You should read the following discussion in conjunction with our consolidated financial statements, including the notes thereto. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below.

Forward Looking Statements

This Quarterly Report contains statements relating to expected future results and business trends of the Company that are based upon our current estimates, expectations, and projections about our industry, and upon management's beliefs, and certain assumptions we have made, that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will," and variations of these words or similar expressions are intended to identify "forward-looking statements." In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are "forward-looking statements." Such statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict. Therefore, our actual results may differ materially and adversely from those expressed in any "forward-looking statement" as a result of various factors. These factors include, but are not limited to: industry and global economic and market conditions, such as the cyclical nature of the semiconductor industry and the markets addressed by our and our customers' products; demand for, and market acceptance of, new and existing products; successful development of new products; the timing of new product introductions; new product performance and quality; the successful integration of acquisitions; manufacturing difficulties, such as the availability and extent of utilization of manufacturing capacity and raw materials; procurement shortages; the failure of our suppliers or outsource providers to perform their obligations in a manner consistent with our expectations; the need for additional capital; pricing pressures and other competitive factors, such as competitor's new products; competitors with significantly greater financial, technical, manufacturing and marketing resources; changes in product mix; fluctuations in manufacturing yields; product obsolescence; the ability to develop and implement new technologies and to obtain protection of the related intellectual property; legal challenges to our products and technology, such as intellectual property infringement and misappropriation claims; customer service; the extent that customers use our products and services in their business, such as the timing of the subsequent entry of our customers' products containing our components into production, the size and timing of orders from customers, and customer cancellations or shipment delays; changes in import export regulations; legislative, tax, accounting, or regulatory changes or changes in their interpretation; transportation, communication, demand, information technology or supply disruptions based on factors outside our control such as natural disasters, wars, and terrorist activities; and exchange rate fluctuations. These "forward-looking statements" are made only as of the date hereof, and we undertake no obligation to update or revise the "forward-looking statements," whether as a result of new information, future events or otherwise.

Overview

We design, develop, manufacture and market high-performance analog integrated circuits (ICs). We believe our product portfolio addresses some of the fastest growing applications within the high-end consumer, industrial, computing and communications markets.

Critical Accounting Policies

You should refer to the disclosures regarding critical accounting policies in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2007.

Results of Operations

Statement of operations data as a percentage of revenue for the periods
indicated:



                                                 Quarter ended                      Three quarters ended
                                        October 3,        September 28,        October 3,        September 28,
                                           2008               2007                2008               2007
                                                                    (% of revenue)
Revenue                                      100.0 %              100.0 %           100.0 %              100.0 %
Cost of revenue                               43.7 %               43.6 %            44.4 %               43.1 %

Gross profit                                  56.3 %               56.4 %            55.6 %               56.9 %
Operating costs, expenses and other
income
Research and development                      16.1 %               17.2 %            17.1 %               18.2 %
Selling, general and administrative           14.5 %               16.9 %            15.0 %               17.8 %
Amortization of purchased
intangibles                                    1.3 %                1.3 %             1.4 %                1.3 %
In-process research and development            1.2 %                1.5 %             0.4 %                0.5 %
Restructuring                                  0.3 %                 -  %             0.9 %                 -  %

Operating income                              22.9 %               19.5 %            20.9 %               19.1 %
(Loss) gain on certain investments,
net                                           (0.6 )%               0.1 %            (1.2 )%               0.2 %
Interest income, net                           1.4 %                4.1 %             1.9 %                4.4 %

Income from continuing operations
before income taxes                           23.7 %               23.7 %            21.6 %               23.7 %
Income tax expense from continuing
operations                                     2.1 %                5.5 %             0.8 %                5.3 %

Income from continuing operations             21.6 %               18.2 %            20.8 %               18.4 %
Discontinued operations
Loss from discontinued operations
before income taxes                             -  %               (0.1 )%             -  %                 -  %
Income tax benefit from
discontinued operations                         -  %                 -  %             3.0 %                 -  %

Income (loss) from discontinued
operations                                      -  %               (0.1 )%            3.0 %                 -  %

Net income                                    21.6 %               18.1 %            23.8 %               18.4 %

Note: Totals and percentages may not add or calculate precisely due to rounding. We have reclassified certain amounts in the quarter and three quarters ended September 28, 2007 to conform to the presentation in the quarter and three quarters ended October 3, 2008.

