Edgar Filing: SEMTECH CORP

Form 10-K Amendment No. 1

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

(Mark One)

x	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended January 29, 2006

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to ________________

Commission file number 1-6395

SEMTECH CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

95-2119684

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

200 Flynn Road, Camarillo, California, 93012-8790

(Address of principal executive offices, Zip Code)

Registrant’s telephone number, including area code: (805) 498-2111

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock par value $.01 per share		The NASDAQ Stock Market LLC
Rights to Purchase Series X Junior Participating Preferred Stock		The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x Accelerated Filer ¨ Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

The aggregate market value of the common stock held by non-affiliates of the registrant as of July 31, 2005 was approximately $972 million. Stock held by directors, officers and shareholders owning 5% or more of the outstanding common stock (as reported by shareholders on Schedules 13D and 13G) were excluded as they may be deemed affiliates. This determination of affiliate status is not a conclusive determination for any other purpose.

The number of shares of the Registrant’s common stock outstanding at April 3, 2006 was 72,400,389.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference in Part III of this report: Definitive Proxy Statement filed on May 9, 2006 in connection with registrant’s annual meeting of shareholders held on June 15, 2006.

EXPLANATORY NOTE

SCOPE OF THIS AMENDMENT NO. 1

We are filing this Amendment No. 1 (“Amendment No. 1” or “Form 10-K/A”) to amend our Annual Report on Form 10-K for the fiscal year ended January 29, 2006 as filed on April 14, 2006 (the “Original Report”) to restate our:

(a)

Consolidated Statements of Income for the fiscal years ended January 29, 2006; January 30, 2005 and January 25, 2004;

(b)

Consolidated Balance Sheets as of January 29, 2006 and January 30, 2005;

(c)

Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 29, 2006; January 30, 2005 and January 25, 2004;

(d)

Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2006; January 30, 2005 and January 25, 2004;

(e)

selected financial data as of and for the fiscal years ended January 29, 2006; January 30, 2005; January 25, 2004; January 26, 2003 and January 27, 2002;

(f)

unaudited quarterly financial data for each of the quarters in the fiscal years ended January 29, 2006 and January 30, 2005; and

(g)

related disclosures.

These items are being restated to reflect:

(1)

$91.0 million of additional pre-tax non-cash stock-based compensation expense (net of $30,000 capitalized into inventory), and related income tax effects, resulting from stock options granted or modified primarily during fiscal years 1996 to 2003 that were incorrectly accounted for under U.S. generally accepted accounting principles (“GAAP”) (“Restatement Adjustments”). The effect of the Restatement Adjustments extends back to fiscal year 1996 and the cumulative non-cash stock-based compensation expense, including the related income tax impacts, as of the beginning of fiscal year 2002 is recognized as a net decrease to stockholders’ equity in fiscal year 2002. The amount related to this incorrect option accounting that impacts fiscal year 2007 and future years is immaterial. See Note 1A Restatement of Consolidated Financial Statements of the Notes to Consolidated Financial Statements for a detailed discussion of the effect of the restatement. Also see the discussions under Restatement of Consolidated Financial Statements Based on Review of Stock Option Practices in this Explanatory Note and in Item 7 and under Item 9A Controls and Procedures.

(2)

$60,000 increase to income, net of related tax effects, of miscellaneous audit adjustments (“Audit Adjustments”) that were excluded from the fiscal year 2006 financial statements presented in the Original Report based on materiality. See Note 20 Audit Adjustments of the Notes to Consolidated Financial Statements.

This Amendment No. 1 does not result in a change to the cash or cash equivalents previously reported in our consolidated financial statements. The Restatement Adjustments do not result in a change to the net cash provided by operating activities or the revenue previously reported in our consolidated financial statements. However, this report refers to fiscal year 2006 revenue as restated because the Audit Adjustments decreased fiscal year 2006 revenue by $67,000.

