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

Introduction

The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes for the year ended June 28, 2009. The discussion includes:

º •
º Overview

º •
º Results of Operations

º •
º Liquidity and Capital Resources

º •
º Critical Accounting Polices and Estimates

We revised our reporting segments during the first quarter of fiscal 2009 to reflect how our chief decision maker, our CEO, manages our business. Prior period results have been adjusted to reflect the changes in our reportable segments. Prior periods have also been adjusted to reflect a change in the method of accounting for patent-related costs. See Note 1, "Business, Basis of Presentation and Summary of Significant Accounting Policies," in the notes to the consolidated financial statements.

Overview

Fiscal 2009 Developments

Significant events during fiscal 2009 include:

º •
º Our revenues were $740.4 million, a 24.8 percent decrease from the prior fiscal year.

º •
º Our margins were 30.4 percent, a decline of 2.4 percentage points from 32.8 percent in the prior fiscal year.

º •
º We reported a net loss from continuing operations of $(247.4) million.

º •
º Our loss per share from continuing operations was $(3.42) per share, an increase of $(2.61) per share from the prior fiscal year.

º •
º We recorded a charge of $45.0 million in selling, general and administrative expense as a result of reaching an agreement in principle to settle a pending securities class action lawsuit on July 29, 2009.

º •
º We initiated plans to consolidate our manufacturing operations in Newport, Wales and to close our El Segundo, California wafer fabrication facility. We estimate these actions will result in savings of $3.6 million beginning in the June 2009 quarter and $12.7 million beginning in calendar year 2011, respectively.

º •
º We recorded a previously deferred pre-tax gain on the sale of the PCS Business of $96.1 million as a result of resolving claims from Vishay related to the divestiture.

º •
º We used cash from operations of $41.2 million during fiscal year 2009 compared to generating cash from operations of $36.4 million in the prior fiscal year.

º •
º The Board of Directors authorized a stock repurchase program of up to $100.0 million. During fiscal year 2009 we repurchased approximately 1.9 million shares for $23.6 million.

This has been a challenging year for the industry and our Company, with relatively sharp swings in demand as customers react to market conditions and channel inventories fluctuate. We experienced sequential quarterly revenue declines during the first three quarters of our fiscal year along with the overall market's decline. However, after experiencing these declines, our ongoing segment customer revenue grew 16.2% during the fourth quarter of fiscal 2009 compared to the third quarter. In addition, we are experiencing strong orders for the first fiscal quarter of 2010 and expect total quarterly revenue to grow to between $165.0 million and $175.0 million for the first quarter of fiscal year 2010.

Although we saw strong sequential revenue growth during the fourth fiscal quarter, our ongoing customer segment gross margins were negatively impacted as we shipped higher unit cost inventory that was produced in prior periods when our manufacturing costs were higher due to low utilization rates.

Throughout the year, we continued our efforts to reduce inventory. Reduced manufacturing production combined with our revenue growth during the fourth quarter allowed us to reduce our inventory levels to $151.1 million, our lowest level since the Divestiture two years ago. During the quarter ended June 28, 2009, we saw our demand visibility improve throughout the quarter.

If revenue grows over the next few quarters as our current visibility indicates, we anticipate that our gross margins would improve significantly as we consume our excess capacity and reduce the high costs associated with low factory utilization. In order to support our revenue growth, we will need to increase our inventory levels, although we plan to closely manage this investment through controlling the number of weeks of inventory on hand.

During fiscal year 2009, we have made what we believe to be good progress on our overall strategic roadmap, particularly in light of the current economic environment, and we are continuing to drive toward our three year overall plan. In particular, we have continued to (i) rebuild our executive management team,
(ii) implement targeted cost reductions, (iii) optimize our distribution channels, (iv) focus on accelerating near-term revenue opportunities and
(v) look to find and implement additional operational efficiencies. We have also made initial efforts to streamline our operational and manufacturing efforts, including (i) changing the way we plan and schedule production at our factories and with subcontractors, (ii) implementing a new demand forecasting model,
(iii) launching broad initiatives to improve our asset productivity and
(iv) commencing rationalization and consolidation of subcontract manufacturing firms. We have also seen initial success in revenue acceleration measures through the capture of high volume MOSFET and IGBT business, which we believe is important to our ability to regain operational efficiencies and economies of scale.

