The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes included in Part I Item
1. - Financial Statements, of this Quarterly Report on Form 10-Q ("Quarterly Report") of Standard Microsystems Corporation (the "Company" or "SMSC").

Forward-Looking Statements

Portions of this Quarterly Report may contain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are based on management's beliefs and assumptions, current expectations, estimates and projections. Such statements, including statements relating to the Company's expectations for future financial performance, are not considered historical facts and are considered forward-looking statements under federal securities laws. Words such as "believe," "expect," "anticipate" and similar expressions identify forward-looking statements. These risks and uncertainties may cause the Company's actual future results to be materially different from those discussed in forward-looking statements. The Company's risks and uncertainties include (but are not limited to) the timely development and market acceptance of new products; the impact of competitive products and pricing; the Company's ability to procure capacity from suppliers and the timely performance of their obligations, commodity prices, potential investment losses as a result of liquidity conditions, the effects of changing economic and political conditions in the market domestically and internationally and on its customers; relationships with and dependence on customers and growth rates in the personal computer, consumer electronics and embedded and automotive markets and within the Company's sales channel; changes in customer order patterns, including order cancellations or reduced bookings; the effects of tariff, import and currency regulation; potential or actual litigation; and excess or obsolete inventory and variations in inventory valuation, among others. In addition, SMSC competes in the semiconductor industry, which has historically been characterized by intense competition, rapid technological change, cyclical market patterns, price erosion and periods of mismatched supply and demand.

The Company's forward looking statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations and may not reflect the potential impact of any future acquisitions, mergers or divestitures. All forward-looking statements speak only as of the date hereof and are based upon the information available to SMSC at this time. Such statements are subject to change, and the Company does not undertake to update such statements, except to the extent required under applicable law and regulation. These and other risks and uncertainties, including potential liability resulting from pending or future litigation, are detailed from time to time in the Company's periodic and current reports as filed with the United States Securities and Exchange Commission (the "SEC"). Readers are advised to review the Company's most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q as filed subsequently with the SEC, particularly those sections entitled "Risk Factors," for a more complete discussion of these and other risks and uncertainties. Other cautionary statements concerning risks and uncertainties may also appear elsewhere in this Quarterly Report.

Description of Business

SMSC designs and sells a wide range of silicon-based integrated circuits that utilize analog and mixed-signal technologies. The Company's integrated circuits and systems provide a wide variety of signal processing attributes that are incorporated by its globally diverse customers into numerous end products in the Consumer Electronics, Automotive, Mobile PC, Desktop PC and Industrial markets. These products generally provide connectivity, networking, or input/output control solutions for a variety of high-speed communication, computer and related peripheral, consumer electronics, industrial control systems or automotive information applications. The market for these solutions is increasingly diverse, and the Company's technologies are

increasingly used in various combinations and in alternative applications. SMSC is headquartered in Hauppauge, New York with operations in North America, Taiwan, Japan, Korea, Singapore, China and Europe. Engineering design centers are located in Arizona, New York, Texas, Chennai, India and Karlsruhe, Germany. Additional information is available at www.smsc.com.

Acquisitions and Strategic Investments

On August 6, 2009, SMSC made an initial cash investment of $4 million in Symwave, Inc., a leading silicon supplier of system solutions for SuperSpeed USB devices. As part of the relationship, SMSC has committed to an additional $1.3 million investment if required by Symwave and has obtained the right to acquire Symwave under certain conditions. SMSC will be represented on Symwave's Board of Directors by its President and Chief Executive Officer. The objective of this collaboration is to accelerate delivery of USB 3.0 solutions into mobile, consumer and computing segments. The investment in Symwave, Inc. has been accounted for as a cost-basis investment and is included in Other assets (long-term) on the Company's condensed consolidated balance sheet.

On September 8, 2009, the Company completed its acquisition of certain assets of Tallika Corporation and 100% of the outstanding shares of Tallika Technologies Private Limited (collectively "Tallika"), a company with a team of approximately 50 highly skilled engineers located in design centers in Chennai, India and Phoenix, Arizona. This team will bring to SMSC a broad set of capabilities, including software development, in a low cost geography. The Tallika and SMSC teams have previously worked together on various projects including transceiver development, chip design and pre-silicon verification. SMSC paid approximately $3.4 million to purchase Tallika.