References in this report to “the restatement” are references to the restatement required due to stock option matters (item 1 above) and not to the Audit Adjustments.

For the convenience of the reader, this Form 10-K/A presents both the items amended due to the restatement and the Audit Adjustments and the portions of the Original Report that are unchanged. Only the following items have been substantively amended as a result of, and to reflect, the restatement and Audit Adjustments, and no other information in the Original Report is substantively amended as a result of the restatement:


Item 1	–	Business (updated only as to the data on product development and engineering expenses presented under the caption Intellectual Capital and Product Development and sales by region data under the caption Customers, Sales Data and Backlog);

Item 1A	–	Risk Factors;


Item 6	–	Selected Financial Data;

Item 7	–	Management’s Discussion and Analysis of Financial Condition and Results of Operations;

Item 8	–	Financial Statements and Supplementary Data, including the Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements

Item 9A	–	Controls and Procedures

Item 9B	–	Other Information

Item 12	–	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

This Form 10-K/A also includes an updated Exhibit 23.1 Consent of Independent Registered Public Accounting Firm and, in accordance with applicable Securities and Exchange Commission (“SEC”) rules, updated certifications from our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) as Exhibits 31.1, 31.2, 32.1 and 32.2. We have also included new Exhibits 10.29 and 10.30 with respect to information reported under Item 9B in lieu of filing such information on a separately filed Form 8-K.

Significant events occurring through the date of filing of this Amendment No. 1 that are related to the restatement or its underlying cause are described in Note 19 Matters Related to Stock Option Review and Restatement of the Notes to Consolidated Financial Statements in Item 8 of this Amendment No. 1.

Except as required to reflect the effects of the restatement and the Audit Adjustments, we have not substantively modified or updated any information presented in the Original Report or the exhibits thereto (except for updated Exhibits 23.1, 31.1, 31.2, 32.1, and 32.2 described above).

This Form 10-K/A does not reflect events that occurred after the filing of the Original Report or modify or update information affected by subsequent events, except for matters related to the restatement or its underlying cause as specifically referenced herein. Events occurring after the filing of the Original Report or other disclosures to reflect subsequent events have been addressed in Current Reports on Form 8-K or will be addressed in our Quarterly Reports on Form 10-Q for the quarterly periods ended April 30, 2006 (“First Quarter Form 10-Q”), July 30, 2006 (“Second Quarter Form 10-Q”), and October 29, 2006 (“Third Quarter Form 10-Q” ) which are being filed concurrently with this Form 10-K/A or in reports filed with the SEC subsequent to the filing of this Form 10-K/A. The First Quarter Form 10-Q, the Second Quarter Form 10-Q, and the Third Quarter Form 10-Q are together referred to as the “FY2007 Form 10-Qs.” This Form 10-K/A should be read in conjunction with the FY2007 Form 10-Qs, as well as any Current Reports on Form 8-K filed subsequent to the date the Original Report was filed.

We have not amended and do not anticipate amending our Annual Reports on Form 10-K for any years prior to fiscal year 2006, nor will we be amending any of our previously filed Quarterly Reports on Form 10-Q. The financial statements and other information that have been previously filed or otherwise reported for these periods should no longer be relied upon; all such prior information is superseded by the information in this Form 10-K/A, and the FY2007 Form 10-Qs.

RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

BASED ON REVIEW OF STOCK OPTION PRACTICES

Forward Looking and Cautionary Statements

This Form 10-K/A contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may also make forward-looking statements in other reports filed with the Securities and Exchange Commission (“SEC”), in materials delivered to shareholders and in press releases. In addition, Company representatives may make oral forward-looking statements from time to time. Forward-looking statements are statements other than historical information or statements of current condition and relate to matters such as our future financial performance, future operational performance, and our plans, objectives and expectations. Some forward-looking statements may be identified by use of terms such as “expects,” “anticipates,” “intends,” “estimates,” “believes,” “projects,” “should,” “will,” “plans” and similar words.

or plans will be achieved or that any of our operating expectations or financial forecasts will be realized. Financial results could differ materially from those projected in forward-looking statements due to known or unknown risks. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition to regarding forward-looking statements with caution, you should consider that the preparation of the restated consolidated financial statements required us to draw conclusions and make interpretations, judgments, and assumptions with respect to certain factual, legal, and accounting matters. Different conclusions, interpretations, judgments or assumptions could have resulted in materially different Restatement Adjustments. See Item 7 of this report for a further discussion of the restatement process.