During the fiscal year we put our new executive management team in place, and prevailed in a third party proxy contest and unsolicited purchase offer brought by Vishay.

Our operating cash flow was a use of cash of approximately $41.2 million for fiscal year 2009. Our current view is that our operations will continue to use cash during at least the first half of fiscal year 2010. We have approximately $600.5 million of cash, cash equivalents and available for sale investments which are available to fund operations as well as other uses of cash. These uses of cash include our

ongoing $100.0 million share repurchase program of which approximately $23.6 million was utilized in fiscal year 2009, the payment to settle a pending securities class action lawsuit of $45.0 million, and capital expenditures which we project will be approximately $11.0 million per quarter for fiscal year 2010. The estimated capital expenditures do not include projected expenditures of approximately $16.0 million for the potential implementation of a new ERP system. We currently have no outstanding long-term debt or credit facilities. Given our current cash requirements, we believe that we have sufficient cash reserves to finance our operations and fund our growth for at least the next twelve months without the incurrence of debt.

We are proceeding with our plans to consolidate our manufacturing sites in order to reduce our costs. During the quarter ended December 28, 2008, we decided to reduce the size of our Newport, Wales wafer fabrication facility, and we estimated that we would achieve savings from this initiative of about $7.9 million per year beginning in third fiscal quarter of fiscal year 2010. During the quarter ended June 28, 2009, due to a significant increase in demand, we decided to postpone this consolidation initiative by at least six months to at least July 2010 or when sufficient alternative external capacity comes on-line. Since we already implemented fixed cost reductions associated with this initiative, we anticipate saving $3.6 million on an annualized basis associated with this initiative beginning in the June 2009 quarter. During the quarter ended December 28, 2008, we also decided to close our El Segundo, California wafer fabrication facility which we estimate will be completed by the end of calendar year 2010. We estimate that this factory closure will save us about $12.7 million per year beginning in calendar year 2011.

In addition to reducing our manufacturing costs, we are continuing our efforts to align our operating expense structure with our reduced revenue levels. Although we plan to reduce selling, general and administrative costs in the near term, we expect to maintain our investment levels in new product development in order to meet our longer term revenue goals. During the second quarter, we announced that we planned to reduce our worldwide workforce by about 850 employees for the fiscal year ended June 28, 2009 compared to the fiscal year ended June 29, 2008. Through the fiscal year ended June 28, 2009, we have decreased our workforce by almost 80% of our planned 850 reduction. We did not reduce our headcount by the full planned amount since we saw an increase in demand during the fiscal quarter ended June 28, 2009 which required us to retain more direct manufacturing employees. With the headcount reductions we completed during the fiscal year, we expect to save about $24.0 million on an annualized basis. We incurred severance related costs for the 2009 fiscal year of about $14.0 million associated with these reductions.

Vishay Settlement/Securities Class Action Settlement. Additionally, on June 25, 2009 we entered into various agreements with Vishay (collectively the "Settlement Agreement") which resolved disputes between the parties related to the sale of our PCS Business to Vishay in fiscal year 2007. The Settlement Agreement resolved all outstanding claims between the parties related to the sale of our PCS Business and clarified certain terms of the non-compete agreement between the parties related to the sale of the PCS Business. These clarifications will allow us flexibility in designing solutions for our customers as well as additional options for developing new products. As a result of resolving the outstanding claims between the parties we recognized a previously deferred gain of $96.1 million related to the sale of Commodity Products portion of the PCS Business. Additionally, effective April 30, 2009, Vishay terminated most elements of the TPSA under which we provided certain manufacturing services to Vishay during the period the PCS Business was transitioned to Vishay's facilities, causing the loss of most remaining Transition Services revenue during the quarter. We estimate that revenue from sales to Vishay for fiscal year 2010 will be less than $1.0 million per quarter.