Critical Accounting Policies & Estimates

This discussion and analysis of the Company's financial condition and results of operations is based upon the unaudited condensed consolidated financial statements included in this Quarterly Report, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and applicable SEC regulations for preparation of interim financial statements.

The preparation of financial statements in conformity with U.S. GAAP and SEC regulations requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Although management believes that its judgments and estimates are appropriate and reasonable, actual future results may differ from these estimates, and to the extent that such differences are material, future reported operating results may be affected.

The Company believes that the critical accounting policies and estimates listed below are important to the portrayal of the Company's financial condition, results of operations and cash flows, and require critical management judgments and estimates about matters that are inherently uncertain.

• Revenue Recognition

• Inventory Valuation

• Valuation of Long-Lived Assets

• Accounting for and Valuation of Share-Based Payments

• Accounting for Income Taxes and Uncertain Tax Positions

• Legal Contingencies

• Valuation of Long-Term Investments

Further information regarding these policies appears within the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2009, as filed with the SEC on April 28, 2009. During the six-month period ended August 31, 2009, there were no significant changes to any critical accounting policies or to the related estimates and judgments involved in applying those policies.

Results of Operations
Overview

Net revenue, gross profit, operating (loss) income, and net (loss) income for
the three months ended August 31, 2009, May 31, 2009, and August 31, 2008 were
as follows (in thousands):

[[Image Removed]]         [[Image Removed]]      [[Image Removed]]      [[Image Removed]]
                              Three Months           Three Months          Three Months
                                 Ended                  Ended                  Ended
                            August 31, 2009          May 31, 2009         August 31, 2008
Sales and revenues        $        75,075        $        62,479        $          97,196
Gross profit              $        35,543        $        27,799        $          49,667
Operating (loss) income   $       (10,056 )      $       (14,597 )      $          10,050
Net (loss) income         $        (6,534 )      $        (9,196 )      $           8,703

Sales and revenues for the second quarter of fiscal 2010 were $75.1 million, an increase of $12.6 million or 20.2% sequentially over the prior quarter ended May 31, 2009. The strong sales growth was primarily driven by improved consumer and automotive product sales. The Company expects sales and revenues to increase further sequentially in the third quarter of fiscal 2010.

Sales and revenues decreased $22.1 million or 22.8% from sales and revenues of $97.2 million in the second quarter of the prior fiscal year, primarily due to the continuing effects of the global economic downturn in the PC and automotive markets, and a decrease in intellectual property revenues from Intel Corporation of $3.0 million per quarter as payments pursuant to this agreement ceased with receipt of the final payment in the third quarter of fiscal 2009. While demand for our consumer products has increased significantly over the prior quarter, the Company is still experiencing continuing weakness in demand, as compared to prior year levels, particularly in the automotive and industrial markets.

The Company reported a gross profit of $35.5 million, or 47.3% of sales and revenues for the second quarter of fiscal 2010, an increase of $7.7 million or 280 basis points, compared to gross profit of $27.8 million or 44.5% of sales and revenues in the prior quarter ended May 31, 2009, as the Company gained the benefit of increased production and sales levels and significant reductions in supply chain costs. The depressed economic outlook faced by SMSC's suppliers in the fourth quarter of fiscal 2009 allowed SMSC to seek aggressive price reductions, particularly in the wafer and assembly area. Gross profit in the second quarter of fiscal 2010 decreased $14.1 million, as compared to gross profit of $49.7 million, or 51.0% of sales and revenues in the second quarter of the prior fiscal year, primarily due to lower demand, and the reduction in intellectual property revenues as noted above.