Our discussion of this topic is divided into the following segments:

(I)

Background of the Restatement

(II)

Nature of the Restatement Adjustments

(III)

Findings as to Individual Conduct

(IV)

Amortization of the Restatement Adjustments

(V)

Effect of the Restatement Adjustments on the Previously Reported Financial Statements

(VI)

Judgments and Interpretations

(VII)

Going Forward

(I)	Background of the Restatement

We first learned of issues associated with our past stock option grants on May 17, 2006 when Nasdaq alerted us to a research report published on May 16, 2006 by the Center for Financial Research and Analysis (“CFRA”). On May 18, 2006, we received a letter from the SEC requesting that we voluntarily provide certain information and documents relating to stock option grants dating back to January 1, 1997 (the “SEC Letter”).

Upon learning of the CFRA report and receiving the SEC Letter, we began a review of our historical stock option practices with the assistance of outside counsel, Paul, Hastings, Janofsky & Walker LLP. During the course of these efforts, our in-house counsel discovered documents indicating irregularities with respect to certain stock option grants for new employees in fiscal year 2001 (which ended on January 28, 2001). We alerted the Board of Directors (“Board”) to the existence of these documents and immediately began investigating the new hire grants referenced in the documents. After detecting apparent irregularities in these and other new hire grants, we expanded our review to include a more thorough examination of employment files for new hires on and after January 1, 1997. We also began investigating other stock option matters, including delegation authorities for stock option grants, grants to continuing employees, and procedural steps associated with the stock option grant process. We retained Kroll, Inc. to conduct a comprehensive review of the stock option grant issues and FTI Consulting, Inc. to assist in analyzing related accounting issues.

After receiving several management reports on this matter in accordance with previously established procedures regarding accounting complaints, the Audit Committee, at that time comprised of Directors Burra, Hankin and Lindstrom, determined that it should retain independent counsel to assist in conducting an investigation of our stock option grant practices. On June 9, 2006, the Audit Committee retained the law firm of Fenwick & West LLP (“Fenwick”), a law firm not previously used by the Company, to assist in conducting this investigation. Fenwick retained Navigant Consulting, Inc. as its forensic accounting advisor. Directors Burra and Hankin, who had previously served on the Compensation Committee, recused themselves from the investigation early in July 2006 after Fenwick learned of a new hire stock option grant to an officer in 1996 that was approved by the Compensation Committee and that would be a subject of the investigation. On July 12, 2006, the Board appointed Directors Lindstrom and Piotrowski as a Special Committee (“Special Committee”) fully authorized and empowered to continue the investigation.

Ernst & Young LLP, the Company’s independent registered public accounting firm, did not participate in management’s review or the Special Committee’s investigation, but was kept apprised of the progress and results.

financial statements and the related reports of our independent public accountants, earnings press releases, and similar communications we previously issued should no longer be relied upon pending restatement of our financial statements for fiscal years 2002 through 2006 to record a material level of additional non-cash compensation expense. We also announced that the restatement would affect financial statements for earlier fiscal years and that adjustments for those earlier years would be reflected as part of the opening balances in the financial statements for the restatement period.

The Special Committee’s investigation and management’s review extended back to January 30, 1995, which was the start of fiscal year 1996. The initial focus was on grants made since the beginning of calendar year 1997, which is the period covered by the informal request received from the SEC. The period covered was expanded to determine if material grant issues existed beyond the periods covered by the SEC request. The Company, with the assistance of Kroll, reviewed grant activity back to 1992 and found no evidence of deliberate manipulation related to grants made prior to fiscal year 1996. The Company concluded that a more detailed review of grants made prior to fiscal year 1996 was not warranted.