Following the close of the quarter, we and the other participants in the pending securities class action lawsuit agreed in principle to settle the pending securities class action lawsuit in which we are a defendant. This settlement will require us to make a $45.0 million cash payment in the near future. The proposed settlement is subject to negotiation and execution of a formal settlement agreement and is

dependent upon final approval by the United States District Court for the Central District of California. (See Note 14, Litigation, to our Consolidated Financial Statements set forth in Part II, Item 8.). Pursuant to Financial Accounting Standards Board Statement No. 5, Accounting for Contingencies, because we consider it probable we will make this payment, the amount is estimable, and the events giving rise to the settlement occurred prior to June 28, 2009, we have recorded a charge for this pending settlement of $45.0 million on our statement of operations for the fiscal year ended June 28, 2009.

Segment Reporting

At the beginning of the first quarter of fiscal year 2009, the Company's CEO, who is the chief operating decision maker, refined the definition of the Company's business segments by renaming its A&D segment its HiRel segment, combining its previously identified PS segment with its EP segment and creating a new AP segment which was previously reported within the ESP and PMD segments. Furthermore, some products that were previously reported under the EP segment are now reported under the PMD segment. Consequently, the Company now reports in six segments: EP, PMD, ESP, HiRel, AP, and IP. Additionally, we have reported the ongoing work for Vishay under the TPSA (which had previously been reported as part of the PCS Business) as Transition Services, separate from our ongoing segments. This work declined substantially during the quarter, and the small amount of remaining sales to Vishay will be incorporated into our ongoing segments beginning in the first quarter of fiscal year 2010. For the description of the Company's reportable segments, see Note 9, "Segment Information".

Results of Operations

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

                                                        Fiscal Year Ended
                                   June 28, 2009         June 29, 2008          July 1, 2007
 Revenues                        $  740.4     100.0 %  $  984.8     100.0 %  $ 1,202.5     100.0 %
 Cost of sales                      515.5      69.6       662.0      67.2        741.1      61.6

     Gross profit                   224.9      30.4       322.8      32.8        461.4      38.4
 Selling, general and
 administrative expense             262.1      35.4       287.8      29.2        212.5      17.7
 Research and development
 expense                             98.2      13.3       105.8      10.7        122.8      10.2
 Impairment of goodwill              23.9       3.2        32.6       3.3            -         -
 Amortization of
 acquisition-related
 intangible assets                    4.4       0.6         4.7       0.5          1.9       0.2
 Asset impairment,
 restructuring and other
 charges                             56.5       7.6         3.1       0.4         10.4       0.9
 Gain on divestiture                (96.1 )   (13.0 )         -         -            -         -

     Operating (loss) income       (124.1 )   (16.8 )    (111.2 )   (11.3 )      113.8       9.5
 Other expense (income), net         39.7       5.4        19.4       2.0         (6.3 )    (0.5 )
 Interest income, net               (11.7 )    (1.6 )     (29.1 )    (3.0 )      (16.0 )    (1.3 )

     (Loss) income from
     continuing operations
     before income taxes           (152.1 )   (20.5 )    (101.5 )   (10.3 )      136.1      11.3
 (Benefit from) provision for
 income taxes                        95.3      12.9       (42.3 )    (4.3 )       63.0       5.2

     (Loss) income from
     continuing operations         (247.4 )   (33.4 )     (59.2 )    (6.0 )       73.1       6.1
 Income (loss) from
 discontinued operations, net
 of taxes                               -         -           -         -          4.3       0.4

     Net (loss) income           $ (247.4 )   (33.4 )% $  (59.2 )    (6.0 )% $    77.4       6.5 %

Revenue and Gross Margin

                                                 Fiscal Year Ended

(Dollars in                                                                                       Change         Change
thousands)            June 28,      % of      June 29,      % of        July 1,       % of        FY09 to        FY08 to
Ongoing Segments        2009       Revenue      2008       Revenue       2007        Revenue       FY08           FY07
Revenues              $ 702,300               $ 925,212               $ 1,014,498                     (24.1 )%        (8.8 )%

