You should read the following discussion of our financial condition and results of operations together with the consolidated condensed financial statements and the notes to the consolidated condensed financial statements included elsewhere in this Form 10-Q.

Forward Looking Statements

This Form 10-Q contains forward-looking statements. Forward-looking statements are statements other than historical information or statements of current condition and relate to matters such as our future financial performance, future operational performance and our plans, objectives and expectations. Some forward-looking statements may be identified by use of terms such as "expects," "anticipates," "intends," "estimates," "believes," "projects," "should," "will," "plans" and similar words. In light of the risks and uncertainties inherent in all such projected matters, forward-looking statements should not be regarded as a representation by the Company or any other person that our objectives or plans will be achieved or that any of our operating expectations or financial forecasts will be realized. Results could differ materially from those projected in forward-looking statements, due to factors including, but not limited to, those set forth in the "Risk Factors" and "Quantitative and Qualitative Disclosure About Market Risk" sections of this Form 10-Q and the "Risk Factors" section of our annual report on Form 10-K for the year ended January 25, 2009. We undertake no duty to update any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition to regarding forward-looking statements with caution, you should consider that the preparation of financial statements requires us to draw conclusions and make interpretations, judgments, assumptions and estimates with respect to factual, legal, and accounting matters. Different conclusions, interpretations, judgments, assumptions, or estimates could result in materially different results. See Note 1 to the financial statements included in this report.

Overview

We design, produce and market a broad range of products that are sold principally to customers in the high-end consumer, industrial, computing and communications end-markets. The high-end consumer market includes handheld products, set-top boxes, digital televisions, digital video recorders, Bluetooth headsets and other consumer equipment. Included in the industrial customer base are automated meter reading, military and aerospace, medical, automated test equipment, security, automotive, home automation, and other industrial equipment. The computing market includes desktops, servers, notebooks, graphics, printers, and other computer peripherals. The communications market includes base stations, optical networks, switches and routers, wireless LAN, and other communication infrastructure equipment. Our end-customers are primarily original equipment manufacturers and their suppliers, including Alcatel, Apple, Cisco, Compal Electronics, Dell, Hewlett Packard, Intel, LG Electronics, Motorola, Nokia Siemens Networks, Phonak, Quanta Computer, Research In Motion, Samsung, Sanyo, Siemens, and Sony.

We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable. Product design and engineering revenue is recognized during the period in which services are performed. Gross profit is equal to our net sales less our cost of sales. Our cost of sales includes materials, depreciation on fixed assets used in the manufacturing process, shipping costs, direct labor and overhead. We determine the cost of inventory by the first-in, first-out method. Our operating costs and expenses generally consist of selling, general and administrative (SG&A), product development and engineering costs (R&D), costs associated with acquisitions, and other operating related charges.

Most of our sales to customers are made on the basis of individual customer purchase orders. Many customers include liberal cancellation provisions in their purchase orders. Trends within the industry toward shorter lead-times and "just-in-time" deliveries have resulted in our reduced ability to predict future shipments. As a result, we rely on orders received and shipped within the same quarter for a significant portion of our sales. Sales made directly to customers during fiscal year 2010 were 54% of net sales. The remaining 46% of net sales were made through independent distributors.

We divide and operate our business based on two reportable segments: Standard Semiconductor Products and Rectifier, Assembly and Other Products. We evaluate segment performance based on net sales and operating income of each segment. We do not track segment data or evaluate segment performance on additional financial information. We do not track balance sheet items by individual reportable segments. As such, there are no separately identifiable segment assets nor are there any separately identifiable statements of income data (below operating income). The Standard Semiconductor Products segment makes up the vast majority of overall sales and includes our Power Management, Protection, Advanced Communication and Sensing product lines. The Rectifier, Assembly and Other Products segment includes our line of assembly and rectifier devices, which are the remaining products from our founding as a supplier into the military and aerospace market.

Our business involves reliance on foreign-based entities. Most of our outside subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Taiwan, Singapore, Thailand, Malaysia, the Philippines, Germany, Israel and Canada. For the first quarter of fiscal year 2010, approximately 47% of our silicon, in terms of cost of wafers purchased, was manufactured in China. Foreign sales during the first quarter of fiscal year 2010 constituted approximately 73% of our net sales. Approximately 51% of foreign sales during the first quarter of fiscal year 2010 were to customers located in the Asia-Pacific region. The remaining foreign sales were primarily to customers in Europe, Canada, and Mexico.

Sales into the Computing and Consumer markets have historically been seasonal and generally experience weaker demand in the first and second fiscal quarters of each year followed by stronger demand in the third and fourth fiscal quarters.

Critical Accounting Policies and Estimates

In addition to the discussion below, 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 January 25, 2009.