(II)	Nature of the Restatement Adjustments

This section summarizes the main categories of situations in which the initial accounting was incorrect and describes the measurement date used for the restatement or the other change made for the restatement.

The pre-tax, non-cash, stock-based compensation expense resulting from the revised measurement dates and other adjustments discussed below is approximately $91.0 million in the aggregate for fiscal years 1996 through fiscal year 2006. The following table shows the aggregate financial statement impact of each category of adjustment. In order to avoid double counting, the table reflects an adjustment for items that fall into more than one category.

in thousands, except number of grants


Category	Number of grants	Expense for all grants			Expense for grants to Section 16 group (1)			Percent of total expense related to Section 16 group
(A) Grants to continuing employees	1,153	$	50,473		$	7,567		15	%
(B) Grants to new employees	343		19,425			—		0	%
(C) Grants lacking evidence of approval	33		149			—		0	%
(D) Grants modified after ratification	83		4,545			—		0	%
(E) Post-termination arrangements	68		20,854			16,396		79	%
(F) Pricing exceptions	393		733			107		15	%

		$	96,179		$	24,070		25	%
Adjustment for duplication among categories			(5,151	)		(107	)	2	%

Total pre-tax stock option related adjustments		$	91,028			23,963		26	%

Amount capitalized into inventory			(30	)

Total pre-tax stock option compensation expense		$	90,998
Tax benefits			(28,688	)

Net adjustment (2) (3)		$	62,310

(1)	Expense related to grants made to, or modifications made for, directors, officers and key executives subject to Section 16 of the Securities Exchange Act of 1934 at the time of grant or modification.

(2)	The additional non-cash compensation expense is net of forfeitures related to employee terminations.

(3)	Amortization of the expense by category is shown in Section (IV) below.

The Company applied APB 25 in determining the correct measurement date in each situation described below. Under APB 25, the measurement date is the first date on which are known both the number of shares that an individual employee is entitled to receive and the option or purchase price, if any. Any intrinsic value that exists at the measurement date must be recognized as compensation cost, generally as a charge to compensation expense in the income statement.

(A) Grants made by Former Chief Executive Officer John D. Poe (“Former CEO”) from April 1997 to May 2002 to continuing employees

In April 1997, the Compensation Committee delegated authority to the Former CEO to make option grants as an agent of the Committee for the stated purpose of granting options on a more timely basis. Grants made by the Former CEO were subsequently submitted to the Compensation Committee for approval. The Former CEO granted options under this authority to existing executive and non-executive level employees through May 2002.

by the Former CEO from April 1997 through May 2002. There is evidence of intentional manipulation on nine of these grant dates, representing approximately 42% of the shares and approximately 76% of the expense in this category. Based primarily on evidence of the Former CEOs willingness to manipulate grant dates, the Company determined that the grants made during this period were not final until approved by the Compensation Committee. Although the reviews found no specific documentary evidence of manipulation for certain grants, the fact that those grants lack adequate contemporaneous documentation to corroborate the establishment of the grant date, combined with evidence of manipulation of other grants during this period, led to the Company’s conclusion that the original measurement date was in error because the terms of the grant were not determined with finality.

The appropriate measurement date for all grants in this category is the date of Compensation Committee ratification, unless the measurement date for a particular grant has been further revised due to one of the issues discussed below.

In August 2002, the Compensation Committee determined that options for continuing employees would be granted in conjunction with regularly scheduled Compensation Committee meetings, thus restoring the delegated authority to the Compensation Committee.

This category also includes adjustments related to miscellaneous grant scenarios, primarily related to acquisitions. The non-cash compensation expense related to these miscellaneous items is approximately $4.6 million pretax.

