OVERVIEW
We are a leading designer, developer and manufacturer of a wide range of semiconductor products and intellectual property (IP) products. Our diversified product portfolio includes our proprietary AVR microcontrollers, security and smart card integrated circuits, and a diverse range of advanced logic, mixed-signal, nonvolatile memory and radio frequency devices. Leveraging our broad intellectual property portfolio, we are able to provide our customers with complete system solutions. Our solutions target a wide range of applications in the communications, computing, consumer electronics, storage, security, automotive, military and aerospace markets, and are used in products such as mobile handsets, automotive electronics, GPS systems and batteries.
We design, develop, manufacture and sell our products. We develop process technologies to ensure our products provide the maximum possible performance. During the three and six months ended June 30, 2008, we manufactured approximately 92% of our products in our own wafer fabrication facilities.
Our operating segments consist of: (1) application specific integrated circuits (ASICs); (2) microcontroller products (Microcontroller);
(3) nonvolatile memory products (Nonvolatile Memory); and (4) radio frequency and automotive products (RF and Automotive). On March 6, 2008, we acquired Quantum Research Group Ltd. ("Quantum") for $96 million. The results of operations of Quantum acquired are included in our Microcontroller segment. Net revenues increased by 4% to $421 million in the three months ended June 30, 2008, compared to $404 million in the three months ended June 30, 2007. Net revenues increased by 5% to $832 million in the six months ended June 30, 2008, compared to $796 million in the six months ended June 30, 2007. These increases were a result of higher shipments in our Microcontroller segment in the three and six months ended June 30, 2008, primarily driven by growth of our AVR and ARM products, which were partially offset by decreases in net revenues in the RF and Automotive segment in the three and six months ended June 30, 2008 which were primarily related to reduced shipment quantities for BiCMOS foundry products related to communication chipsets for code-division multiple access ("CDMA") phones. Gross margin improved to 36.5% in the three months ended June 30, 2008, compared to 35.0% in the three months ended June 30, 2007. Gross margin improved to 36.0% in the six months ended June 30, 2008 compared to 35.4% in the six months ended June 30, 2007. These improvements were primarily a result of higher factory utilization levels at our Colorado Springs and Rousset, France wafer fabs following closure of our North Tyneside, UK facility and improved mix of higher margin core products, partially offset by unfavorable foreign exchange impact of manufacturing costs in Euros when translated to U.S. dollars. Charges related to restructuring, acquisition-related and grant repayment and loss (gain) on sale of assets totaled approximately $16 million and $17 million in the three and six months ended June 30, 2008, respectively, compared to credits of $3 million and $1 million in the three and six months ended June 30, 2007, respectively. During the second quarter of 2008, costs related to the Quantum acquisition totaled $7 million, and exit-related costs to complete the closure of our North Tyneside facility totaled $6 million. We generated income from operations of $0.2 million in the three months ended June 30, 2008, compared to $7 million in the three months ended June 30, 2007. Income from operations totaled $16 million in the six months ended June 30, 2008, compared to $20 million in the six months ended June 30, 2007. Cash provided by operating activities totaled approximately $10 million in the six months ended June 30, 2008, compared to cash provided by operating activities of $61 million in the six months ended June 30, 2007. At June 30, 2008, our cash, cash equivalents and short-term investments totaled $376 million, down from approximately $430 million at December 31, 2007, primarily due to approximately $93 million invested in the Quantum acquisition and payments of $26 million for fixed assets during the six months ended June 30, 2008. Our total indebtedness decreased to approximately $152 million at June 30, 2008 from $163 million at December 31, 2007. We are continuing to evaluate ways to safeguard our ability to compete in the market. In this context, we are commencing a consultation procedure with the works councils in France in relation to potential redundancies in our operations at Rousset, France and Nantes, France. We are also continually reviewing potential changes in our business and asset portfolio throughout our worldwide operations, including those located in Europe in order to enhance our overall competiveness and viability.
Conversion of Distributors in the Quarter Ending September 30, 2008

In the six months ended June 30, 2008, our sales agreements with independent distributors in Europe were accounted for using a "sell-in" revenue recognition model. Sales to these distributors were made under arrangements which did not provide these distributors with allowances such as price protection or rights of return and pricing was fixed at the time of shipment. As such, revenues were recognized upon shipment.
In June 2008, we changed the terms of certain European distributor agreements to allow for price protection and stock rotation rights relating to shipments to distributors after July 1, 2008. In addition, we changed our pricing on certain products to follow a "ship-and-debit" model, whereby pricing credits are finalized upon shipment by the distributor to the end customer. Given the uncertainties over finalization of pricing for shipments to these distributors, starting from July 1, 2008, revenues and costs will be deferred until the products are sold by the distributors to the end customers. We consider that the sale prices are not "fixed or determinable" upon shipment to these distributors.
The objective of this conversion is to enable us to better manage end-customer pricing, track design registrations, and monitor distribution inventory levels. We expect this conversion to result in improved operating results for us and our distribution partners. We estimate that the revenue impact of this one-time event will be to lower revenue in the range of approximately $28 million to $34 million in the three months ending September 30, 2008.

