Critical Accounting Estimates

There have been no significant changes to the Company's critical accounting policies during the quarter ended September 28, 2008, as compared to the previous disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2008.

Results of Operations

The table below summarizes the income statement items for the three months ended
September 28, 2008 and September 30, 2007 as a percentage of total revenue and
provides the percentage change in absolute dollars of such items comparing the
interim period ended September 28, 2008 to the corresponding period from the
prior fiscal year:

                                                Three Months Ended
                                    September 28,   September 30,   Increase/
                                        2008            2007        (Decrease)

Revenues                               100.0%          100.0%          10%
Cost of sales                           23.0            22.8            12
Gross profit                            77.0            77.2            10
Expenses:
Research and development                16.4            17.0            6
Selling, general and administrative     12.0            11.6            13
                                        28.4            28.6            9
Operating income                        48.6            48.6            10
Interest expense                        (4.6)           (5.1)           -
Interest income                          2.2             2.3            8
Income before income taxes              46.2%           45.8%           11

Effective tax rates                     25.0%           29.0%

Revenue for the quarter ended September 28, 2008 was $310.4 million, an increase of $28.9 million or 10% over revenue of $281.5 million for the same quarter of the previous fiscal year. The average selling price ("ASP") of $1.47 per unit in the first quarter of fiscal year 2009 decreased from $1.55 per unit in the first quarter of fiscal year 2008. The decrease in the Company's ASP is primarily due to the change in sales mix as the Company's customer product mix within consumer related products changed year over year. Geographically, international revenues were $226.2 million or 73% of revenues, an increase of $29.7 million as compared to international revenues of $196.5 million or 70% of revenues for the same quarter of the previous fiscal year. The increase in international revenues as a percentage of revenues is primarily due to a lower percentage of sales to both, domestic original equipment manufacturer ("OEM") and distribution customers reflective of the weakness in the United States economy. Internationally, revenues to Rest of the World ("ROW"), which is primarily Asia excluding Japan, represented $130.2 million or 42% of revenues, while sales to Europe and Japan were $55.8 million or 18% of revenues and $40.2 million or 13% of revenues, respectively. Domestic revenues were $84.2 million or 27% of revenues in the first quarter of fiscal year 2009, a decrease of $0.8 million, from $85.0 million or 30% of revenues in the same period in fiscal year 2008.

Gross profit was $238.9 million for the first quarter of fiscal year 2009, an increase of $21.5 million from the corresponding period of fiscal year 2008. Gross profit as a percentage of revenues decreased to 77.0% in first quarter of fiscal year 2009 as compared to 77.2% of revenues for the same period in the previous fiscal year. The modest decrease in gross profit as a percentage of revenues for the quarter ended September 28, 2008 was primarily due to a decrease in ASP, an increase in raw material costs such as gold and an increase in accrued employee profit sharing. These decreases in gross profit as a percentage of revenue were largely offset by improved factory efficiencies on higher sales volume.

Research and development ("R&D") expenses for the quarter ended September 28, 2008 were $50.9 million, an increase of $3.1 million or 6% over R&D expenses of $47.8 million for the same period in the previous fiscal year. The increase in R&D was due to a $2.3 million increase in compensation costs related to an increase in employee headcount and annual salary increases. The increase in R&D expense was also due to a $1.0 million increase in accrued employee profit sharing and a $0.2 million increase in stock-based compensation expense. Partially offsetting these increases was a $0.4 million decrease in other R&D related expenses such as software and equipment maintenance fees.

The Company's tax rate for the first quarter of fiscal year 2009 was 25% as compared to 29.0% in the same quarter of fiscal year 2008. The decrease in the tax rate was primarily due to a quarterly discrete tax benefit recognized during the first quarter of fiscal year 2009 relating to an agreement with the IRS to settle certain disputed ETI tax benefits the Company claimed during fiscal years 2002 through 2006, partially offset by lower R&D tax credits due to expiration of this benefit as of December 31, 2007. Subsequent to the quarter just ended, the R&D tax credit was restored by legislation retroactive to the beginning of calendar year 2008. This will have a favorable impact on the Company's annual effective tax rate for fiscal year 2009 and will result in a discrete quarterly tax benefit in the second quarter for the recognition of the prior year R&D tax credit. As a result, and absent other quarterly discrete items or changes in estimates, the Company expects its annual effective tax rate to improve to the 28% to 29% range, excluding discrete items, and its second quarter tax rate to be in the range of 22.5% to 25%, including a discrete item for the retroactive reinstatement of the R&D tax benefit.

The Company's effective tax rate is lower than the federal statutory rate of 35% as a result of lower tax rates on the earnings of its wholly-owned foreign subsidiaries, principally in Singapore and Malaysia. The Company has a partial tax holiday through July 2015 in Malaysia and a partial tax holiday in Singapore through August 2011. In addition, the Company receives tax benefits from non-taxable interest income, domestic manufacturing credits and going forward, from reinstated R&D tax credits.

Factors Affecting Future Operating Results

Except for historical information contained herein, the matters set forth in this Form 10-Q, including the statements in the following paragraphs, are forward-looking statements that are dependent on certain risks and uncertainties including such factors, among others, as the timing, volume and pricing of new orders received and shipped during the quarter, timely ramp-up of new facilities, the timely introduction of new processes and products; increases in costs associated with utilities, transportation and raw materials; currency fluctuations; the effects of adverse economic conditions in the United States and international markets and other factors described below and in "Item 1A - Risk Factors" section of this Quarterly Report on Form 10-Q.