(B) Grants to new employees

In April 1997, the Compensation Committee stated that all option grants communicated via an offer letter would be granted to each employee on his or her start date.

The reviews revealed inconsistencies in grant practices to new hires from April 1997 to August 2002 and evidence of management’s willingness to intentionally select favorable grant dates for new hires during this period. More specifically, it was found that a majority of grants during this period were not made as of the recipient’s start date. Of those who received a new hire grant on a date other than the actual hire date, approximately 90% received a more favorable price. Of the grants that were made on the hire date, approximately 95% were priced favorably when compared to the price of the stock on the date of the relevant Compensation Committee meeting. The appropriate measurement date for all new hire grants during this period is the date of Compensation Committee approval, unless the measurement date for a particular grant has been further revised due to one of the issues discussed below.

The reviews also identified 76 stock option grants, made between November 1996 and May 2002, that were made to persons before they became employees, including through assignment of the employee to leave of absence status prior to the date the employee began performing services. The appropriate measurement date for these options is the employee’s start date. However, a later measurement date tied to the Compensation Committee’s approval was applied in a significant number of these cases because grant terms were not determined with finality on the hire date. Compensation expense is amortized over the vesting period, the end of which, for the grants in this group, remains the same but starts at the date of employment. For grants with a measurement date after the stated grant date, amortization related to the first vesting period is accelerated, which could result in more than twelve months of amortization in a fiscal year.

Following a leadership change in the Human Resources Department, the procedures were more fully explained to the HR staff and better enforced, such that beginning in August 2002, new hire grants were made consistently as of the employee’s hire date.

In February 2006, the Compensation Committee determined to align the procedure for new hire grants and promotional grants with the procedure in place for annual grants to continuing employees. That is, new hire option grants are now awarded at Compensation Committee meetings rather than on the date of hire.

(C) Grants lacking evidence of Compensation Committee approval

the Compensation Committee meeting minutes because the employee had terminated following the meeting or was about to terminate. For grants in this category, management used available relevant information, such as personnel records and Compensation Committee records, to determine the most likely grant date. The Special Committee found these conclusions to be reasonable.

(D) Grants modified after ratification by the Compensation Committee

The reviews revealed 84 grants, out of more than 1,600 grants over 23 grant dates, with changes between the grant lists distributed with the Compensation Committee agendas, on which basis the grants were ratified, and the grant lists attached to the minutes for the related meetings. More specifically, the reviews showed 31 new grants, 32 deleted grants (apparently related to employees who terminated in the interim), 12 increased grants, 8 decreased grants, and 1 addition specifically approved by the Compensation Committee. In most cases, these changes were not significant individually or in the aggregate, were not significantly concentrated within individual grant dates, and appear to be the result of administrative error and not indicative of an open-allocation process. The exceptions to these determinations are (i) one grant date in May 1999 for which there is evidence indicating the grant process for ten employees in two departments was incomplete on the award approval date, (ii) 21 grants to continuing employees on one grant date in May 2000 for which the grant process was found to be incomplete on the award approval date, and (iii) five grants to new hires concentrated on one grant date in December 2000 that were made prior to the employees’ start dates, but not indicative of an open allocation process.

For grants that were added or changed, the measurement date is the date that the Compensation Committee approved the minutes that reflected the changes. With respect to the May 1999 grant, we revised the measurement date for grants to all employees in the two departments with the open allocation process rather than revising the measurement date for only the modified awards. Similarly, with respect to the May 2000 grant, we revised the measurement date for awards to all continuing employees on the second quarter grant list because the list was not finalized on the award approval date.