RESULTS OF OPERATIONS

                                                Three Months Ended                                                    Six Months Ended
                               June 30, 2008                      June 30, 2007                         June 30, 2008                    June 30, 2007
                                                                  (in thousands, except percentage of net revenues)
Net revenues              $ 420,908         100.0 %     $      404,247              100.0 %      $      832,145         100.0 %     $ 795,560         100.0 %
Gross profit                153,526          36.5 %            141,642               35.0 %             299,580          36.0 %       281,579          35.4 %
Research and
development expenses         68,218          16.2 %             69,266               17.1 %             134,595          16.2 %       136,565          17.2 %
Selling, general and
administrative
expenses                     68,573          16.3 %             67,881               16.8 %             132,135          15.9 %       125,940          15.8 %
Acquisition-related
charges                       6,709           1.6 %                  -                  -                10,420           1.3 %             -             -
Charges for grant
repayments                      292           0.1 %                  -                  -                   173           0.0 %             -             -
Restructuring charges
(credits)                     8,676           2.1 %             (2,640 )             -0.7 %              36,584           4.4 %          (858 )        -0.1 %
Loss (gain) on sale
of assets                       810           0.2 %                  -                  -               (29,948 )        -3.6 %             -             -

Income from
operations                $     248           0.1 %     $        7,135                1.8 %      $       15,621           1.9 %     $  19,932           2.5 %

Net Revenues
Net revenues increased by 4% to $421 million in the three months ended June 30, 2008, compared to $404 million in the three months ended June 30, 2007. Net revenues increased by 5% to $832 million in the six months ended June 30, 2008, compared to $796 million in the six months ended June 30, 2007. These increases were a result of increased shipments in our Microcontroller segment in the three and six months ended June 30, 2008, primarily driven by growth of our AVR and ARM products, which were partially offset by decreases in net revenues in the RF and Automotive segment in the three and six months ended June 30, 2008 , which were primarily related to reduced shipment quantities for BiCMOS foundry products related to communication chipsets for CDMA phones. Net Revenues - By Operating Segment
Our net revenues by segment in the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007 are summarized as follows:

                                  Three Months Ended
                           June 30, 2008       June 30, 2007       Change       % Change
                                      (in thousands, except for percentages)
     ASIC                 $       120,514     $       124,518     $  (4,004 )          -3 %
     Microcontroller              142,709     $       110,619        32,090            29 %
     Nonvolatile Memory            87,695     $        89,112        (1,417 )          -2 %
     RF and Automotive             69,990     $        79,998       (10,008 )         -13 %

     Total net revenues   $       420,908     $       404,247     $  16,661             4 %




                                   Six Months Ended
                           June 30, 2008       June 30, 2007       Change       % Change
                                      (in thousands, except for percentages)
     ASIC                 $       235,553     $       235,495     $      58             0 %
     Microcontroller              273,369             218,641        54,728            25 %
     Nonvolatile Memory           182,688             175,140         7,548             4 %
     RF and Automotive            140,535             166,284       (25,749 )         -15 %

     Total net revenues   $       832,145     $       795,560     $  36,585             5 %

ASIC
ASIC segment net revenues decreased by 3% or $4 million to $121 million in the three months ended June 30, 2008, compared to $125 million in the three months ended June 30, 2007. ASIC segment net revenues decreased in the three months ended June 30, 2008 compared to the three months ended June 30, 2007 primarily due to lower shipments for PC crypto memory products of $4 million. ASIC segment net revenues remained flat at $236 million in the six months ended June 30, 2008, compared to $235 million in the six months ended June 30, 2007. Microcontroller
Microcontroller segment net revenues increased by 29% or $32 million to $143 million in the three months ended June 30, 2008, compared to $111 million in the three months ended June 30, 2007. Microcontroller segment net revenues increased by 25% or $55 million to $273 million in the six months ended June 30, 2008, compared to $219 million in the six months ended June 30, 2007. The increase in net revenues in the three months ended June 30, 2008, compared to the three months ended June 30, 2007, resulted primarily from increased shipments from sales of products with new customer designs utilizing both our proprietary AVR microcontroller products as well as our ARM-based microcontroller products. AVR microcontroller revenue grew 28% in the three months ended June 30, 2008, while ARM based products grew 48%, compared to the three months ended June 30, 2007. In the six months ended June 30, 2008 AVR microcontroller revenue grew 29% while ARM-based microcontroller products grew 36% when compared to the six months ended June 30, 2007. Revenue for capacitive sensing products acquired from Quantum is included as part of our microcontroller segment.
Nonvolatile Memory
Nonvolatile memory segment net revenues decreased by 2% or $1 million to $88 million in the three months ended June 30, 2008, compared to $89 million in the three months ended June 30, 2007. Nonvolatile memory segment net revenues increased by 4% or $8 million to $183 million in the six months ended June 30, 2008, compared to $175 million in the six months ended June 30, 2007. The decrease in the three months ended June 30, 2008, compared with the three months ended June 30, 2007 was primarily due to competitive pricing pressures for Serial EEPROM products, offset in part by increased shipments of serial flash memory products. The increase in the six months ended June 30, 2008, compared with the six months ended June 30, 2007 was primarily due to an increase in serial flash memory products of 52% from higher unit volumes, partially offset by a reduction in Serial EEPROM of 2% and other serial flash memory products of 19% from lower pricing. Markets for our nonvolatile memory products are more competitive than other markets we sell in, and as a result, our memory products are subject to greater declines in average selling prices than products in our other segments. Competitive pressures and rapid obsolescence of products are among several factors causing continued pricing declines in 2008. In the third quarter of 2008 we expect a more stable pricing environment, and expect higher unit volumes based on seasonal trends.