Revenue and Gross Profit

Revenue for the quarter ended October 3, 2008 increased $20.4 million or 10.3% to $218.7 million from $198.3 million during the quarter ended September 28, 2007. The increase in net revenue was predominately from sales to the computing market, which increased $21.9 million or 38.4% over the quarter ended September 28, 2007. Sales to the communications market increased $4.1 million, while sales to the high-end consumer and industrial markets decreased $0.3 million and $5.3 million, respectively. In aggregate, a 9.6% increase in unit shipments increased net revenue by $19.0 million, and average selling prices (ASPs) increased 0.6%, increasing revenues by $1.4 million.

Revenue for the three quarters ended October 3, 2008 increased $94.3 million or 17.3% to $638.6 million from $544.3 million during the three quarters ended September 28, 2007. The increase in net revenues was primarily from sales to the computing market, which increased $66.9 million or 47.8% over the three quarters ended September 28, 2007. Other sales increased as follows: high-end consumer, $8.6 million; communications, $18.1 million and industrial, $0.7 million. In aggregate, a 24.4% increase in unit demand increased net revenues by $132.4 million and a 5.5% decline in ASPs decreased net revenues by $37.4 million. The trend of declining unit prices, which must be made up by higher unit volumes for sales growth, is normal for the semiconductor industry and we expect it to continue.

Geographically, year to date revenues were derived from the Asia/Pacific, North America and Europe regions as follows:

                                    October 3,     September 28,
                                       2008            2007
                                       (percent of revenues)
                    Asia/Pacific            74 %              70 %
                    North America           17                20
                    Europe                   9                10

                    Total                  100 %             100 %

The long-term trend of revenue growth in the Asia/Pacific region continues to reflect in the geographic split. Revenues in the Asia/Pacific region increased 23% as compared with North America and Europe, which saw only modest increases in absolute dollars as compared with the three quarters ended September 28, 2007. As manufacturing of consumer electronic and computing/communication products continues to migrate to the Asia/Pacific region of the world, we believe our sales will continue to grow proportionately in that region.

We sell our products to customers in many countries including, in descending order by revenue dollars for our top ten countries, China (including Hong Kong), the United States, South Korea, Taiwan, Japan, Singapore, Germany, Netherlands, France and Thailand. Sales to customers in China, including Hong Kong, comprised approximately 47% of revenue, followed by the United States (15%) and South Korea (11%) during the quarter ended October 3, 2008. Two distributors that support a wide range of customers around the world accounted for 13% and 8% of our revenues in the quarter ended October 3, 2008.

Cost of Revenue and Gross Profit

Cost of revenue consists primarily of purchased materials and services, labor and overhead associated with product manufacturing. During the quarter ended October 3, 2008, gross profit increased $11.3 million or 10.1% to $123.1 million from $111.8 million during the quarter ended September 28, 2007. As a percentage of sales, gross margin was 56.3% during the quarter ended October 3, 2008 compared to 56.4% during the quarter ended September 28, 2007. The gross margin was impacted by product sales mix changes at the product family level.

During the three quarters ended October 3, 2008, gross profit increased $45.2 million or 14.6%, to $355.2 million from $310.0 million during the three quarters ended September 28, 2007. As a percentage of sales, gross margin was 55.6% and 56.9% in the three quarters ended October 3, 2008 and September 28, 2007, respectively. Year to date, gross margins were impacted in part by expenses related to our reorganization, product sales mix changes at the product family level and increases in the price of gold.