(E) Post-termination arrangements

The reviews identified 21 employees with termination arrangements whereby options were modified through continued vesting and/or extension of the exercise period. Two of these arrangements involved executive level employees transitioned from full-time status to on-call status in anticipation of full retirement. Of the remaining agreements, many involved placing terminated employees below the vice-president level on leave of absence status for stock option purposes. In each of these instances, it has been concluded that the modifications were made in recognition of past services. Specifically, the individuals on leave of absence were no longer required to provide substantive services for the Company and the executives on call did not perform substantive services during the on-call period. Thus, compensation cost for the options affected by the termination arrangements was remeasured on the modification dates and the incremental compensation cost, plus any originally measured but unrecognized compensation cost, has been expensed entirely at the time of modification. These costs were recorded even if the options were exercised by the employee within the originally permitted window following termination of substantive employment.

(F) Pricing exceptions

The reviews identified that approximately 9% of the grants made in fiscal years 1996 through 2006 had exercise prices that were determined in a manner inconsistent with our convention of pricing options at the closing price on the day before the grant. The significant majority of the exceptions relate to the use of the closing price on the date of grant. The majority of these grants had pricing exceptions that resulted in pricing unfavorable to the employee, leading to the conclusion that the exceptions were administrative errors. The measurement of compensation cost was corrected to consistently measure compensation cost based on the closing price on the day before the grant date.

For many years we have used the prior date closing methodology set forth in our 1994 stock option plans to determine the exercise price and measure the compensation cost of our employee stock options. Although this methodology is not consistent with the terms of our later option plans, which call for using the weighted-average traded price on date of grant, we have determined, and our accounting advisors and the Special Committee’s forensic accountant have concurred, that continued use of the prior date closing methodology was reasonable and acceptable. The Board also concurred and ratified past use of the prior date closing methodology. However, in

October 2006 we amended the operative stock option plans to establish the exercise price based on the closing stock price on the grant date. This change in methodology is not expected to have a material effect on our financial statements.

Restatement Charges Related to Officers and Key Employees

The Company’s management team during fiscal years 1996 through 2006 included 28 individuals who at various times were subject to the provisions of Section 16 of the Securities Act of 1934 (“Section 16”) due to their positions as officers or key executives. The eight individuals who served as independent directors at various times during the same period were also subject to Section 16. None of the additional non-cash compensation expense relates to options awarded to independent directors. Approximately 8% of the additional pre-tax non-cash compensation expense is related to options granted to 15 employees after they became officers or key executives subject to Section 16. This expense is almost entirely attributable to Category A, with a small portion attributable to Category F. No Section 16 executive accounted for more than 2.2% of the total non-cash compensation expense due to Category A and F errors. An additional 18% of the total non-cash compensation expense is related to “on-call” arrangements intended to provide continuity to the Company by transitioning two executives from full-time employment into retirement. Our review indicated that although one executive provided some services during the on-call period, there is no evidence that the other performed any. We determined that since neither employee performed sufficient services to meet the substantive services requirement set forth by current interpretations of applicable accounting standards, the options held by the employees were modified to extend the exercise period and to effectively accelerate vesting on the date they ceased full-time employment and, therefore, a new measurement date was required by APB 25.

(III)

Findings as to Individual Conduct

In considering the situations described in (A) through (F) above, the Special Committee concluded that the evidence supports a finding of intentional manipulation of stock option grant dates directed by the Former CEO, that a former human resources executive who was with the Company from October 1999 through May 2002 (“Former HR VP”) participated in this conduct, and that the Chief Financial Officer (“Former CFO”) and the Treasurer (“Former Treasurer”) at the time the Special Committee’s report was issued knew, or should have known, of the manipulation and initiated or participated in some manipulative acts. One other executive (“Former Executive”) who left the Company in early January 2007 was found to be significantly less culpable in that he evidenced a willingness to acquiesce in manipulative conduct.