An operating loss of $10.1 million was generated in the second quarter of fiscal 2010, as compared to an operating loss of $14.6 million in the prior quarter ended May 31, 2009 and operating income of $10.1 million in the second quarter of the prior year. The decline in operating loss compared to the prior quarter ended May 31, 2009 was due to the increase in revenue and gross profit sequentially over the prior quarter as well as the benefit of cost reduction initiatives we have completed, partially offset by an increase in stock based compensation charges of $3.6 million. The prior quarter also included a settlement charge of $2.1 million in connection with the OPTi, Inc. patent infringement lawsuit against the Company, The significant decline in operating income compared to the second quarter of the prior fiscal year ended August 31, 2008 was primarily attributable to the year over year decrease in product sales volume in the second quarter of fiscal 2010, as well as increase in stock based compensation of $7.1 million (expenses related to stock appreciation rights increased $7.7 million in the quarter due to the increase in the Company's stock price relative to the increase in the second quarter of the prior year) and the reduction in intellectual property revenues of $3.0 million per quarter as noted above.

Net loss in the second quarter of fiscal 2010 was $6.5 million, compared to a net loss of $9.2 million in the prior quarter ended May 31, 2009, and net income of $8.7 million in the second quarter of the prior fiscal year, primarily due to the factors mentioned above, as well as the significant decrease in interest income and other income. Interest income decreased from $1.1 million in the second quarter of fiscal 2009 to $0.3 million in the second quarter of fiscal 2010. This is primarily the result of a decrease in the Company's overall investment in auction rate securities, as well as lower market interest rates as compared to the second quarter of the

prior fiscal year. Other income decreased from $1.0 million in the second quarter of fiscal 2009 to a loss of $0.3 million in the first quarter of fiscal 2010 and a loss of $0.1 million in the second quarter of fiscal 2010. This decrease was primarily due to the significant strengthening of the euro versus the U.S. dollar in the first six months of fiscal 2010, compared to a weakening of the euro versus the U.S. dollar in the first six months of fiscal 2009. The Company took action in the fourth quarter of fiscal 2009 to minimize the impact of such fluctuations in fiscal 2010 going forward, primarily limiting the amount of net U.S. dollar monetary assets held by its European affiliate.

Sales and Revenues

The Company's sales and revenues for the three months ended August 31, 2009 were $75.1 million, compared to sales and revenues of $97.2 million in the three months ended August 31, 2008. The decrease of $22.1 million or 22.8% overall was primarily due to substantial decreases in shipping volumes, particularly in the PC, industrial and automotive markets as a result of the continuing global economic downturn, as well as the reduction in intellectual property revenues from Intel Corporation of $3.0 million per quarter. While demand for our PC, automotive and consumer electronics products has increased over the prior quarter, the Company is still expecting challenging market conditions, especially in the automotive and industrial markets.

The Company's sales and revenues for the six-months ended August 31, 2009 were $137.6 million, compared to sales and revenues of $190.0 million in the six-months ended August 31, 2008. The decrease of $52.4 million or 27.6% overall was primarily due to substantial decreases in shipping volumes, particularly in the PC, industrial and automotive markets as a result of the continuing global economic downturn, as well as the reduction in intellectual property revenues from Intel Corporation of $3.0 million per quarter comparatively.

Costs of Goods Sold

Costs of goods sold include: the purchase cost of finished silicon wafers manufactured by independent foundries (including mask and tooling costs); costs of assembly, packaging and mechanical and electrical testing; manufacturing overhead; quality assurance and other support overhead (including costs of personnel and equipment associated with manufacturing support); royalties paid to developers of intellectual property incorporated into the Company's products; amortization of intangible assets relating to acquired technologies; and adjustments for excess, slow-moving or obsolete inventories.

The Company reported a gross profit of $35.5 million or 47.3% of sales and revenues in the second quarter of fiscal 2010, a decrease of $14.1 million, compared to gross profit of $49.7 million, or 51.0% of sales and revenues in the second quarter of fiscal 2009. The decrease in gross profit as a percentage of sales and revenues in the second quarter of the current fiscal year compared to the second quarter of the prior fiscal year was primarily due to the decrease in production levels in response to lower demand and our inventory reduction initiatives which led to significant unabsorbed manufacturing overhead costs. Additionally, gross profit in the second quarter of the current fiscal year was impacted by a charge to costs of goods sold of $1.7 million for accelerated depreciation on test equipment associated with the transition of test center operations to Taiwan, as well as the decrease in intellectual property revenues of $3.0 million as noted above with a corresponding impact on gross profit.