Pure gold wire is used in many of our products and recent price increases have had a more negative impact to our production costs and our gross margins. We estimate that gold related production costs increased approximately $3.0 million in the three quarters ended October 3, 2008 compared with the three quarters ended September 28, 2007.

We strive to improve gross margins from their present levels by emphasizing new high-margin products and cost saving opportunities in our manufacturing chain. We expect to realize savings from our restructuring initiatives late in 2009 and continue to make progress in our conversion from gold to copper wire in many of our high volume products.

Operating Costs, Expenses and Other Income

Research and Development (R&D)

R&D expenses consist primarily of salaries and costs of employees engaged in product/process research, design and development activities, as well as related subcontracting activities, prototype development, cost of design tools and technology license agreement expenses. R&D expenses increased $1.0 million or 3% to $35.1 million during the quarter ended October 3, 2008 from $34.1 million during the quarter ended September 28, 2007. In the three quarters ended October 3, 2008, R&D expenses increased $10.0 million, or 10%, to $108.9 million from $98.9 million during the three quarters ended September 28, 2007. Stock-based compensation expense recorded to R&D declined in both comparative periods, which was offset by strong hiring of new design engineers and related materials and supplies costs. In order to increase the number of new products introduced, we increased our engineering related spending including labor and material costs. The quarter ended July 4, 2008 included an additional week, resulting in approximately 5% increase in expenses over the same quarter last year.

Selling, General and Administrative (SG&A)

SG&A costs include primarily salary and incentive expenses of employees engaged in marketing and selling, as well as salaries and expenses required to perform our human resource, finance, legal and executive functions. SG&A costs decreased by $1.7 million or 5% to $31.8 million during the quarter ended October 3, 2008 from $33.6 million during the quarter ended September 28, 2007. In the three quarters ended October 3, 2008, SG&A costs decreased $1.3 million or 1% to $95.6 million from $96.9 million during the three quarters ended September 28, 2007. The decrease for the quarter ended October 3, 2008 related primarily to decreased incentives based on revenue expectations. The decrease for the three quarters ended October 3, 2008 over the comparable period related primarily to decreased incentives and labor and a reduction in stock-based compensation expense as a result of the departure of our former chief executive officer. The quarter ended July 4, 2008 included an additional week, resulting in approximately 5% increase in expenses over the same quarter last year.

Amortization of Purchased Intangible Assets

Amortization of purchased intangible assets increased $0.3 million to $2.8 million in the quarter ended October 3, 2008 from $2.5 million in the quarter ended September 28, 2007. The increase was $1.6 million to $8.8 million in the three quarters ended October 3, 2008 from $7.2 million in the three quarters ended September 28, 2007. The increases resulted primarily from two acquisitions made in September 2007. We expect amortization of current definite-lived intangible asset balances to increase slightly in the fourth quarter to reflect new acquisitions and remain at that level until the third quarter of fiscal 2009 when certain balances become fully amortized.

Many factors, including future market demand for our products, could cause impairment of our goodwill and purchased intangible asset balances. We test our goodwill for impairment at least annually, or more frequently if impairment indicators arise. During the fourth quarter of 2007, we determined that the value of each of our reporting units exceeded its book value and recorded no impairments of goodwill at that time. We will conduct our annual goodwill impairment test in the fourth quarter of 2008.

Restructuring

During the quarter ended March 28, 2008, we initiated a restructuring plan to reorganize certain operations, consolidate internal manufacturing facilities and reduce workforce. We expect to complete the reorganization and consolidation within the next four quarters, with most of the workforce reductions taking place upon completion of the plan. During the quarter and three quarters ended October 3, 2008, we recorded costs of $0.6 million and $5.5 million for employee severance and other facility consolidation costs, included in operating costs and expenses. We expect to incur an additional $5.0 million over the next four quarters. Upon completion of the restructuring, we expect to realize annual cost benefits between $4.0 million and $6.0 million with no impact to revenue.