Gross Margin          $ 229,181               $ 322,605               $   430,802                     (29.0 )%       (25.1 )%

   Gross Margin %          32.6 %                  34.9 %                    42.5 %               (2.3) ppt      (7.6) ppt
   Abnormal           $  16,898         2.4 % $   5,051         0.5 % $         -           - %     1.9 ppt        0.5 ppt
   Utilization
   Costs(1)
   Inventory          $   9,349         1.3 % $  26,588         2.9 % $    30,055         3.0 %   (1.6) ppt      (0.1) ppt
   Write-down
   Costs(2)
   Factory            $   3,977         0.6 % $       -           - % $         -           - %     0.6 ppt           -ppt
   Consolidation
   Costs(3)


--------------------------------------------------------------------------------
   º (1)

º (2)
º Inventory Write-down Costs: Inventory costs associated with the products we deem to be in excess of demand or to be obsolete and no longer plan to support.

º (3)
º Factory Consolidation Costs: Costs reported in Cost of Sales related to consolidating our manufacturing facilities in Newport, Wales and El Segundo, California.

Revenue for our ongoing segments, which includes all of our operating segments except the TS segment, declined 24.1 percent for the fiscal year ended June 28, 2009 due primarily to (1) a slowdown in the economy; (2) customer draw down of inventories, and (3) lower sales of our game station related products compared to the prior period.

During fiscal 2009, the Company experienced unfavorable production cost variances of $16.6 million which were incurred as a result of abnormally low factory utilization. The abnormally low factory utilization resulted in excess capacity costs which were recognized in costs of goods sold as period costs. The abnormally low utilization and excess capacity were a direct result of our efforts to reduce current inventory to an appropriate level in light of the decreased demand and downturn in the macro-economic environment that the Company experienced during fiscal 2009. The low factory utilization and unfavorable production cost variances were the primary drivers of our ongoing segments margin decline from 34.9% in 2008 to 32.6% in 2009. The decline in our gross margin for our ongoing segments of 2.3 percentage points for fiscal year 2009 was due to the unfavorable impact on gross margin from (1) an increase of approximately $11.5 million due to abnormally low capacity utilization during fiscal year 2009 (see table above); (2) facility consolidation costs of $3.9 million reported in cost of sales related to the initiatives at our Newport, Wales and El Segundo, California fabrication facilities and (3) the 24.1 percent decline in our ongoing segment revenue which increased our fixed manufacturing costs as a percentage of revenue. In addition, during fiscal quarter ended June 28, 2009 the Company refined the methodology used for accounting for production cost variances to better reflect the current economic environment which resulted in demand volatility, abnormally low factory utilization, excess capacity costs and slower inventory turns during the year. Also, during the fiscal quarter ended June 28, 2009, the Company adjusted its product return accrual to respond to recent changes in actual returns during the quarter. The net impact of these two items further contributed to our margin decline. These increases were partially offset by $17.3 million increase in gross margin, compared to the prior year, due to a lower level of inventory write-downs in the fiscal year ended June 28, 2009 (see table above).

The 8.8 percent decline in ongoing segments revenue from fiscal year 2007 to fiscal year 2008 was mostly due to the expiration of our broadest royalty-producing patents in the fourth quarter of fiscal year 2008 and reduction of our distributors' inventories particularly during the last quarter of the fiscal year. Since we recognize revenue upon sales to our distributors, their decisions to reduce their inventories levels impact our revenues.

The 7.6 percentage point decline in gross margin from fiscal year 2007 and 2008 was due to lower factory utilization as production volumes declined as a result of planned inventory reductions and lower revenues from sales into the distribution channel. Furthermore the PCS Business Divestiture resulted in a lower revenue base over which to absorb indirect manufacturing costs, and we did not complete a commensurate reduction in these costs.

During the fiscal year ended June 28, 2009, we incurred manufacturing employee severance expenses of $4.3 million associated with the lower production levels. During the fiscal years ended June 29, 2008 and July 1, 2007, we did not incur a material amount of manufacturing employee severance expense.