Revenue Recognition

We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable. We record a provision for estimated sales returns in the same period as the related revenues are recorded. We base these estimates on historical sales returns and other known factors. Actual returns could be different from our estimates and current provisions for sales returns and allowances, resulting in future charges to earnings.

We defer revenue recognition on shipment of products to certain customers, principally distributors, where return privileges exist, until these products are sold through to end-users or the rights lapse. Given the uncertainties associated with the levels of returns, we have concluded that sales to customers with return privileges are not fixed and determinable at the date of the sale.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, our statements of
operations data expressed as a percentage of revenues.



                                                   Three Months Ended
                                                 April 26,     April 27,
                                                   2009          2008
            Net Sales                                100.0 %       100.0 %
            Cost of Sales                             45.5 %        45.2 %

            Gross Profit                              54.5 %        54.8 %
            Operating costs and expenses:
            Selling, general & administrative         28.7 %        25.0 %
            Product development & engineering         16.8 %        14.9 %
            Acquisition related items                  0.5 %         0.4 %
            Restructuring charges                      0.3 %         2.9 %

            Total operating costs and expenses        46.3 %        43.2 %

            Operating income                           8.1 %        11.6 %
            Interest and other income, net             2.1 %         2.3 %

            Income before taxes                       10.3 %        14.0 %
            Provision for taxes                        2.1 %         3.1 %

            Net income                                 8.2 %        10.8 %

Comparison of The Three Months Ended April 26, 2009 and April 27, 2008

We report on the basis of 52 and 53 week periods and end our fiscal year on the last Sunday in January. All quarters consist of 13 weeks, except for one 14-week quarter in 53-week years. The first quarter of fiscal years 2010 and 2009 were both 13 week periods.

Net Sales. Net sales for the first quarter of fiscal year 2010 were $60.1 million, a decrease of 19% compared to $74.4 million for the first quarter of fiscal year 2009. Continuing weak global economic conditions resulted in continued weakness in demand for our customer's end products, which resulted in continued weakness in demand for our component products.

Our estimates of sales by major end-markets are detailed below:

                     End-Market
                                          Three Months Ended
                                        April 26,     April 27,
                     (% of net sales)     2009          2008
                     Computer                  14 %          18 %
                     Communications            19 %          19 %
                     Consumer                  36 %          36 %
                     Industrial                31 %          27 %

                     Total                    100 %         100 %

Net sales summarized by reportable segment are detailed below:

Net Sales by Reportable Segment
                                                  Three Months Ended         Three Months Ended
                                                      April 26,                  April 27,
(in thousands)                                           2009                       2008              Change
Standard Semiconductor Products                 $      52,141       87 %   $      66,272       89 %      -21 %
Rectifier, Assembly and Other Products                  7,936       13 %           8,172       11 %       -3 %

Net sales                                       $      60,077      100 %   $      74,444      100 %      -19 %

The 21% decrease in sales of Standard Semiconductor Products in the first quarter of fiscal year 2010 reflected lower sales across all product lines within this segment resulting from the continuing weak global economic conditions.

Sales of our Rectifier, Assembly and Other Products, which are primarily sold into military and industrial applications, decreased 3% in the first quarter of fiscal year 2010 compared to the first quarter of fiscal year 2009 as we worked to resolve post-fire yield and ramp-up issues in the fabrication facility. This segment was not significantly impacted by the current global economic conditions. These products rely on older technology and historically have supported a very limited customer base.

Cost of Sales and Gross Profit. Cost of sales consists primarily of purchased materials and services, labor and overhead associated with product manufacturing. We have experienced long-term price reductions in our manufacturing costs, in part due to our outsourcing of most manufacturing functions. However, declines in the average selling prices of our parts, a trend which is typical in the semiconductor industry, tends to offset much of the manufacturing cost savings. Our gross margin is most impacted by the mix of products used in our customer's particular end-applications. During the first quarter of fiscal year 2010, gross profit decreased to $32.7 million from $40.8 million in the first quarter of fiscal year 2009. This 20% decrease in gross profit reflects the impact of lower sales. Gross profit margins were essentially unchanged at approximately 55%.

Operating Costs and Expenses. Operating costs and expenses were $27.8 million, or 46% of net sales in the first quarter of fiscal year 2010. Operating costs and expenses for the first quarter of fiscal year 2009 were $32.1 million, or 43% of net sales. Operating costs and expenses in the first quarters of fiscal year 2010 and fiscal year 2009 were impacted by $4.8 million of stock-based compensation and approximately $2.0 million of targeted cost reduction initiatives. These cost reduction initiatives will be continued in the second quarter of fiscal year 2010. Stock-based compensation is expected to be approximately $4.0 million in the second quarter of fiscal year 2010.