As previously announced, the Former CEO stepped down from his position as Chairman of the Board on August 17, 2006. He also took a leave of absence from the Board, effective the same date, pending the conclusion of the investigation. The Former CEO informed us he was taking these actions to avoid even the appearance of a conflict of interest. Both he and the Former HR VP declined to be interviewed by the Special Committee. Following the Special Committee’s report to the Board on October 2, 2006, the Board accepted the recommendation of the Special Committee that the Former CEO be asked to resign and, if he does not do so, that he not be nominated to stand for reelection as a Director at the next annual meeting of shareholders. The Former CEO was asked to immediately resign from the Board. As reported in the Form 8-K we filed on October 25, 2006, we received an October 20, 2006 letter from the Former CEO advising us that he intends to resign his position as a Director effective as of the first date, subsequent to the filing of the Company’s restated financial statements, on which the Company regains compliance with Nasdaq continued listing standards and the window for trading by officers and directors of the Company is reasonably expected to be open for a period of at least 30 days.

The Special Committee recommended that the Former CFO and Former Treasurer be asked to resign within a time consistent with Company needs and an orderly transition. As previously announced, the Former CFO and Former Treasurer resigned their positions on November 7, 2006, although they remained with the Company on special assignments through January 22, 2007 and January 31, 2007, respectively.

The Special Committee found some personal benefit to these five individuals in the form of options that were in-the-money, but unvested, at the date of grant. Grants to these five individuals had intrinsic value, meaning value equal to the number of options multiplied by the difference between the stated exercise price and the price on the correct measurement date, of approximately $4.8 million. Options granted by the Company typically vest in equal annual installments over three or four years, beginning on the first anniversary of the grant. After considering unvested options that were forfeited upon termination, the aggregate additional non-cash compensation expense related to grants to these five individuals is approximately $4.5 million.

Approximately 5% of the intrinsic value related to grants to these five individuals has been realized through exercise of the options. Exercise of options was not permitted during the restatement process. Approximately 41% of the intrinsic value will not be realized because the options have lapsed due to the fixed term of the options expiring during the restatement process or because the 30 day post-termination period for exercising the employee options expired during the restatement process. Approximately 43% of the vested options that expired or lapsed had intrinsic value and 57% had no intrinsic value.

The Board formed a Special Litigation Committee (“Special Litigation Committee”) comprised of Director Baker and Director Edwards, independent Directors who joined the Board in October 2006, to evaluate the existence and extent of any potential claims against these five individuals. The Special Litigation Committee directed management to cancel and rescind all of the outstanding options held by the Former CEO, which amount to over 1.2 million options on a split-adjusted basis, and management has done so. Approximately 19% of the cancelled options had intrinsic value and 81% of the cancelled options had no intrinsic value. Almost all of the cancelled options were vested or would immediately vest upon termination of Board service.

The cancelled, expired and lapsed options had split-adjusted exercise prices ranging from $2.41 to $31.91 per share.

The Special Litigation Committee directed management to cancel one of the Former CFOs grants and to reprice the remainder of his outstanding vested options. However, all of the Former CFOs options (including those to be cancelled) expired or lapsed during the restatement process except for one grant of 240,000 options (split-adjusted) that was issued under one of the Company’s prior option plans and is subject to a 90 day post-termination exercise period. Those options have been repriced from $5.31 per share to $6.59 per share (split-adjusted), such that the intrinsic value associated with the options will not be realized by the Former CFO.

The Former Treasurer also has one outstanding grant for 30,000 options (split-adjusted) at an exercise price of $5.88 (split-adjusted) that is subject to a 90 day post-termination exercise period. There is no intrinsic value associated with that grant. The Special Litigation Committee took no action with respect to the Former Treasurer.

The Special Litigation Committee took no action with respect to the Former HR VP or Former Executive.