(Loss) gain on certain investments

During the quarter ended March 28, 2008, we recorded an impairment charge of $6.4 million, before taxes, on certain auction rate securities whose decline in fair value was determined to be other-than-temporary. We continue to monitor our auction rate securities and intend to hold all of these investments until the anticipated recovery in market value occurs.

We maintain a portfolio of approximately $11.4 million of mutual fund investments under two qualified deferred employee compensation plans. We have an offsetting liability recorded for the investments. Changes in the fair value of the asset are recorded as a (loss) gain on investments and changes in the fair value of the liability are recorded as a component of compensation expense. During the quarter ended October 3, 2008, we recorded a loss on investments of $1.3 million and a reduction of compensation expense of $1.2 million. For the three quarters ended October 3, 2008, we recorded loss on investments of $1.4 million and a reduction of compensation expense of $1.5 million.

Interest Income, net

Net interest income decreased to $3.1 million and $12.1 million during the quarter and three quarters ended October 3, 2008, respectively, from $8.1 million and $24.2 million during the quarter and three quarters ended September 28, 2007. This decrease is attributable to approximately $154 million decrease in average cash and investment balances and declining interest rates when compared to the same period last year.

Income Tax

Income tax expense from continuing operations for the three quarters ended October 3, 2008 included a $24.1 million reversal of a previously established unrecognized tax benefit (UTB) due to the expiration of the statute of limitations on the tax years 2002 and 2003. Also included was a one time $4.5 million R&D tax credit re-enacted by Congress at the end of our third quarter. Excluding these items, the effective tax rate on income from continuing operations for the quarter and three quarters ended October 3, 2008 was 23.0% and 24.4%, compared with 23.4% and 22.3% for the quarter and three quarters ended September 28, 2007. Our tax rate is expected to be approximately 25% in future quarters.

The statute of limitations for the 2002 and 2003 tax years each expired during the first quarter of our fiscal year 2008. Expiration for tax year 2002 was extended to December 31, 2007 by agreement with the Internal Revenue Service (IRS) and tax year 2003 was extended to December 31, 2007 by the IRS for relief from multiple hurricanes that affected our Florida operations in 2004. The statute of limitations for the 2004 tax year expired during the third quarter of our 2008 fiscal year.

In determining net income, we estimate and exercise judgment in the calculation of tax expense and tax liabilities and in assessing the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of assets and liabilities.

In the ordinary course of business, the ultimate tax outcome of many transactions and calculations is uncertain, as the calculation of tax liabilities involves the application of complex tax laws in the United States and other jurisdictions. We recognize liabilities for additional taxes that may be due on tax audit issues based on an estimate of the ultimate resolution of those issues. Although we believe the estimates are reasonable, the final outcome may be different than amounts we estimate. Such determinations could have a material impact on the income tax provision, effective tax rate and operating results in the period they occur. In addition, the effective tax rate reflected in our forward-looking statements is based on current enacted tax law. Significant changes in enacted tax law could materially affect our estimates.

Discontinued Operations

Income (loss) from discontinued operations in the three quarters ended October 3, 2008 included a tax benefit of $19.4 million for a reversal of a previously established UTB due to the expiration of the statute of limitations on the tax years 2002 and 2003.

Backlog

Our sales are made pursuant to purchase orders that are generally booked up to six months in advance of delivery. Our standard terms and conditions of sale provide that these orders become non-cancelable and non-reschedulable thirty days prior to the most current customer request date (CRD) for standard products and ninety days prior to CRD for semi-custom and custom products. Backlog is influenced by several factors, including market demand, pricing and customer order patterns in reaction to product lead times. We had a six-month backlog as of October 3, 2008 of $130.3 million compared to December 28, 2007 of $176.4 million and $186.9 million as of September 28, 2007. Although not always the case, backlog can be a leading indicator of performance for approximately the next three quarters.

