Gross margin declined to 31.1% in the three months ended September 30, 2009, compared to 39.5% in the three months ended September 30, 2008. Gross margin declined to 32.7% in the nine months ended September 30, 2009, compared to 37.1% in the nine months ended September 30, 2008. Gross margin in the three and nine months ended September 30, 2009 was negatively impacted by higher manufacturing costs resulting primarily from reduced factory utilization at our wafer fabrication facilities and test operations during the first half of 2009. Our internal operations have significant fixed costs that cannot be reduced as quickly as our shipment levels, which have declined over the last 12 months. In addition, gross margins have been unfavorably impacted by inventory write downs and competitive pricing pressures during the nine months ended September 30, 2009. In response to increased demand, we began to increase production levels towards the end of the third quarter, and expect increased factory loading in future quarters to lower our unit costs, thereby improving gross margins. We expect better factory utilization, along with cost reduction initiatives and improving product mix from new products to result in higher gross margins in the fourth quarter of 2009 compared to gross margin levels experienced to date in 2009.
We continue to take significant actions to improve operational efficiencies and further reduce costs. In the three months ended September 30, 2009 and 2008, we incurred $1 million and $27 million, respectively, and in the nine months ended September 30, 2009 and 2008, we incurred $6 million and $63 million, respectively, in restructuring charges related to headcount reductions and facility closure costs primarily related to our manufacturing operations.
Provision for income taxes totaled $0.4 million in the three months ended September 30, 2009, compared to a benefit from income taxes of $4 million in the three months ended September 30, 2008. Benefit from income taxes totaled $37 million in the nine months ended September 30, 2009, compared to a provision for income taxes of $3 million in the nine months ended September 30, 2008. The tax benefits recorded in the three and nine months ended September 30, 2009 are primarily related to foreign research and development ("R&D") tax credits as well as reduced taxable income in certain foreign jurisdictions during 2009.
Cash provided by operating activities totaled $67 million in the nine months ended September 30, 2009, compared to cash provided of $77 million in the nine months ended September 30, 2008. At September 30, 2009, our cash, cash equivalents and short-term investments totaled $446 million, compared to $441 million at December 31, 2008. We reduced our total debt to $97 million at September 30, 2009 from $145 million at December 31, 2008. Working capital increased to $577 million at September 30, 2009 from $531 million at December 31, 2008.
On March 6, 2008, we acquired Quantum Research Group Ltd. ("Quantum") for an initial purchase price of $96 million, subsequently increased to $105 million due to contingent consideration earned. The results of operations of Quantum are included in our Microcontroller segment from the date of acquisition.
In the first quarter of 2009, we announced our intention to sell our ASIC business and related assets. We have classified the assets and liabilities of the ASIC business unit, including the fabrication facility in Rousset, France, as held for sale as of September 30, 2009. The assets and liabilities held for sale are carried on the condensed consolidated balance sheet at September 30, 2009, at their carrying amount, which is less than their fair value, less cost to sell. The fair value of the disposal group was calculated based on various metrics including estimated future discounted cash flows and valuation measures from other comparable transactions. As management expects to sell the disposal group at an amount, net of selling costs, that is greater than its carrying value, no impairment charge was recorded during the quarter. We are actively marketing these assets, but have not completed a sale as of the date of this filing. Given the current uncertainties in the global economy, it is possible that we may ultimately sell the disposal group for less than we currently estimate and therefore may need to record a charge for any reduction in the future value of these assets in future periods.

RESULTS OF OPERATIONS

                                         Three Months Ended                                          Nine Months Ended
                          September 30, 2009            September 30, 2008            September 30, 2009            September 30, 2008
                                                       (in thousands, except percentage of net revenues)
Net revenues           $   317,730        100.0 %    $   400,008        100.0 %    $   873,765        100.0 %    $ 1,232,153        100.0 %
Gross profit                98,739         31.1 %        158,009         39.5 %        285,968         32.7 %        457,589         37.1 %
Research and
development                 51,460         16.2 %         63,856         16.0 %        156,203         17.9 %        198,451         16.1 %
Selling, general
and administrative          56,974         17.9 %         63,898         16.0 %        162,774         18.6 %        196,033         15.9 %
Acquisition-related
charges                      3,604          1.1 %          6,690          1.7 %         12,745          1.5 %         17,110          1.4 %
Charges for grant
repayments                     264          0.1 %            291          0.1 %          1,278          0.1 %            464          0.0 %
Restructuring
charges                      1,180          0.4 %         26,625          6.7 %          6,002          0.7 %         63,209          5.1 %
Asset impairment
charges                          -          0.0 %          7,969          2.0 %              -          0.0 %          7,969          0.6 %
Gain on sale of
assets                           -          0.0 %              -          0.0 %           (164 )        0.0 %        (29,948 )       -2.4 %

