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 27, 2009 (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 revenues for the second quarter of fiscal 2010, the Company's sales to Taiwan and China, plans to remediate the material weaknesses in our internal control over financial reporting, the Company's total investment in the Jinan Hi-Tech Industries Development Zone, the continuation of a high level of turns orders, higher or lower levels of inventory, future gross profit and gross margin; the plans and objectives of management for future operations; the Company's tax rate; currency fluctuations; 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
                                                            September 26,          September 27,
                                                                 2009                  2008

Net revenues                                                          100.0 %               100.0 %
Cost of revenues                                                       68.0 %                63.5 %
Gross profit                                                           32.0 %                36.5 %
Operating expenses:
Research and development                                               12.3 %                 9.6 %
Selling, general and administrative                                    20.7 %                15.8 %
Total                                                                  33.0 %                25.4 %

Income (loss) from operations                                          (1.0 )%               11.1 %
Interest and other income                                               5.0 %                 2.5 %
Other-than-temporary decline in value of investment                     0.0 %                (1.0 )%
Income before income taxes                                              4.0 %                12.6 %

Income taxes                                                            1.5 %                 4.4 %
Income from consolidated companies                                      2.5 %                 8.2 %
Equity in net income of unconsolidated affiliates                       1.6 %                 0.3 %
Net income                                                              4.1 %                 8.5 %
Net income attributable to the noncontrolling interests                 0.0 %                (0.1 )%

Net income attributable to Pericom shareholders                         4.1 %                 8.4 %

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
                                                      September 26,       September 27,          %
(In thousands)                                            2009                2008            Change

Net revenues                                         $        32,952     $        43,798         -24.8 %
% of net sales accounted for by top 5 direct
customers (1)                                                   56.0 %              49.5 %
Number of direct customers that each account for
more than 10% of net sales                                         3                   2
% of net sales accounted for by top 5 end
customers (2)                                                   34.4 %              29.5 %
Number of end customers that each account for more
than 10% of net sales                                              1                   1

(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 products 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. Over the past two quarters we have experienced a sharp decline in revenue, which is consistent with declining end-market demand and inventory reduction initiatives across the supply chain. Net revenue decreased $10.8 million or 24.8% in the first quarter of fiscal 2010 versus the first quarter of fiscal 2009 primarily as the result of:

· a decrease of $6.3 million or 34.8% in sales of our FCP products to $11.9 million and

· a $4.5 million decline in sales of IC products to $21.1 million, for a 17.6% sales decrease.

The following table sets forth net revenues by country as a percentage of total net revenues for the three months ended September 26, 2009 and September 27, 2008:

                                                Three Months Ended
                                        September 26,         September 27,
                                            2009                  2008

         Taiwan                                     54 %                  42 %
         China (including Hong Kong)                27 %                  35 %
         United States                               7 %                   6 %
         Other (less than 10% each)                 12 %                  17 %
         Total net revenues                        100 %                 100 %

For the three months ended September 26, 2009 as compared with the same period of the prior year, the percentage of our net revenues derived from sales to Taiwan increased as a result of continued demand for technological devices and an increasing concentration of contract manufacturing there. We expect our future sales to continue to grow, as a percentage of net revenues, in Taiwan and China in future periods. As the migration of assembly operations to Asia continues, we expect our net revenues from sales in North America to continue a modest decline.

We have announced our expectation that fiscal second quarter revenues will show improvement from the amount reported for the fiscal first quarter based in part on improved bookings and backlog at the beginning of the 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.


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                                                               Three Months Ended
                                                September 26,       September 27,           %
(In thousands)                                      2009                2008             Change

Net revenues                                   $        32,952     $        43,798           -24.8 %
Gross profit                                            10,536              15,993           -34.1 %
Gross profit as a percentage of net revenues
(gross margin)                                            32.0 %              36.5 %

The decrease in gross profit for the three months ended September 27, 2009 as compared with the same period of the prior year was primarily due to significant sales declines in both IC and FCP products. To a lesser extent margin decreases also contributed, and reflect both a competitive marketplace as well as somewhat higher production costs due to lower volumes and higher overhead absorption rates.

Specifically, the decrease in gross profit in the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009 of $5.5 million is the result of:

· decreased sales, which led to $3.5 million of decreased gross profit, and

· margin declines, which led to $2.0 million of decreased 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 months ended September 26, 2009 and September 27, 2008, gross profit and gross margin benefited as a result of the sale of inventory of $63,000 that we had previously identified as excess and written down to zero value.

Research and Development("R&D")

                                              Three Months Ended
                                       September 26,       September 27,         %
(In thousands)                             2009                2008           Change

Net revenues                          $        32,952     $        43,798       -24.8 %
Research and development                        4,046               4,221        -4.1 %

R&D as a percentage of net revenues              12.3 %               9.6 %

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 $175,000 expense reduction for the three month period ended September 26, 2009 as compared to the same period of the prior year reflects the restructuring program completed last year and cost saving efforts, with reductions of $256,000 in salaries and bonus, partially offset by a $98,000 increase in fabrication and assembly expenses.

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
                                        September 26,       September 27,         %
(In thousands)                              2009                2008           Change

Net revenues                           $        32,952     $        43,798       -24.8 %
Selling, general and administrative              6,828               6,901        -1.1 %

SG&A as a percentage of net revenues              20.7 %              15.8 %

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 $73,000 for the three month period ended September 26, 2009 as compared to the same period of the prior year is attributable primarily to savings related to reduced sales volumes, with reduced expenditures for compensation ($716,000), commissions ($166,000), travel and entertainment ($136,000), and samples and postage ($106,000), with the savings nearly offset by increased expenditures of $1.2 million for legal and accounting fees in connection with the fiscal 2009 year-end accounting review, quarterly restatements and delayed 10-K filing.