Gross profit for the six-month period ended August 31, 2009 totaled $63.3 million, or 46.0% of sales and revenues, as compared to $96.8 million, or 51.0% of sales and revenues, in the prior comparable six-month period. The decrease in gross profit as a percentage of sales and revenues in the current fiscal year compared to the prior fiscal year was primarily due to the decrease in production levels in response to lower demand and our inventory reduction initiatives which contributed to significant unabsorbed manufacturing overhead costs. Additionally, gross profit in the current fiscal year was impacted by a charge to costs of goods sold of $1.7 million for accelerated depreciation on test equipment associated with the transition of test center operations to Taiwan, as well as the decrease in intellectual property revenues of $3.0 million per quarter as previously noted.

Research and Development Expenses

Research and development ("R&D") expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, costs related to engineering design tools and

computer hardware, subcontractor costs and device prototyping costs. The Company's R&D activities are performed by highly-skilled and experienced engineers and technicians, and are primarily directed towards the design of new integrated circuits; the development of new software drivers, firmware and design tools and blocks of logic; and investment in new product offerings based on converging technology trends, as well as ongoing cost reductions and performance improvements in existing products.

The Company intends to continue its efforts to develop innovative new products and technologies, and believes that an ongoing commitment to R&D is essential in order to maintain product leadership and compete effectively. Therefore, the Company expects to continue to make significant R&D investments in the future.

Research and Development expenses were $20.1 million, or 26.8% of sales and revenues, for the three months ended August 31, 2009 compared to $18.0 million, or approximately 18.5% of sales and revenues, for the three months ended August 31, 2008. Stock based compensation charges pursuant to SFAS 123R of $2.5 million are included in the current quarterly period as compared to a charge of $0.6 million in the three month period ended August 31, 2008.

R&D expenses were $38.6 million, or 28.0% of sales and revenues, for the six-months ended August 31, 2009 compared to $36.4 million, or approximately 19.1% of sales and revenues, for the six-months ended August 31, 2008. Stock based compensation charges pursuant to SFAS 123R of $4.0 million are included in the current six-month period as compared to a charge of $2.4 million in the six-month period ending August 31, 2008. Increases in costs associated with mask write-offs ($0.4 million) and occupancy costs associated with our new facility in Austin, Texas ($0.6 million), which was occupied in January, 2009 to replace two existing facilities whose leases were due to expire, as well as the increase in stock based compensation charges ($1.6 million) accounted for most of the increase for the period.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses were $24.9 million, or approximately 33.1% of sales and revenues, for the quarter ended August 31, 2009, compared to $21.6 million, or approximately 22.2% of revenues, for the quarter ended August 31, 2008. Stock based compensation charges pursuant to SFAS 123R of $5.9 million are included in the current quarterly period as compared to a charge of $1.3 million in the three month period ended August 31, 2008. The increase in stock based compensation charges was partially offset by a decrease in administrative costs ($0.9 million) and headcount ($0.6 million) in connection with the Company's cost saving initiatives and restructuring plan initiated in the fourth quarter of fiscal 2009.

SG&A expenses were $46.5 million, or approximately 33.8% of sales and revenues, for the six-month period ended August 31, 2009, compared to $45.7 million, or approximately 24.0% of revenues, for the six-month period ended August 31, 2008. Stock based compensation charges pursuant to SFAS 123R of $9.6 million are included in the current six- month period as compared to a charge of $5.1 million in the six-month period ended August 31, 2008. The increase in stock based compensation charges was partially offset by a decrease in administrative costs ($1.7 million) and headcount ($0.3 million) in connection with the Company's cost saving initiatives and restructuring plan initiated in the fourth quarter of fiscal 2009.

Restructuring Charges

In the fourth quarter of fiscal 2009, the Company announced a restructuring plan that included a supplemental voluntary retirement program and involuntary separations that would result in approximately a ten percent reduction in employee headcount and expenses worldwide. This action resulted in a charge of $5.2 million for severance and termination benefits for 88 full-time employees in the fourth quarter of fiscal 2009. An additional $0.2 million was incurred in the first six months of fiscal 2010 relating to this restructuring plan and $0.6 million was incurred as part of an additional restructuring plan initiated in the second quarter of fiscal 2010 in connection with the transition of test center operations to Taiwan.