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

                                                              Fiscal Year Ended

(Dollars in thousands)                                                                                         Change          Change
                                    June 28,      % of      June 29,      % of       July 1,      % of        FY09 to         FY08 to
Power Management Devices (PMD)        2009       Revenue      2008       Revenue      2007       Revenue        FY08            FY07
Revenues                            $ 234,937               $ 330,016               $ 373,042                      (28.8 )%        (11.5 )%

Gross Margin                        $  25,939               $  72,318               $ 128,082                      (64.1 )%        (43.5 )%

    Gross Margin %                       11.0 %                  21.9 %                  34.3 %               (10.9) ppt      (12.4) ppt
    Abnormal Utilization Costs      $   9,876         4.2 % $   2,434         0.7 % $       -           - %      3.5 ppt         0.7 ppt
    Inventory Write-down Costs      $   3,577         1.5 % $   7,084         2.1 % $   4,675         1.3 %    (0.6) ppt         0.8 ppt
    Factory Consolidation Costs     $   1,008         0.4 % $       -           - % $       -           - %      0.4 ppt            -ppt

The 28.8 percent revenue decrease for the fiscal year ended June 28, 2009 for PMD was due to a slowdown in the market, a decline in demand for notebooks and other consumer related products as well as a decline in demand for our previous generation products. The year-over-year decrease of 10.9 percentage points in gross margin was primarily driven by the 28.8 percent drop in revenue as we were not able to reduce our fixed manufacturing costs at the same rate as the revenue decline. Gross margin, as noted in the table above, was also unfavorably impacted by lower average selling price for fiscal year 2009 compared to the prior period. These unfavorable impacts on gross margin were partially offset by lower inventory write-down costs compared to the prior period.

The 11.5 percent revenue decrease in PMD segment revenue for the fiscal year ended June 29, 2008 was due to reductions in distributors' inventories and softening in the general market. The gross margin for the PMD segment declined for the fiscal year ended June 29, 2008 was primarily due to lower average selling price, lower factory utilization from lower revenue and lower manufacturing overhead absorption due to the PCS Business Divestiture.

                                                           Fiscal Year Ended
                                                                                                           Change          Change
(Dollars in thousands)           June 28,      % of      June 29,      % of       July 1,      % of        FY09 to        FY08 to
Energy Saving Products (ESP)       2009       Revenue      2008       Revenue      2007       Revenue       FY08            FY07
Revenues                         $ 151,086               $ 166,316               $ 188,664                      (9.2 )%        (11.8 )%

Gross Margin                     $  55,428               $  57,645               $  88,296                      (3.8 )%        (34.7 )%

   Gross Margin %                     36.7 %                  34.7 %                  46.8 %                 2.0 ppt      (12.1) ppt
   Abnormal Utilization Costs    $   2,556         1.7 % $     947         0.6 % $       -           - %     1.1 ppt         0.6 ppt
   Inventory Write-down Costs    $   1,902         1.3 % $   5,583         3.4 % $   4,887         2.6 %   (2.1) ppt         0.8 ppt
   Factory Consolidation Costs   $   2,304         1.5 % $       -           - % $       -           - %     1.5 ppt            -ppt

The 9.2 percent revenue decrease for the fiscal year ended June 28, 2009 for ESP was due to a continued slowdown in the market and a decline in our industrial and consumer appliance related products. The 2.0 percentage point improvement in gross margin for the year ended June 28, 2009 was primarily driven by improved mix on higher margin products shipped to support consumer appliances in Asia, and lower inventory write-downs which offset an increase in abnormally low utilization costs as a result of lower than normal capacity utilization (see the table above).

The 11.8 percent revenue decrease for the fiscal year ended June 29, 2008 was caused by a decline in sales of general purpose of High Voltage Integrated Circuits, due to a reduction of inventory levels at distributors and general softening of market demand. The large volume decline in general purpose ICs reduced factory utilization and negatively impacted gross margin in fiscal year 2008. In addition, production costs in fiscal year 2008 were higher due to lower manufacturing overhead absorption due to the PCS Business Divestiture.

                                                Fiscal Year Ended

(Dollars in                                                                                     Change         Change
. . .