The Company grew its revenues and pretax income by 1% and 3%, respectively, over the fourth quarter of fiscal year 2008. This marks the sixth consecutive quarter that the Company has sequentially grown revenues and EPS. However, during the latter part of the September quarter and especially through early October, the Company began to see a decrease in new order bookings across the Company's major end-markets. The current global credit crisis and related economic uncertainty have begun to affect the Company as well as the semiconductor industry. Given the recent decrease in orders and the softness the Company is currently seeing in the industry, the Company presently estimates that revenues will decrease 10% to 20% sequentially from the September quarter. It is difficult to forecast what the decline in revenues will be given the uncertain state of the economy as a whole. The Company's results will be dependent on its customers' reaction to the global crisis. Nevertheless, the Company is well positioned to manage through difficult times and has a proven track record that it can maintain industry leading profitability under challenging market conditions. Many of the Company's expenses are variable and the Company is taking measures to adjust those downward. The Company believes it can maintain pretax profits above 40% of revenues with the lower forecasted sales range. In addition, once this global economic crisis eases, the Company continues to be optimistic about its long-term growth prospects.

Estimates of future performance are uncertain, and past performance of the Company may not be a good indicator of future performance due to factors affecting the Company, its competitors, the semiconductor industry and the overall economy. The semiconductor industry is characterized by rapid technological change, price erosion, cyclical market patterns, periodic oversupply conditions, occasional shortages of materials, capacity constraints, variations in manufacturing efficiencies and significant expenditures for capital equipment and product development. Furthermore, new product introductions and patent protection of existing products, as well as exposure related to patent infringement suits if brought against the Company, are factors that can influence future sales growth and sustained profitability.

Although the Company believes that it has the product lines, manufacturing facilities and technical and financial resources for its current operations, sales and profitability could be significantly affected by factors described above and other factors. Additionally, the Company's common stock could be subject to significant price volatility should sales and/or earnings fail to meet expectations of the investment community. Furthermore, stocks of high technology companies are subject to extreme price and volume fluctuations that are often unrelated or disproportionate to the operating performance of these companies.

At September 28, 2008, cash, cash equivalents and marketable securities totaled $1,021.9 million and working capital was $1,108.6 million.

Prepaid expenses and other current assets increased $7.7 million over the fourth quarter of fiscal year 2008 primarily due to an increase in prepaid income taxes of $5.6 million. Net property, plant and equipment increased $12.7 million over the fourth quarter of fiscal year 2008 primarily due to fixed asset additions of $23.1 million related to the expansion of clean room space at one of the Company's manufacturing facilities. These additions were offset by $10.3 million in depreciation expense.

Accrued payroll and related benefits decreased $13.1 million from the fourth quarter of fiscal year 2008 primarily due to the payment of profit sharing. The Company accrues for profit sharing on a quarterly basis while distributing payouts to employees on a semi-annual basis during the first and third quarters. Income taxes payable increased $32.3 million over the fourth quarter of fiscal year 2008 primarily due to the income tax provision of $35.9 million partially offset by the final payment of the prior year income tax liability. Other accrued liabilities of $48.1 million increased $13.8 million over the fourth quarter of fiscal year 2008 primarily due to accrued interest on the Company's convertible senior notes. The Company makes semi-annual interest payments during the second and fourth quarters.

Deferred tax liabilities increased $5.8 million over the fourth quarter of fiscal year 2008 mainly due to an increase in deferred taxes related to interest deductions for the Company's convertible senior debt. Other long-term liabilities of $89.8 million decreased $10.9 million from the fourth quarter of fiscal year 2008 primarily due the reclassification of tax reserves related to the Company's agreement with the IRS to settle certain disputed ETI tax benefits.

During the first quarter of fiscal year 2009, the Company generated $144.6 million of cash from operating activities and $5.1 million in proceeds from common stock issued under employee stock plans.

During the first quarter of fiscal year 2009, significant cash expenditures included $10.1 million for net purchases of short-term investments; payments of $47.4 million for cash dividends to stockholders, representing $0.21 per share; $23.1 million for repurchases of the Company's common stock; and $23.1 million for the purchase of property plant and equipment. In October 2008, the Company's Board of Directors declared a cash dividend of $0.21 per share. The $0.21 per share dividend will be paid on November 26, 2008 to shareholders of record on November 14, 2008. The payment of future dividends will be based on the Company's financial performance.

Historically, the Company has satisfied its liquidity needs through cash generated from operations. Given its financial condition and historical operating performance, the Company believes that current capital resources and cash generated from operating activities will be sufficient to meet its liquidity, capital expenditures requirements, and debt retirement for the foreseeable future.

Off Balance-Sheet Arrangements

As of September 28, 2008, the Company had no off-balance sheet financing arrangements.

Contractual Obligations

In April 2007, the Company issued $1.0 billion principal amount of 3.0% debentures due May 1, 2027 and $0.7 billion principal amount of 3.125% debentures due May 1, 2027. The Company pays cash interest at an annual rate of 3.0% and 3.125%, respectively, payable semiannually on November 1 and May 1 of each year, beginning November 1, 2007. See Note 7 to the consolidated financial statements, included in Part 1. "Financial Information," for additional information about the debentures.

Fair Value

As of September 28, 2008, the Company's cash and cash equivalents, and marketable securities investment portfolio had a fair market value of $939.3 million. The Company's cash and cash equivalents, and marketable securities investment portfolio consists of money-market funds, U.S. Treasury securities, obligations of U.S. government sponsored enterprises, municipal bonds, commercial debt and corporate debt securities. The Company currently does not hold any investments in auction rate securities or asset backed securities. Most of the Company's investments in debt instruments have an investment rating of AAA. As of September 28, 2008, the Company's cash and cash equivalent, and marketable securities investment portfolio had a remaining maturity of approximately one year.