995  

Property, plant and equipment, at cost, net

    534,098     573,246  

Goodwill

    98,822     131,446  

Acquisition-related intangible assets, net

    16,225     20,881  

Long-term deferred tax assets

    89,576     71,560  

Other assets

    52,650     85,663  
           
   

Total assets

  $ 1,874,912   $ 2,647,405  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             
 

Bank loans

  $   $ 462  
 

Long-term debt, due within one year

        543,383  
 

Accounts payable

    77,653     68,410  
 

Accrued income taxes

    30,943     162,836  
 

Accrued salaries, wages and commissions

    33,022     40,588  
 

Current deferred tax liabilities

    2,266     2,883  
 

Other accrued expenses

    103,355     133,463  
           
   

Total current liabilities

    247,239     952,025  

Long-term deferred tax liabilities

    4,828     4,188  

Deferred gain on Divestiture

    112,609     116,059  

Other long-term liabilities

    59,285     41,873  
           
   

Total liabilities

    423,961     1,114,145  
           

Commitments and contingencies (Notes 11, 12 and 13)

             

Stockholders' equity:

             
 

Common shares, $1 par value, authorized: 330,000,000; issued and outstanding: 72,826,406 shares in 2008 and 72,811,406 shares in 2007

    72,826     72,811  
 

Preferred shares, $1 par value, authorized: 1,000,000; issued and outstanding: none in 2008 and 2007

         
 

Capital contributed in excess of par value of shares

    971,920     958,417  
 

Retained earnings

    338,946     401,588  
 

Accumulated other comprehensive income

    67,259     100,444  
           
   

Total stockholders' equity

    1,450,951     1,533,260  
           
   

Total liabilities and stockholders' equity

  $ 1,874,912   $ 2,647,405  
           

The accompanying notes are an integral part of this statement.

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INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share data)

 
  Common Shares   Capital
Contributed
in Excess of
Par Value
of Shares
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income (Loss)
  Comprehensive
Income (Loss)
  Total  

Balance, June 30, 2005

  $ 69,826   $ 853,353   $ 287,336   $ 65,884   $   $ 1,276,399  

Net income for the year ended June 30, 2006

            36,510         36,510     36,510  

Other comprehensive loss:

                                     
 

Foreign currency translation adjustments

                    9,193      
 

Unrealized gains on foreign currency forward contract, net of deferred tax provision of $(460)

                    754      
 

Net unrealized gains (losses) on available-for-sale securities, net of deferred tax benefit of $1,658

                    (2,717 )    
 

Reclassification adjustments of gain on available-for-sale securities and foreign currency forward contract, net of tax benefit of $5,244

                    (8,588 )    

Other comprehensive loss

                (1,358 )   (1,358 )   (1,358 )

Comprehensive income

                    35,152      

Issuance of common shares:

                                     
 

Exercise of stock options—2,156,766 shares

    2,158     55,540                 57,698  
 

Stock participation plan—4,234 shares

    4     172                 176  

Tax benefit from exercise of stock options

        11,762                 11,762  

Stock-based compensation cost

        3,891                 3,891  
                           

Balance, June 30, 2006

    71,988     924,718     323,846     64,526         1,385,078  

Net income for the year ended June 30, 2007

            77,742         77,742     77,742  

Other comprehensive income:

                                     
 

Foreign currency translation adjustments

                    45,443      
 

Unrealized gains on foreign currency forward contract, net of deferred tax provision of $(4,028)

                    5,660      
 

Net unrealized gains (losses) on available-for-sale securities, net of deferred tax benefit of $3,842

                    (5,400 )    
 

Reclassification adjustments of gain on available-for-sale securities and foreign currency forward contract, net of tax benefit of $1,220

                    (1,714 )    
 

Reclassification of currency translation adjustment related to the Divestiture

                    (8,071 )    

Other comprehensive income

                35,918     35,918     35,918  

Comprehensive income

                    113,660      

Issuance of common shares:

                                     
 

Exercise of stock options—805,136 shares

    805     18,668                 19,473  
 

Stock participation plan—18,542 shares

    18     610                 628  

Tax benefit from exercise of stock options

        3,739                 3,739  

Stock-based compensation cost

        10,682                 10,682  
                           

Balance, June 30, 2007

    72,811     958,417     401,588     100,444         1,533,260  

Net loss for the year ended June 30, 2008

            (62,642 )       (62,642 )   (62,642 )

Other comprehensive loss:

                                     
 

Foreign currency translation adjustments

                    (6,971 )    
 

Unrealized loss on foreign currency forward contract, net of deferred tax provision of $0

                    (3,941 )    
 

Net unrealized gains (losses) on available-for-sale securities, net of deferred tax provision of $0

                    (21,054 )    
 

Reclassification adjustments of gain on available-for-sale securities and foreign currency forward contract, net of tax provision of $0

                    (1,219 )    
 

Other comprehensive loss

                (33,185 )   (33,185 )   (33,185 )

Comprehensive loss

                    (95,827 )    

Issuance of common shares:

                                     
 

Exercise of stock options—15,000 shares

    15     174                 189  

Tax charge from stock options

        (1,019 )               (1,019 )

Stock-based compensation cost

        14,348                 14,348  
                           

Balance, June 30, 2008

  $ 72,826   $ 971,920   $ 338,946   $ 67,259   $   $ 1,450,951  
                           

The accompanying notes are an integral part of this statement.

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INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 
  Fiscal Year Ended June 30,  
 
  2008   2007   2006  

Cash flow from operating activities:

                   
 

Net (loss) income

  $ (62,642 ) $ 77,742   $ 36,510  
 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

                   
   

Depreciation and amortization

    82,934     78,491     82,598  
   

Amortization of acquisition-related intangible assets

    4,656     2,209     4,250  
   

Stock compensation expense

    11,128     14,201     3,891  
   

Pre-tax loss on Divestiture, discontinued operations

        4,262      
   

Debt retirement charge

    5,659          
   

Goodwill impairment

    32,624          
   

Loss (gain) on sale of investments

    358     (2,070 )   (13,304 )
   

Write-down of investments

    12,023          
   

Provision for bad debt

    387     6,498     2,960  
   

Provision for inventory write-downs

    29,825     36,622     13,714  
   

Asset impairment

        5,878     397  
   

Unrealized gains on derivatives

        (2,244 )   (3,678 )
   

Deferred revenue

    (16,449 )   (880 )   374  
   

Deferred income taxes

    (20,298 )   (20,573 )   6,902  
   

Tax (charge) benefit from stock options

    (1,019 )   3,739     11,762  
   

Excess tax benefit from stock options exercised

    (81 )   (1,559 )   (6,016 )
   

Changes in operating assets and liabilities, net (Note 1)

    (42,705 )   (16,898 )   (3,922 )
               

Net cash provided by operating activities

    36,400     185,418     136,438  
               

Cash flow from investing activities:

                   
 

Additions to property, plant and equipment

    (41,780 )   (120,539 )   (156,509 )
 

Proceeds from sale of property, plant and equipment

    837     1,055     1,317  
 

Acquisition of technologies

        (1,000 )   (3,500 )
 

Proceeds from Divestiture

        339,615      
 

Cash conveyed as part of Divestiture

        (56,964 )    
 

Cost associated with Divestiture

&nb