Settlement Charge

A charge of $2.1 million in settlement of the OPTi, Inc. patent infringement lawsuit against the Company was recognized in the first quarter of fiscal 2010. The settlement was concluded in the second quarter of fiscal 2010 at the amount previously accrued by the Company.

Interest and Other (Expense) Income

The decrease in interest income, from $1.1 million and $2.8 million for the three and six-month period ended August 31, 2008, to $0.3 million and $0.7 million for the three and six-month period ended August 31, 2009, respectively, is primarily the result of a decrease in the Company's overall investment in auction rate securities, as the Company continues to liquidate its positions as opportunities arise in response to market conditions. Funds from liquidated auction rate securities investments as well as funds generated through operating activities are currently being invested in high grade money market accounts, at lower average rates of return.

Interest expenses were nominal for the three month periods ended August 31, 2009 and 2008, respectively. Interest expense was $0.1 million and $0.1 million for the six-month periods ended August 31, 2009 and 2008, respectively.

Other expenses were $0.1 million and $0.4 million for the three-month and six-month periods ended August 31, 2009, respectively, compared to gains of $1.0 million and $0.8 million for the three-month and six-month periods ended August 31, 2008, respectively. The increase in other expense in the first six months of fiscal 2010, which consisted primarily of foreign exchange rate losses on U.S. dollar transactions of SMSC Europe, was due to the significant strengthening of the euro vs. the U.S. dollar in the first six months of fiscal 2010, compared to a weakening of the euro vs. the U.S. dollar in the first six months of fiscal 2009. The Company has taken action in the fourth quarter of fiscal 2009 to minimize the impact of such fluctuations in fiscal 2010 going forward, primarily by limiting the amount of U.S. dollar monetary assets held by its European affiliate.

Provision for Income Taxes

The Company's effective income tax rate reflects statutory federal, state and foreign tax rates, the impact of certain permanent differences between the book and tax treatment of certain expenses and the impact of tax-exempt income.

The benefit for income taxes for the three and six month periods ended August 31, 2009, was $3.4 million and $8.7 million, or an effective income tax rate of 34.5% against $10.0 million losses and an effective income tax rate of 35.7% on $24.5 million of losses before income taxes, respectively. The tax provision for the six month period ended August 31, 2009 included the impact of $0.1 million from tax exempt income, a $0.2 million increase in reserves for uncertain tax positions and approximately $0.1 million of accrued interest and penalties.

The provision for income taxes for the three and six month periods ended August 31, 2008 was $3.4 million and $5.2 million, respectively, for an effective income tax rate of 28.1% against $12.1 million of income before income taxes and an effective income tax rate of 28.1% on $18.3 million of income before income taxes respectively. The tax provision for the six month period ended August 31, 2008 included the impact of $0.7 million from tax exempt income, a $0.4 million decrease in reserves for uncertain tax positions in connection with the completion of certain income tax audits and the related reversal of approximately $0.3 million of interest and penalties accrued in respect of tax exposures attributable to prior periods.

Business Outlook

The Company believes that current macroeconomic conditions and corresponding weakness in semiconductor demand remain challenging, however there has been continued improvement since the end of the previous fiscal year. The Company currently anticipates third quarter fiscal 2010 revenue to grow sequentially and typical seasonality in the fourth quarter of fiscal 2010.

Liquidity & Capital Resources

The Company currently finances its operations through a combination of existing cash and cash generated by operations. The Company had no bank debt during fiscal 2010 or 2009.

The Company's cash, cash equivalents, short-term and long-term investments (including investments in auction rate securities with maturities in excess of one year) were $175.3 million at August 31, 2009, compared to $166.4 million at February 28, 2009. Positive cash flows from operations, proceeds from the issuance

of common stock in connection with the exercise of stock options and a decrease in impairment reserves, partially offset by strategic equity investments and capital expenditures in fiscal 2010, contributed to this increase.

Operating activities generated $10.1 million of cash in the first six months of fiscal 2010, compared to $17.6 million of cash generated in the first six months of fiscal 2009. The decrease in operating cash flows reflects the impact of a significant decrease in revenues and operating profits in the first six months . . .