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
(In thousands)               September 26,        September 27,         %
                                 2009                 2008            Change

Interest income, net        $         1,762      $           917         92.1 %
Exchange gain (loss)                   (118 )                230       -151.3 %
Other income (expense)                   (1 )                (41 )      -97.6 %

Interest and other income   $         1,643      $         1,106         48.6 %

The $537,000 increase in interest and other income for the three month period ended September 26, 2009 as compared with the same period of the prior year was primarily the result of $946,000 of realized gains on sales of short-term investments this year as compared with a small realized loss last year, partially offset by the $348,000 adverse change due to exchange rates, which went from causing a gain last year to a loss this year as the US dollar weakened against the Taiwan dollar.

Other-Than-Temporary Decline in Value of Investment

Other-than-temporary decline in value of investment decreased to zero for the three month period ended September 26, 2009 as compared with $458,000 in the same period of the prior year. The prior year decline was primarily caused by a $414,000 loss in value of an investment security held in our short-term investment portfolio, which resulted from the issuing company filing for Chapter 11 bankruptcy protection. The Company's investment guidelines require a diversified portfolio of investment grade instruments, and it is unlikely that any future impairments on individual securities would be material to the Company's liquidity and financial position.

Income Tax Expense

                                   Three Months Ended
                      September 26,       September 27,         %
(In thousands)            2009                2008           Change

Pre-tax income       $         1,305     $         5,519       -76.4 %
Income tax                       475               1,930       -75.4 %

Effective tax rate                36 %                35 %

The decrease in income tax expense for the three months ended September 29, 2008 over the same period of the prior year is due to the significant decrease in income before income taxes. The effective tax rate of 36% for the quarter ended September 26, 2009 is modestly higher than the rate in the same period last year primarily as a result of the reduced level of pretax income and the earnings mix between tax jurisdictions.

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

Equity in Net Income of Unconsolidated Affiliates

                                                            September 26,        June 27,
(in thousands)                                                  2009               2009

Pericom Technology, Inc.                                   $         9,274     $      8,806
Jiyuan Crystal Photoelectric Frequency Technology Ltd.               2,045            2,020
Total                                                      $        11,319     $     10,826

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 income of $468,000 for the three months ended September 26, 2009, as compared with income of $60,000 for the same period 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 month period ended September 26, 2009, the Company's allocated portion of JCP's results was income of $59,000 as compared with income of $57,000 for the same period of the prior year.

Liquidity and Capital Resources

As of September 26, 2009, the Company's principal sources of liquidity included cash, cash equivalents and short-term and long-term investments of approximately $127.2 million as compared with $124.6 million on June 27, 2009.

The Company's investments in debt securities include 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 or mortgages. 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 September 26, 2009, unrealized gains on marketable securities net of taxes were $1.2 million. 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 September 26, 2009 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 September 26, 2009.

As of September 26, 2009, $43.5 million was classified as cash and cash equivalents compared with $37.3 million as of June 27, 2009. 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 three month period ended September 26, 2009, the Company spent approximately $2.9 million on property and equipment compared to $2.5 million for the three month period ended September 27, 2008. The Company generated approximately $1.6 million of interest and other income, net for the three month period ended September 26, 2009, as compared with $1.1 million of interest and other income, net for the three month period ended September 27, 2008. 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 $3.7 million for the three months ended September 26, 2009 was primarily the result of net income of $1.4 million, non-cash expenses of $1.9 million in depreciation and amortization, $930,000 of share-based compensation expense and $465,000 of deferred taxes, partially offset by a $946,000 gain on sale of investments in marketable securities and $527,000 equity in net income of unconsolidated affiliates. Additional contributions to cash included decreases of $1.4 million in accounts receivable, $473,000 in inventory and $756,000 in prepaid expenses and other current assets, and an increase of $740,000 in accounts payable. Partially offsetting these was a $3.1 million decrease in other current liabilities. The Company's net cash provided by operating activities was $3.7 million in the three months ended September 27, 2008.

Generally, as sales levels fall, the Company expects accounts receivable and accounts payable, and to a lesser extent inventories, to decrease. Inventories react more slowly because we outsource much of our production, and reduced demand takes time to be reflected back through our supply chain. Further, there will be routine fluctuations in these accounts from period to period that may be significant in amount.

The Company's cash provided by investing activities of $2.1 million for the three months ended September 26, 2009 was primarily due to sales and maturities of short-term investments exceeding purchases of short term investments by approximately $5.0 million, partially offset by the Company's additions to property and equipment of approximately $2.9 million. The Company's cash used in investing activities was $3.5 million for the three months ended September 27, 2008.

The Company's cash provided by financing activities for the three months ended September 26, 2009 of $282,000 was the result of proceeds generated from the issuance of common stock in the Company's employee stock plans. The Company used $2.2 million of cash in financing activities for the three months ended September 27, 2008.

A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we may evaluate potential acquisitions of such businesses, products or technologies.

Our long-term future capital requirements will depend on many factors, including our level of revenues, the timing and extent of spending to support our product development efforts, the expansion of sales and marketing efforts, the timing of our introductions of new products, the costs to ensure access to adequate manufacturing capacity, and the continuing market acceptance of our products. We could be required, or could elect, to seek additional funding through public or private equity or debt financing and additional funds may not be available on terms acceptable to us or at all. We believe our current cash balances and cash flows generated by operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures.

Contractual Obligations and Commitments

The Company's contractual obligations and commitments at September 26, 2009 are
as follows:


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