(Loss) income from
operations             $   (14,743 )       -4.6 %    $   (11,320 )       -2.8 %    $   (52,870 )       -6.1 %    $     4,301          0.3 %

Net Revenues
Net revenues decreased to $318 million in the three months ended September 30, 2009 from $400 million in the three months ended September 30, 2008. Net revenues decreased to $874 million in the nine months ended September 30, 2009 from $1,232 million in the nine months ended September 30, 2008. Net revenues in the three and nine months ended September 30, 2009 were negatively impacted by reduced demand resulting from the global economic weakness experienced in all electronic markets since the fourth quarter of 2008. In addition, reduced inventory levels held by distributors also resulted in reduced shipments levels compared to prior periods. All of our business units experienced reduced demand and resulting net revenues in the three and nine months ended September 30, 2009, compared to the three and nine months ended September 30, 2008, with net revenues declining 21% and 29%, respectively.
Average exchange rates utilized to translate foreign currency revenues and expenses were 1.41 and 1.54 Euro to the dollar in the three months ended September 30, 2009 and 2008 and 1.36 and 1.52 Euro to the dollar in the nine months ended September 30, 2009 and 2008, respectively. During the three and nine months ended September 30, 2009, changes in foreign exchange rates had an unfavorable impact on net revenues. Had average exchange rates remained the same during the three and nine months ended September 30, 2009 as the average exchange rates in effect for the three and nine months ended September 30, 2008, our reported net revenues for the three and nine months ended September 30, 2009 would have been $8 million and $25 million higher, respectively. Net Revenues - By Operating Segment
Our net revenues by segment in the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008 are summarized as follows:

                                  Three Months Ended
                           September 30,       September 30,
                               2009                2008            Change       % Change
                                      (in thousands, except for percentages)
     Microcontroller      $       120,042     $       129,755     $  (9,713 )          -7 %
     Nonvolatile Memory            78,796              91,760       (12,964 )         -14 %
     RF and Automotive             38,525              63,836       (25,311 )         -40 %
     ASIC                          80,367             114,657       (34,290 )         -30 %

     Total net revenues   $       317,730     $       400,008     $ (82,278 )         -21 %

                                  Nine Months Ended
                          September 30,       September 30,
                              2009                2008             Change       % Change
                                      (in thousands, except for percentages)
    Microcontroller      $       318,702     $       403,124     $  (84,422 )         -21 %
    Nonvolatile Memory           211,961             274,448        (62,487 )         -23 %
    RF and Automotive            106,497             204,371        (97,874 )         -48 %
    ASIC                         236,605             350,210       (113,605 )         -32 %

    Total net revenues   $       873,765     $     1,232,153     $ (358,388 )         -29 %

