The following information should be read in conjunction with the unaudited financial statements and notes thereto included in Part 1 - Item 1 of this Quarterly Report and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended June 28, 2008 (the "Form 10-K").

Factors That May Affect Operating Results

This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical fact are "forward-looking statements" for purposes of these provisions, including any statements regarding the Company's expected third quarter revenues, the Company's total investment in the Jinan Hi-Tech Industries Development Zone, the continuation of a high level of turns orders, higher levels of inventory, future gross profit and gross margin; the plans and objectives of management for future operations; the Company's tax rate; the adequacy of allowances for returns, price protection and other concessions; the sufficiency of cash generated from operations and cash balances; the Company's exposure to interest rate risk; expectations regarding our R&D and SG&A expenses; and our possible future acquisitions and assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology. Although the Company believes that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. The Company's future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth (i) in Item 1A, Risk Factors, of Part II of this Form 10-Q, and (ii) in Note 1 to the Notes to Condensed Consolidated Financial Statements. All forward-looking statements and reasons why results may differ included in this Quarterly Report are made as of the date hereof, and the Company assumes no obligation to update any such forward-looking statement or reason why actual results may differ.

Results of Operations

The following table sets forth certain statement of operations data as a
percentage of net revenues for the periods indicated.

                                                  Three Months Ended                     Six Months Ended
                                           December 27,        December 29,       December 27,       December 29,
                                               2008                2007               2008               2007

Net revenues                                       100.0 %             100.0 %            100.0 %            100.0 %
Cost of revenues                                    65.1 %              63.1 %             64.2 %             63.3 %
Gross profit                                        34.9 %              36.9 %             35.8 %             36.7 %
Operating expenses:
Research and development                            14.2 %              10.5 %             11.5 %             10.6 %
Selling, general and administrative                 17.7 %              14.2 %             16.6 %             14.7 %
Restructuring charge                                 0.7 %               0.0 %              0.3 %              0.0 %
Total                                               32.6 %              24.7 %             28.4 %             25.3 %

Income from operations                               2.3 %              12.2 %              7.4 %             11.4 %
Interest and other income                            4.1 %               4.0 %              3.2 %              3.8 %
Other than temporary decline in value of
investment                                           0.0 %               0.0 %             (0.1 )%             0.0 %
Income before income taxes                           6.4 %              16.2 %             10.5 %             15.2 %

Income taxes                                         0.5 %               5.8 %              3.0 %              5.1 %
Minority interest in (income) loss of
consolidated subsidiaries                           (0.1 )%              0.0 %             (0.1 )%             0.0 %
Equity in net income (loss) of
unconsolidated affiliates                           (0.2 )%              0.4 %              0.1 %              0.4 %

Net income                                           5.6 %              10.8 %              7.5 %             10.5 %

Net Revenues

The following table sets forth our revenues and the customer concentrations with
respect to such revenues for the periods indicated.

                                         Three Months Ended                                    Six Months Ended
(In thousands)              December 27,       December 29,          %          December 27,       December 29,          %
                                2008               2007           Change            2008               2007            Change

Net revenues               $       30,732     $       40,726         -24.5 %   $       74,628     $       79,194           -5.8 %
% of net sales accounted
for by top 5 direct
customers (1)                        50.6 %             36.6 %                           49.4 %             36.4 %

Number of direct
customers that each
account for more than
10% of net sales                        2                  1                                2                  1

% of net sales accounted
for by top 5 end
customers (2)                        27.6 %             21.8 %                           27.6 %             21.9 %

Number of end customers
that each account for
more than 10% of net
sales                                   0                  0                                0                  0

(1) Direct customers purchase products directly from the Company. These include distributors and contract manufacturers that in turn sell to many end customers as well as OEMs that also purchase directly from the Company.

(2) End customers are OEMs whose products include the Company's products. End customers may purchase directly from the Company or from distributors or contract manufacturers. We rely on the end customer data provided by our direct distribution and contract manufacturing customers to provide this information.

The Company designs, develops and markets high-performance integrated circuits
("ICs" or IC products) and frequency control products ("FCPs" or FCP products)
used in many of today's advanced electronic systems. Our IC products include functions that support the connectivity, timing and signal conditioning of high-speed parallel and serial protocols that transfer data among a system's microprocessor, memory and various peripherals, such as displays and monitors, and between interconnected systems. Our FCPs are electronic components that provide frequency references such as crystals, oscillators, and hybrid timing generation products for computer, communication and consumer electronic products. Our analog, digital and mixed-signal ICs, together with our FCP products enable higher system bandwidth and signal quality, resulting in better operating reliability, signal integrity, and lower overall system cost in applications such as notebook computers, servers, network switches and routers, storage area networks, digital TVs, cell phones, GPS and digital media players.