Business Outlook

On October 22, 2008, we announced our outlook for the fourth quarter of 2008. At that time, we expected revenue decline of approximately 20% to 25% from the third quarter. We have seen a significant decline in orders entering the fourth quarter. The decrease in demand is broad and spread across most of our product families and end markets. Demand for our computing and consumer products is particularly weak as global demand for these products has dropped quickly. We expected GAAP earnings per diluted share of approximately $0.10 to $0.14. The full announcement can be referenced in the press release that is an exhibit to a Current Report on Form 8-K filed on October 22, 2008.

Contractual Obligations and Off-Balance Sheet Arrangements

Our contractual obligations and off-balance sheet arrangements have not changed significantly from December 28, 2007. As of October 3, 2008, we had committed to purchase $23.9 million of inventory from suppliers.

The Planet ATE agreement contains a provision for payment of additional consideration to the former stockholders of that business. This additional consideration is a multiple of the net revenues of or attributed to Planet ATE through December 31, 2008 with a maximum additional payment of $12 million. The D2Audio and Kenet agreements also contain provisions for payment of additional consideration to former stockholders if revenue in excess of a base amount is attained. The maximum payout under these provisions is $27.5 million, based on revenue earned through July 2010. We have not accrued any amount for additional consideration as of October 3, 2008.

Liquidity and Capital Resources

Our capital requirements depend on a variety of factors, including but not limited to, the rate of increase or decrease in our existing business base; the success, timing and amount of investment required to bring new products to market; revenue growth or decline; and potential acquisitions. We believe that we have the financial resources necessary to meet business requirements for the next 12 months, including capital expenditures for the expansion or upgrading of worldwide manufacturing capacity, working capital requirements, our dividend program, our stock repurchase program and potential future acquisitions or strategic investments. As of October 3, 2008, our total shareholders' equity was $2.2 billion. At that date, we had $291 million in cash and short-term investments. We have no debt outstanding.

We have $118 million in long-term investments, primarily auction rate securities. These auction rate securities are composed of approximately $98 million of insurance based securities and $25 million of student loan based securities. We continue to accrue and receive interest on the securities based on a contractual rate. The weighted rate is currently approximately 175 basis points above one month LIBOR.

On October 17, 2008, we closed a $75 million revolving credit facility with Bank of America, N.A. as administrative agent and certain other banks. This credit line increases our available cash and enhances our ability to invest in our business.

Our primary sources and uses of cash during the quarters ended October 3, 2008 and September 28, 2007 were as follows:

                                                                 Three quarters ended
                                                          October 3,           September 28,
                                                             2008                  2007
                                                                    (in millions)
Sources of Cash
Existing business performance and activities
Operating activities, including working capital
changes                                                  $        154         $           174
Proceeds from exercise of compensatory stock plans,
including tax benefits                                             24                     117

                                                         $        178         $           291

Uses of Cash
Business improvement investments
Business (acquisitions) and divestitures, net            $        (38 )       $           (48 )
Capital expenditures, net of sale proceeds                        (31 )                   (12 )

                                                         $        (69 )       $           (60 )

Returned to shareholders
Stock repurchases                                        $       (140 )       $          (320 )
Dividends paid                                                    (45 )                   (40 )

                                                         $       (185 )       $          (360 )

Cash/Investment Management Activities
Decrease in investments and foreign exchange
effects                                                  $         36         $           202

Net (decrease) increase in cash and cash
equivalents                                              $        (40 )       $            73

In the three quarters ended October 3, 2008, our operational cash (including proceeds from stock plans) was $154 million compared to $174 million in the three quarters ended September 28, 2007, a decrease of $20 million. We used approximately $31 million for capital expenditures and $38 million for acquisitions. We returned $185 million to shareholders in the form of our stock repurchase and dividend programs. Investment balances were reduced by $36 million compared to $202 million in the three quarters ended September 28, 2007, resulting in net cash used of $40 million overall.

Our aim is to constantly improve the cash flows from our existing business activities and return the majority of that cash flow to shareholders. We continue to maintain and improve our existing business performance with necessary capital expenditures and acquisitions that may further improve our . . .