RF and Automotive
RF and Automotive segment net revenues decreased by 13% or $10 million to $70 million in the three months ended June 30, 2008, compared to $80 million in the three months ended June 30, 2007. RF and Automotive segment net revenues decreased by 15% or $26 million to $141 million in the six months ended June 30, 2008, compared to $166 million in the six months ended June 30, 2007. The decreases in net revenues in the RF and Automotive segment in the three and six months ended June 30, 2008 were primarily related to reduced shipment quantities for BiCMOS foundry products related to communication chipsets for CDMA phones partially offset by growth in other automotive products. In the three months ended June 30, 2008, net revenues decreased approximately $12 million for BiCMOS foundry products, partially offset by a $2 million increase in revenue from other automotive products, compared to the three months ended June 30, 2007. In the six months ended June 30, 2007, net revenues decreased approximately $29 million for BiCMOS foundry products, partially offset by a $3 million increase in revenue from other automotive products, compared to the six months ended June 30, 2007.
Net Revenues - By Geographic Area
Our net revenues by geographic areas in the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007 are summarized as follows (revenues are attributed to countries based on delivery locations):

                                  Three Months Ended
                           June 30, 2008       June 30, 2007       Change       % Change
                               (in thousands, except for percentages)
     United States        $        56,381     $        56,212     $    169              0 %
     Europe                       157,206             141,911       15,295             11 %
     Asia                         201,687             201,271          416              0 %
     Other*                         5,634               4,853          781             16 %

     Total net revenues   $       420,908     $       404,247     $ 16,661              4 %




                                   Six Months Ended
                           June 30, 2008       June 30, 2007       Change       % Change
                               (in thousands, except for percentages)
     United States        $       117,778     $       105,998     $ 11,780             11 %
     Europe                       302,957             285,021       17,936              6 %
     Asia                         399,520             395,210        4,310              1 %
     Other*                        11,890               9,331        2,559             27 %

     Total net revenues   $       832,145     $       795,560     $ 36,585              5 %

* Primarily includes South Africa and Central and South America

Sales outside the United States accounted for 87% and 86% of our net revenues in the three and six months ended June 30, 2008, compared to 86% and 87% in the three and six months ended June 30, 2007.
Our sales in the United States remained flat in the three months ended June 30, 2008, compared to the three months ended June 30, 2007, and increased by $12 million, or 11% in the six months ended June 30, 2008, compared to the six months ended June 30, 2007. The increase in sales in the six months ended June 30, 2008 compared to the six months ended June 30, 2007 was primarily due to United States based customers increasing deliveries to domestic operations and increased shipments to United States based distributors in the first quarter of 2008.
Our sales in Europe increased by $15 million, or 11%, in the three months ended June 30, 2008, compared to the three months ended June 30, 2007, and increased by $18 million, or 6% in the six months ended June 30, 2008, compared to the six months ended June 30, 2007. These increases are primarily due to both higher volume shipments of Quantum and ARM-based microcontrollers, as well as higher revenues related to the increase in the value of the Euro relative to the U.S. Dollar.