Net revenues consist of product sales, which are recognized upon shipment, less an estimate for returns and allowances. Net revenue decreased $10.0 million or 24.5% in the second quarter of fiscal 2009 versus the second quarter of fiscal 2008 primarily as the result of:

· a decrease of $4.3 million or 25.6% in sales of our FCP products to $12.4 million and
· a decline of sales in analog, digital switch, clock, and interface IC products to $13.2 million, for a 38.6% sales decrease; partially offset by
· a 98% increase in the sales of connect IC products to $5.2 million, reflecting an increase of $2.6 million.

Net revenue declined $4.6 million or 5.8% in the first half of fiscal 2009 versus the first half of fiscal 2008 primarily as the result of:

· A decrease of $1.3 million or 4.0% in sales of our FCP products to $30.7 million and
· a decline of sales in analog, digital switch, clock, and interface IC products to $32.5 million, for a $9.6 million sales decrease; partially offset by
· a 126.5% increase in the sales of connect IC products to $11.4 million, reflecting an increase of $6.3 million.

The following table sets forth net revenues by country as a percentage of total net revenues for the three and six month periods ended December 27, 2008 and December 29, 2007:

                                                  Three Months Ended                      Six Months Ended
                                           December 27,        December 29,       December 27,         December 29,
                                               2008                2007               2008                 2007

Taiwan                                                44 %                30 %               43 %                 29 %
China (including Hong Kong)                           30 %                38 %               33 %                 39 %
United States                                         10 %                 9 %                7 %                  9 %
Singapore                                              3 %                 6 %                4 %                  5 %
Other (less than 10% each)                            13 %                18 %               13 %                 17 %
Total net revenues                                   100 %               100 %              100 %                100 %

For the three and six months ended December 27, 2008, as compared with the same periods of the prior year, the percentage of our net revenues derived from sales to Asian countries increased as a result of continued demand for technological devices and an increasing concentration of contract manufacturing in those regions. We expect our future sales to continue to grow, as a percentage of net revenues, in Asian countries.

We currently have a cautious outlook on our fiscal third quarter ending March 28, 2009 due to the challenging business environment and limited visibility on end-market demands. We have also announced our expectation that fiscal third quarter revenues will decline from the amount reported for the fiscal second quarter. Our net revenue levels have been highly dependent on the number of new orders that are received for products to be delivered to the customer within the same quarter, also called "turns" orders. Because of our lack of visibility into demand when turns orders are high, it is difficult to predict which products to build to match future demand. We believe the current high level of turns orders will continue indefinitely. The sustainability of customer demand is uncertain and our markets are highly dependent on worldwide economic conditions. The high level of turns orders together with the uncertainty of product mix and pricing makes it difficult to predict future levels of sales and may require us to carry higher levels of inventory.

Gross Profit

The following table sets forth our gross profit for the periods indicated.

                                      Three Months Ended                                    Six Months Ended
                         December 27,       December 29,          %          December 27,       December 29,          %
(In thousands)               2008               2007           Change            2008               2007            Change

Net revenues            $       30,732     $       40,726         -24.5 %   $       74,628     $       79,194           -5.8 %
Gross profit                    10,719             15,032         -28.7 %           26,701             29,033           -8.0 %
Gross profit as a
percentage of net
revenues (gross

The decrease in gross profit for the three and six month periods ended December 27, 2008 as compared with the same periods of the prior year was primarily due to significant sales declines in the second quarter in all lines except connect IC products.

Specifically, the decrease in gross profit in the second quarter of fiscal 2009 as compared to the second quarter of fiscal 2008 of $4.3 million is the result of:

· decreased sales of the FCP product family, which led to $1.2 million of decreased gross profit,
· decreased sales of analog and digital switch, clock and silicon interface products, which led to $3.6 million of decreased gross profit,
· margin declines which led to $0.9 million of decreased gross profit; partially offset by
· sales growth in silicon connect IC products, which generated $1.4 million of increased gross profit.

With respect to the decrease in gross profit in the first half of fiscal 2009 as compared to the first half of fiscal 2008 of $2.3 million, the decrease is the result of:

· decreased sales of the FCP product family, which led to $0.3 million of decreased gross profit,
· decreased sales of analog and digital switch, clock and silicon interface products, which led to $4.1 of decreased gross profit,
· margin declines which led to $1.2 million of decreased gross profit; partially offset by
· sales growth in silicon connect IC products, which generated $3.3 million of increased gross profit;

Future gross profit and gross margin are highly dependent on the level and product mix of net revenues. This includes the mix of sales between lower margin FCP products and our higher margin integrated circuit products. Although we have been successful at favorably improving our integrated circuit product mix and penetrating new end markets, there can be no assurance that this will continue. Accordingly, we are not able to predict future gross profit levels or gross margins with certainty.