Microcontroller
Microcontroller segment net revenues decreased by 7% or $10 million to $120 million in the three months ended September 30, 2009, compared to $130 million in the three months ended September 30, 2008. Microcontroller segment net revenues decreased by 21% or $84 million to $319 million in the nine months ended September 30, 2009, compared to $403 million in the nine months ended September 30, 2008. The decrease in net revenues was primarily related to reduced demand from customers in Asia as we experienced lower shipments for AVR products to the handset and consumer markets. Revenue for Quantum products is included within the Microcontroller operating segment. Nonvolatile Memory
Nonvolatile Memory segment revenues decreased by 14% or $13 million to $79 million in the three months ended September 30, 2009, compared to $92 million in the three months ended September 30, 2008. Nonvolatile Memory segment revenues decreased by 23% or $62 million to $212 million in the nine months ended September 30, 2009, compared to $274 million in the nine months ended September 30, 2008. The decrease in net revenues was primarily related to reduced demand from customers in Asia for Serial EEPROM and Serial Flash memory products as well as further price erosion in certain competitive commodity segments. Markets for our Nonvolatile Memory products are historically more competitive than other markets we sell to, and as a result, our memory products are subject to greater declines in average selling prices than products in our other segments.
RF and Automotive
RF and Automotive segment revenues decreased by 40% or $25 million to $39 million in the three months ended September 30, 2009, compared to $64 million in the three months ended September 30, 2008. RF and Automotive segment revenues decreased by 48% or $98 million to $106 million in the nine months ended September 30, 2009, compared to $204 million in the nine months ended September 30, 2008. The decrease in net revenues was primarily related to the significant decline in automotive markets, with European automotive markets having the most impact to our shipments. In addition, net revenues decreased $6 million and $25 million as a result of exiting the CDMA foundry business in the three and nine months ended September 30, 2009, respectively. Other RFA revenues decreased $19 million and $73 million in the three and nine months ended September 30, 2009, respectively, as a result of lower demand and increased pricing pressures in GPS and DVD customer end-markets.
ASIC
ASIC segment net revenues decreased by 30% or $35 million to $80 million in the three months ended September 30, 2009, compared to $115 million in the three months ended September 30, 2008. ASIC segment net revenues decreased by 32% or $113 million to $237 million in the nine months ended September 30, 2009, compared to $350 million in the nine months ended September 30, 2008. ASIC segment net revenues decreased primarily due to reduced smart card shipments to European telecom and consumer markets, offset in part by higher shipments to banking and pay TV end markets.
Net Revenues - By Geographic Area
Our net revenues by geographic areas in the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008 are summarized as follows (revenues are attributed to countries based on delivery locations):

                                  Three Months Ended
                           September 30,       September 30,
                               2009                2008            Change       % Change
                                      (in thousands, except for percentages)
     United States        $        57,438     $        53,146     $   4,292             8 %
     Europe                        93,076             153,719       (60,643 )         -39 %
     Asia                         162,874             187,567       (24,693 )         -13 %
     Other*                         4,342               5,576        (1,234 )         -22 %

     Total net revenues   $       317,730     $       400,008     $ (82,278 )         -21 %




                                  Nine Months Ended
                          September 30,       September 30,
                              2009                2008             Change       % Change
                                      (in thousands, except for percentages)
    United States        $       155,856     $       170,924     $  (15,068 )          -9 %
    Europe                       269,518             456,676       (187,158 )         -41 %
    Asia                         435,809             587,087       (151,278 )         -26 %
    Other*                        12,582              17,466         (4,884 )         -28 %

    Total net revenues   $       873,765     $     1,232,153     $ (358,388 )         -29 %

* Primarily includes South Africa and Central and South America

Net revenues outside the United States accounted for 82% of our net revenues in each of the three and nine months ended September 30, 2009, compared to 87% and 86% in the three and nine months ended September 30, 2008.
Our net revenues in Asia decreased by $25 million, or 13% in the three months ended September 30, 2009, compared to the three months ended September 30, 2008, and decreased by $151 million, or 26% in the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008. The decrease in net revenues for the region was primarily due to lower shipments of memory and Microcontroller products as a result of the overall economic slowdown, as well as reduced demand resulting from lower OEM and distribution inventory levels.
Our net revenues in Europe decreased by $61 million, or 39%, in the three months ended September 30, 2009, compared to the three months ended September 30, 2008, and decreased by $187 million, or 41% in the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008. The decrease in net revenues for the region was primarily due to reduced shipments to Smartcard telecom and consumer markets as well as lower demand and increased pricing pressures in GPS and DVD markets.
Our net revenues in the United States increased by $4 million, or 8%, in the three months ended September 30, 2009, compared to the three months ended September 30, 2008, and decreased by $15 million, or 9% in the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008. The increase in net revenues for the three months ended September 30, 2009 was due to shipments to new customers for energy metering and consumer product applications. The decrease in revenues in the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008 for the region was primarily a result of the overall global economic slowdown, as well as reduced shipments to Microcontroller customers.
While net revenues in Asia declined in the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008, we expect that Asia net revenues will grow more rapidly than other regions in the future. Net revenues in Asia may be impacted in the future as we refine our distribution strategy and optimize our distributor base in this region. It may take time for us to identify financially viable distributors and help them develop high quality support services. There can be no assurances that we will be able to manage this optimization process in an efficient and timely manner.