During the first quarter of fiscal year 2009, we initiated a restructuring plan to reorganize certain Company operations, consolidate research and development activities and reduce our workforce. During the first quarter of fiscal year 2009, the Company recorded costs of $2.2 million for employee severance and other facility consolidation costs.

Operating Costs and Expenses

                                                  Three Months Ended
                                             April 26,          April 27,
     (in thousands)                             2009               2008          Change
     Selling, general and administrative   $ 17,267    62 %   $ 18,621    58 %       -7 %
     Product development and engineering     10,085    36 %     11,073    34 %       -9 %
     Acquisition related items                  303     1 %        273     1 %       11 %
     Restructuring charges                      188     1 %      2,169     7 %      100 %

     Total operating costs and expenses    $ 27,843   100 %   $ 32,136   100 %      -13 %

Operating Income. Operating income was $4.9 million in the first quarter of fiscal year 2010, down from $8.7 million in the first quarter of fiscal year 2009. Operating income was unfavorably impacted by a 19% decrease in net sales. The impact of lower sales was partially offset by approximately $2.0 million of targeted cost reduction initiatives.

We evaluate segment performance based on net sales and operating income of each segment. Detailed below is operating income by reportable segment.

Operating Income by Reportable Segment

                                             Three Months        Three Months
                                                 Ended               Ended
                                               April 26,           April 27,
   (in thousands)                                2009                2008           Change
   Standard Semiconductor Products          $   1,102    23 %   $   4,702    54 %      -77 %
   Rectifier, Assembly and Other Products       3,787    77 %       3,953    46 %       -4 %

   Total Operating Income                   $   4,889   100 %   $   8,655   100 %      -44 %

Operating income in the first quarter of fiscal year 2010 for the Standard Semiconductor Products segment decreased as a result of lower net sales. The impact of lower sales in the first quarter of fiscal year 2010 was partially offset by targeted cost reduction initiatives and lower restructuring costs.

Operating income in the first quarter of fiscal year 2010 for the Rectifier, Assembly and Other Products segment decreased as a result of lower production yields. Product demand for this segment was stable, with product supply constraining revenue opportunities.

Interest and Other Income, Net. Interest and other income includes interest income from investments and other items. Net interest and other income was $1.3 million in the first quarter of fiscal year 2010 compared to $1.7 million in the first quarter of fiscal year 2009. This decrease is attributable to declining interest rates when compared to the same period last year. Offsetting lower interest rates in the first quarter of fiscal year 2010 were approximately $600,000 of realized foreign currency gains associated with a stronger U.S. dollar.

Provision for Taxes. Provision for income taxes was $1.2 million for the first quarter of fiscal year 2010, compared to $2.3 million in the first quarter of fiscal year 2009. The effective tax rate for the first quarter of fiscal years 2010 and 2009 was 20% and 22%, respectively. The decrease in rate is primarily attributable to a greater percentage of income in lower tax jurisdictions.

Business Outlook

On May 20, 2009, we announced our outlook for the second quarter of fiscal year 2010. At that time, we expected sequential revenue growth of approximately 4% to 8% from the first quarter. We expect earnings per diluted share of approximately $0.09 to $0.11. Refer to Exhibit 99.1 of our Form 8-K filed on May 20, 2009 for the complete announcement.

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 funds needed for working capital requirements. As of April 26, 2009, our total shareholders' equity was $386.3 million. At that date we also had approximately $248.6 million in cash and short-term investments, as well as $21.9 million in long-term investments. We have no outstanding debt.

Our primary sources and uses of cash during the comparative fiscal quarters are presented in below:

                                                                      Quarter Ended
                                                               April 26,         April 27,
(in millions)                                                     2009             2008
Sources of Cash
Operating activities, including working capital changes       $       15.8      $      14.1
Proceeds from exercise of compensatory stock plans,
including tax benefits                                                 1.4              4.0

                                                              $       17.2      $      18.1

Uses of Cash
Business improvement investments
Capital expenditures, net of sale proceeds (excluding land
sale)                                                         $       (1.4 )    $      (2.1 )
Purchased intangibles                                                 (2.3 )             -

                                                              $       (3.7 )    $      (2.1 )

Returned to shareholders
Stock repurchases                                             $       (1.7 )    $        -

                                                              $       (1.7 )    $        -

Cash/Investment Management Activities
Decrease in investments and foreign exchange effects          $        3.1      $       1.1

Net increase (decrease) in cash and cash equivalents          $       14.9      $      17.1

In the quarter ended April 26, 2009, our sources of cash as summarized above, increased cash $17.2 million compared to $18.1 million in the quarter ended April 27, 2008, a decrease of $0.9 million. This decrease is attributable to lower sales activity, offset partially by lower accounts receivable and inventory. For the quarter ended April 26, 2009, the Company made capital expenditures of approximately $1.4 million and spent $2.3 million to purchase a business line from Leadis Technology Inc. During the first quarter of fiscal year 2010, we repurchased $1.7 million of outstanding common stock. The Company has historically used significant levels of cash to repurchase its common stock. The netting of the purchases of available-for-sale investments and the proceeds from the sale and maturities of available-for-sale investments reflect net cash provided of $3.1 and $1.1 million for the first quarter of fiscal years 2010 and 2009, respectively.