During the three and six months ended December 27, 2008, gross profit and gross margin benefited as a result of the sale of inventory of $52,000 and $115,000, respectively, that we had previously identified as excess and written down to zero value, as compared with $328,000 and $590,000, respectively, for the same periods of the prior year.

Research and Development

                               Three Months Ended                                   Six Months Ended
                         December 27,       December 29,          %          December 27,       December 29,          %
(In thousands)               2008               2007           Change            2008               2007            Change

Net revenues            $       30,732     $       40,726         -24.5 %   $       74,628     $       79,194           -5.8 %
Research and
development                      4,363              4,278           2.0 %            8,584              8,360            2.7 %

R&D as a percentage
of net revenues                   14.2 %             10.5 %                           11.5 %             10.6 %

Research and development expenses consist primarily of costs related to personnel and overhead, non-recurring engineering charges, and other costs associated with the design, prototyping, testing, manufacturing process design support, and technical customer applications support of our products. The $85,000 expense increase for the three month period ended December 27, 2008 as compared to the same period of the prior year is primarily attributable to increased mask costs of $100,000. The $224,000 expense increase for the six month period ended December 27, 2008 as compared to the same period of the prior year is attributable to increased share-based compensation expense of $308,000 partially offset by reduced salary and benefits expense which decreased by $134,000.

The Company believes that continued spending on research and development to develop new products and improve manufacturing processes is critical to the Company's success, and as a result expects to increase research and development expenses in future periods over the long term. In the short term, the Company intends to continue to focus on cost control until business conditions improve. If business conditions deteriorate or the rate of improvement does not meet our expectations, the Company may implement further cost-cutting actions.

Selling, General and Administrative ("SG&A")

                                      Three Months Ended                                    Six Months Ended
                         December 27,       December 29,          %          December 27,       December 29,          %
(In thousands)               2008               2007           Change            2008               2007            Change

Net revenues            $       30,732     $       40,726         -24.5 %   $       74,628     $       79,194           -5.8 %
Selling, general and
administration                   5,453              5,786          -5.8 %           12,354             11,625            6.3 %

SG&A as a percentage
of net revenues 17.7 % 14.2 % 16.6 % 14.7 %

Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management. The expense decrease of $333,000 for the three month period ended December 27, 2008 as compared to the same period of the prior year is attributable to reduced salary and bonus costs of $87,000, reduced sales representative commissions of $58,000, reduced samples and freight of $112,000, and reduced accounting and legal fees of $67,000. The expense increase of $729,000 for the six month period ended December 27, 2008 as compared to the same period of the prior year is attributable to increased salary and benefits costs of $252,000, increased share-based compensation expense of $192,000, increased sales representative commissions of $114,000, and increased legal and accounting expenses of $115,000.

The Company anticipates that selling, general and administrative expenses will increase in future periods over the long term due to increased staffing levels, particularly in sales and marketing, as well as increased commission expense to the extent the Company achieves higher sales levels. The Company intends to continue its focus on controlling costs. If business conditions deteriorate or the rate of improvement does not meet our expectations, the Company may implement further cost-cutting actions.

Interest and Other Income, Net

                                     Three Months Ended                                 Six Months Ended
                        December 27,      December 29,          %         December 27,      December 29,          %
(In thousands)              2008              2007           Change           2008              2007           Change

Interest and other
income, net             $       1,264     $       1,622         -22.1 %   $       2,370     $       2,992         -20.8 %

The decrease in interest and other income for the three and six month periods ended December 27, 2008 as compared with the same periods of the prior year was a combination of lower invested balances and reduced rates of interest available for cash and investments in financial assets in fiscal 2009. The Company was able to generate approximately $1.3 and $2.4 million of net interest income for the three and six month periods ended December 27, 2008 as compared with $1.6 and $3.0 million for the same periods of the prior year.

Income Tax Expense

                                     Three Months Ended                                  Six Months Ended
                        December 27,      December 29,          %         December 27,       December 29,          %
(In thousands)              2008              2007           Change           2008               2007           Change

Pre-tax income          $       1,950     $       6,590         -70.4 %   $       7,872     $       12,040         -34.6 %
Income tax                        147             2,344         -93.7 %           2,216              4,035         -45.1 %

Effective tax rate 8 % 36 % 29 % 34 %

The decrease in income tax expense for the three and six months ended December 27, 2008 over the same periods of the prior year is primarily due to the significant decreases in income before income taxes in the second quarter as well as the reinstatement of the research and development tax credit. The decreased effective tax rate of 29% is due primarily to the reduced level of pretax income as well as the mix of earnings between tax jurisdictions.