Effective July 1, 2008, we entered into revised agreements with certain European distributors that allow additional rights, including future price concessions at the time of resale, price protection, and the right to return products upon termination of the distribution agreement. As a result of uncertainties over finalization of pricing for shipments to these distributors, revenues and related costs are deferred until the products are sold by the distributors to their end customers. We consider that the sale prices are not "fixed or determinable" at the time of shipment to these distributors. Revenues and Costs - Impact from Changes to Foreign Exchange Rates Changes in foreign exchange rates have had a significant impact on our net revenues and operating costs. Net revenues denominated in foreign currencies, were 24% and 19% of our total net revenues in the three months ended September 30, 2009 and 2008, respectively, and 24% and 23% of our total net revenues in the nine months ended September 30, 2009 and 2008, respectively. Costs denominated in foreign currencies were approximately 36% and 45% of our total costs in the three months ended September 30, 2009 and 2008, respectively, and 39% and 48% in the nine months ended September 30, 2009 and 2008, respectively.
Net revenues denominated in Euro were 23% and 18% of our total net revenues in the three months ended September 30, 2009 and 2008, respectively, and net revenues denominated in Euro were 23% and 22% of our total net revenues in the nine months ended September 30, 2009 and 2008, respectively. Costs denominated in Euro were 32% and 40% of our total costs in the three months ended September 30, 2009 and 2008, respectively, and 35% and 43% in the nine months ended September 30, 2009 and 2008, respectively. Net revenues included 53 million Euro in the three months ended September 30, 2009, compared to 46 million Euro in the three months ended September 30, 2008 and included 151 million Euro in the nine months ended September 30, 2009, compared to 169 million Euro in the nine months ended September 30, 2008. Operating expenses in Euro decreased to approximately 74 million Euro in the three months ended September 30, 2009, compared to 96 million Euro in operating expenses in the three months ended September 30, 2008 and decreased to 235 million Euro in the nine months ended September 30, 2009, compared to 328 million Euro in the nine months ended September 30, 2008. Operating expenses in Euro declined due to reduction of European manufacturing activities as well as reduced depreciation expense as a result of classifying the ASIC business as held-for-sale in the first quarter of 2009.
Average exchange rates utilized to translate foreign currency revenues and expenses in were 1.41 and 1.54 Euro to the dollar in the three months ended September 30, 2009 and 2008, respectively. Average exchange rates utilized to translate foreign currency revenues and expenses were 1.36 and 1.52 Euro to the dollar in the nine months ended September 30, 2009 and 2008, respectively.
During the three and nine months ended September 30, 2009, changes in foreign exchange rates had an unfavorable impact on net revenue but a favorable impact on operating costs and loss from operations. Had average exchange rates remained the same in the three and nine months ended September 30, 2009 as the average exchange rates in effect in the three and nine months ended September 30, 2008, our reported revenues in the three and nine months ended September 30, 2009, would have been $8 million and $25 million higher. However, as discussed above, our foreign currency expenses exceed foreign currency revenues. Had average exchange rates in the three and nine months ended September 30, 2009 remained the same as the average exchange rates in the three and nine months ended September 30, 2008, our operating expenses would have been $12 million higher (relating to cost of revenues of $6 million; research and development expenses of $4 million; and selling, general and administrative expenses of $2 million) and $49 million higher (relating to cost of revenues of $26 million; research and development expenses of $15 million; and selling, general and administrative expenses of $8 million), respectively. The net effect resulted in a decrease to loss from operations of $4 million and $24 million in the three and nine months ended September 30, 2009, respectively, as a result of favorable exchange rates when compared to the same periods in the prior year. Cost of Revenues and Gross Margin
Gross margin declined to 31.1% in the three months ended September 30, 2009, compared to 39.5% in the three months ended September 30, 2008. Gross margin declined to 32.7% in the nine months ended September 30, 2009, compared to 37.1% in the nine months ended September 30, 2008. Gross margin in the three and nine months ended September 30, 2009 was negatively impacted by higher manufacturing costs resulting primarily from reduced factory utilization at our wafer fabrication facilities and test operations during the first half of 2009. Our internal operations have significant fixed costs that cannot be reduced as quickly as our shipment levels, which have declined over the last 12 months. In addition, gross margins have been unfavorably impacted by inventory write downs and competitive pricing pressures during the nine months ended September 30, . . .