In order to develop, design and manufacture new products, we have incurred significant expenditures during the past five years. We intend to continue to focus on those areas that have shown potential for viable and profitable market opportunities, which may require additional investment in equipment and will require continued, and perhaps additional, investment in design and application engineers aimed at developing new products. Certain of these expenditures, particularly the addition of design engineers, do not generate significant payback in the short-term. We plan to finance these expenditures with cash generated by our operations and our existing cash balances.

A meaningful portion of our capital resources, and the liquidity they represent, are held by our foreign subsidiaries. As of April 26, 2009, the amount held by our foreign subsidiaries was approximately $201.8 million of cash, cash equivalents, and short-term investments compared to $196.5 million as of January 25, 2009. If we needed these funds for investment in domestic operations, any repatriation could result in increased tax liabilities.

One of the primary goals of the Company is to constantly improve the cash flows from our existing business activities. As discussed above, we have historically used, and intend to continue to use, cash flow to fund the repurchase of our common stock. Additionally, we will continue to seek to maintain and improve our existing business performance with necessary capital expenditures and, potentially, acquisitions that may further improve our base business with prospects of a proper return. Acquisitions, should we undertake them to improve our business, might be made for either cash or stock consideration, or a combination of both.

Our cash, cash equivalents and investments noted above, when combined with lack of any outstanding debt obligations, give us the flexibility to continue to leverage our free cash flow to return value to shareholders (in the form of stock repurchases) while also pursuing business improvement opportunities.

Non-cash Working Capital

Trade accounts receivable, less valuation allowances, decreased by $3.1 million to $24.4 million at April 26, 2009 from $27.5 million at January 25, 2009. Inventories also decreased, by $1.8 million to $26.2 million at April 26, 2009 from $28.0 million at January 25, 2009. We believe non-cash working capital ratios relative to our revenue and cost of revenue, will remain at levels approximately the same as they currently are.

Capital Expenditures and Purchases of Intangibles

Capital expenditures were $1.4 million for the quarter ended April 26, 2009 compared to $2.1 million for the quarter ended April 27, 2008. In the first quarter of fiscal year 2010, we spent $2.3 million to acquire a business line from Leadis Technology Inc.

Proceeds from exercises of Stock Options

For the first quarter of fiscal year 2010, cash collected directly from grantee exercises of stock options was $1.4 million as compared with $2.8 million in the first quarter of 2009. We do not directly control the timing of the exercise of vested stock options by our grantees. Such exercises are decisions made by those grantees and are influenced most directly by the level of our stock price and, indirectly, by other considerations of those grantees. Such proceeds are difficult to forecast. While the level of such cash inflow to us is subject to these factors which we don't control, we believe that such proceeds will remain an important secondary source of cash after cash flow from operations.

Stock Repurchases

We currently have in effect an active stock repurchase program. This program represents one of our major efforts to return value to our shareholders.

In the first quarter of fiscal year 2009, we announced that the Board of Directors authorized the repurchase of up to $50 million of the Company's common stock. In the first quarter of fiscal year 2010, we repurchased approximately 105,000 shares under this program for $1.4 million. Additionally, we withheld 25,609 shares from vested restricted stock for employee payroll and income tax withholding liabilities. The value of the withheld shares was $0.3 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as those arrangements are defined by the SEC, that are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

We do not have any unconsolidated subsidiaries or affiliated entities. We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity or market or credit risk support, engage in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the financial statements.

Certain contractual obligations, representing various commitments we have associated with our business, such as lease commitments and open purchase obligations, are not recorded as liabilities on our balance sheet because we have not yet received the related goods or services as of April 26, 2009.

Contractual Obligations

There were no material changes in our contractual obligations during the first quarter of fiscal year 2010. Refer to the disclosures regarding other contractual obligations in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the our Annual Report on Form 10-K for the fiscal year ended January 25, 2009.

Inflation

Inflationary factors have not had a significant effect on our performance over the past several years. A significant increase in inflation would affect our future performance.

Available Information

General information about us can be found on our website at www.semtech.com. The information on our website is for informational purposes only and should not be . . .