Our effective tax rate differs from the federal statutory rate primarily due to state income taxes, the utilization of research and development tax credits, stock-based compensation from incentive stock options, and differing tax rates in income-earning jurisdictions.

Equity in Net Income of Unconsolidated Affiliates

                               Three Months Ended                                    Six Months Ended
                        December 27,        December 29,                     December 27,        December 29,
(In thousands)              2008                2007            Change           2008                2007            Change

Equity in net income
of PTI                  $         (61 )     $         124     $     (185 )   $          (1 )     $         177     $     (178 )
Equity in net income
of JCP                            (10 )                68            (78 )              47                 139            (92 )
Equity in net lossess
of other investees                  -                 (23 )           23                 -                 (26 )           26
Total                   $         (71 )     $         169     $     (240 )   $          46       $         290     $     (244 )

Equity in net income of unconsolidated affiliates includes our allocated portion of the net income of Pericom Technology, Inc. ("PTI"), a British Virgin Islands corporation based in Shanghai, People's Republic of China and Hong Kong. Our allocated portion of PTI's results was a loss of $61,000 and $1,000 for the three and six months ended December 27, 2008, respectively, as compared with income of $124,000 and $177,000 for the same periods of the prior year.

Equity in net income of unconsolidated affiliates also includes the Company's allocated portion of the net income of Jiyuan Crystal Photoelectric Frequency Technology Ltd. ("JCP"), an FCP manufacturing company located in Science Park of Jiyuan City, Henan Province, China. JCP is a key manufacturing partner of SRe, and SRe has acquired a 49% equity interest in JCP. For the three and six month periods ended December 27, 2008, the Company's allocated portion of JCP's results were a loss of $10,000 and income of $47,000, respectively, as compared with income of $68,000 and $139,000 for the same periods of the prior year.

Liquidity and Capital Resources

As of December 27, 2008, the Company's principal sources of liquidity included cash, cash equivalents and short-term and long-term investments of approximately $115.9 million as compared with $123.9 million on June 28, 2008.

The Company's investment in debt securities includes government securities, commercial paper, corporate debt securities and mortgage-backed and asset-backed securities. Government securities include federal agencies and municipal bonds. Many of the municipal bonds are insured; those that are not are nearly all AAA/Aaa rated. The corporate debt securities are all investment grade and nearly all are single A-rated or better. The asset-backed securities are AAA/Aaa rated and are backed by auto loans. Most of our mortgage-backed securities are collateralized by prime residential mortgages issued by government agencies including FNMA, FHLMC and FHLB. Those issued by banks are AAA-rated. At December 27, 2008, unrealized losses on marketable securities were $504,000. When assessing marketable securities for other-than-temporary declines in value, we consider a number of factors. Our analyses of the severity and duration of price declines, portfolio manager reports, economic forecasts and the specific circumstances of issuers indicate that it is reasonable to expect marketable securities with unrealized losses at December 27, 2008 to recover in fair value up to our cost bases within a reasonable period of time. We have the ability and intent to hold these investments until maturity, when the obligors are required to redeem them at full face value or par, and we believe the obligors have the financial resources to redeem the debt securities. Accordingly, we do not consider our investments to be other-than-temporarily impaired at December 27, 2008.

As of December 27, 2008, $26.9 million was classified as cash and cash equivalents compared with $41.6 million as of June 28, 2008. The maturities of the Company's short term investments are staggered throughout the year so that cash requirements are met. Because the Company is a fabless semiconductor manufacturer, it has lower capital equipment requirements than other semiconductor manufacturers that own wafer fabrication facilities. For the six month period ended December 27, 2008, the Company spent approximately $8.8 million on property and equipment compared to $5.4 million for the six month period ended December 29, 2007. The Company generated approximately $2.4 million of interest and other income, net for the six month period ended December 27, 2008, an approximate $600,000 decrease from the $3.0 million of interest and other income, net for the six month period ended December 29, 2007. The decrease in interest and other income, net was due to a combination of lower invested balances and reduced rates of interest available for cash and investments in financial assets in fiscal 2009. In the longer term the Company may generate less interest income if its total invested balance decreases and these decreases are not offset by rising interest rates or increased cash generated from operations or other sources.

The Company's net cash provided by operating activities of $5.9 million for the six months ended December 27, 2008 was primarily the result of net income of . . .