Our sales in Asia remained relatively flat in the three months ended June 30, 2008, compared to the three months ended June 30, 2007, and increased by $4 million, or 1% in the six months ended June 30, 2008, compared to the six months ended June 30, 2007. The increase in sales in the six months ended June 30, 2008 compared to the six months ended June 30, 2007 was primarily due to higher shipments of Microcontroller and Nonvolatile memory products, but offset by reduced shipments for communication chipsets for CDMA phones.
The trend over the last several years has been an increase in revenues in Asia (excluding Singapore), while revenues in the United States has either declined or grown at a much slower rate. We believe that part of this shift reflects changes in customer manufacturing trends, with many customers increasing production in Asia due to lower labor costs. Revenues in Asia increased in 2008 compared to 2007, and we expect that Asia revenues will continue to grow more rapidly than other regions in the future. Revenues in Asia may be impacted in the future as we refine our distribution strategy and optimize our distributor base in Asia. 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. Impact to Revenues and Costs from Changes to Foreign Exchange Rates Changes in foreign exchange rates, primarily the Euro, have had a significant impact on our net revenues and operating costs. Net revenues denominated in Euro were approximately 23% and 21% in the three months ended June 30, 2008 and 2007, respectively. In the six months ended June 30, 2008 and 2007, net revenues denominated in Euro were approximately 22% for both periods. Costs denominated in Euro were 43% and 47% in the three months ended June 30, 2008 and 2007, respectively. In the six months ended June 30, 2008 and 2007, costs denominated in Euro were 44% and 49%, respectively. Net revenues included 62 million Euros and 123 million Euros in the three and six months ended June 30, 2008, respectively, compared to 63 million Euros and 130 million Euros in the three and six months ended June 30, 2007, respectively. Operating expenses in Euro decreased to approximately 111 million and 232 million Euros in the three and six months ended June 30, 2008, respectively, compared to 140 million and 287 million Euros in operating expenses in the three and six months ended June 30, 2007, respectively. Operating expenses declined by approximately 29 million Euros in the three months ended June 30, 2008, compared to the three months ended June 30, 2007 due to the closure of our North Tyneside, UK facility. However, our operating expenses in Euro continue to exceed our net revenues in Euro.
Average exchange rates utilized to translate foreign currency revenues and expenses were 1.56 and 1.35 Euro to the U.S. Dollar in the three months ended June 30, 2008 and 2007, respectively. Average exchange rates utilized to translate foreign currency revenues and expenses were 1.51 and 1.33 Euro to the U.S. dollar in the six months ended June 30, 2008 and 2007, respectively. Average exchange rates in the three months ended March 31, 2008 was 1.47 Euro to the U.S. dollar.
During the three and six months ended June 30, 2008, changes in foreign exchange rates had an unfavorable impact on operating costs and income from operations. Had average exchange rates remained the same in the three and six months ended June 30, 2008 as the average exchange rates in effect in the three and six months ended June 30, 2007 our reported net revenues would have been $14 million and $22 million lower, respectively. However, as discussed above, our foreign currency expenses exceed foreign currency revenues. Operating expenses were denominated in foreign currencies, primarily the Euro, of 48% and 49%, respectively in the three and six months ended June 30, 2008. Had average exchange rates in the three and six months ended June 30, 2008 remained the same as the average exchange rates in the three and six months ended June 30, 2007, our operating expenses would have been $25 million lower (related to cost of revenues of $15 million; research and development expenses of $7 million; and sales, general and administrative expenses of $3 million) and $44 million lower (related to cost of revenues of $27 million; research and development expenses of $12 million; and sales, general and administrative expenses of $5 million) lower, respectively. The net effect resulted in a decrease to income from operations of $11 million and $22 million in the three and six months ended June 30, 2008, compared to the three and six months ended June 30, 2007, respectively. We expect to take additional actions in the future to reduce this exposure. However, there can be no assurances that we will be able to reduce the exposure to additional unfavorable changes to exchange rates and the results on gross margin.
Cost of Revenues and Gross Margin
Our cost of revenues includes the costs of wafer fabrication, assembly and test operations, changes in inventory reserves and freight costs. Our gross margin as a percentage of net revenues fluctuates, depending on product mix, manufacturing yields, utilization of manufacturing capacity, and average selling prices, among other factors.

Gross margin improved to 36.5% in the three months ended June 30, 2008, compared to 35.0% in the three months ended June 30, 2007. Gross margin improved to 36.0% in the six months ended June 30, 2008 compared to 35.4% in the six months ended June 30, 2007.
Gross margin improved during the three and six months ended June 30, 2008 as a result of higher factory utilization levels at our Colorado Springs and Rousset, France wafer fabs following the closure of our North Tyneside, UK facility. However, these improvements were partially offset by unfavorable foreign exchange impact of manufacturing costs in Euros when translated to US dollars. We anticipate further gross margin improvement over the next several quarters from further increases in factory utilization, a more favorable product mix, and additional cost reduction measures.
We receive economic assistance grants in some locations as an incentive to achieve certain hiring and investment goals related to manufacturing operations, the benefit for which is recognized as an offset to related costs. We recognized a reduction to cost of revenues for such grants of $0.6 million and $0.1 million in the three months ended June 30, 2008 and 2007, respectively, and $1 million and $0.4 million in the six months ended June 30, 2008 and 2007, respectively. Research and Development . . .