The status of the intrinsic value associated with options granted to the five individuals is summarized as follows:

(in thousands)


	Former CEO			Former CFO			Three Other Former Executives			Total
Realized	$	19		$	16		$	193		$	228		5	%
Never Vested		—			—		$	269		$	269		6	%
Expired or Lapsed		—			1,649			316			1,965		41	%
Cancelled		1,989			—			—			1,989		42	%
Repriced		—			307			—			307		6	%

Will Not be Realized	$	1,989		$	1,956		$	585		$	4,530		95	%

Total Intrinsic Value	$	2,008		$	1,972		$	778		$	4,758		100	%

Total Intrinsic Value		42.2	%		41.4	%		16.4	%		100	%

The Special Committee found that false and misleading information was furnished to the Compensation Committee of the Board. The Special Committee did not recommend, and the Board did not take, any action with respect to current or former Compensation Committee members. The Special Committee did, however, recommend certain remedial measures with respect to corporate governance that we have begun to implement, including establishment of a corporate governance committee at the Board level, development of procedures for certifying genuineness of board materials and minutes, and additional ethics and other training for Directors and employees at all levels.

(IV)	Amortization of the Restatement Adjustments

price of the option. The additional non-cash compensation expense was amortized over the required service period, generally over the vesting periods of the respective grants.

The restatement has resulted in additional non-cash stock-based compensation expense related to stock options as follows:

(in thousands)


Fiscal Year	Additional Compensation Expense		Tax Benefit			Additional Compensation Expense, Net of Tax
1996	$	10	$	(3	)	$	7
1997		95		(37	)		58
1998		1,002		(390	)		612
1999		2,826		(1,034	)		1,792
2000		6,862		(2,174	)		4,688
2001		14,050		(4,017	)		10,033
2002		36,354		(12,465	)		23,889
2003		13,401		(3,912	)		9,489

Subtotal Fiscal Years 1996 - 2003		74,600		(24,032	)		50,568
2004		9,234		(2,566	)		6,668
2005		5,637		(1,657	)		3,980
2006		1,527		(433	)		1,094

Total Fiscal Years 1996 - 2006	$	90,998	$	(28,688	)	$	62,310

The amount related to the restatement that impacts fiscal year 2007 and future years is immaterial.

The additional non-cash compensation expense that resulted from the correction of accounting for stock options granted or modified primarily during fiscal years 1996 through 2003 was generally amortized over the required service period, generally the vesting periods of the respective grants. The following table shows the additional non-cash compensation expense for fiscal years 1996 through 2006. The cumulative after tax adjustment for fiscal years 1996 through 2003 is included in the restated fiscal year 2004 balance sheet as a reduction in stockholders’ equity.

(in thousands)


	Fiscal Year
Category	1996			1997			1998			1999			2000			2001
(A) Grants to continuing employees	$	2		$	2		$	449		$	1,725		$	4,530		$	9,573
(B) Grants to new employees		3			27			506			1,073			2,003			4,499
(C) Grants lacking evidence of approval		1			1			—			6			21			24
(D) Grants modified after ratification		—			—			—			—			496			1,399
(E) Post-termination arrangements		—			—			—			—			357			182
(F) Pricing exceptions		7			71			80			70			103			180

	$	13		$	101		$	1,035		$	2,874		$	7,510		$	15,857
Adjustment for duplications		(3	)		(2	)		—			(6	)		(588	)		(1,597	)

Total pre-tax adjustments		10			99			1,035			2,868			6,922			14,260
Amount capitalized into inventory		—			(4	)		(33	)		(42	)		(60	)		(210	)

Total pre-tax compensation expense	$	10		$	95		$	1,002		$	2,826		$	6,862		$	14,050
Tax benefits		(3	)		(37	)		(390	)		(1,034	)		(2,174	)		(4,017	)

Net adjustment	$	7		$	58		$	612		$	1,792		$	4,688		$	10,033


	Fiscal Year						Subtotal FY 1996 through			Fiscal Year									Total FY 1996 through
Category	2002			2003			FY 2003			2004			2005			2006			FY 2006
(A) Grants to continuing employees	$	11,729		$	9,841		$	37,851		$	7,101		$	4,265		$	1,256		$	50,473
(B) Grants to new employees		4,701			3,332			16,144			2,012			1,082			187			19,425
(C) Grants lacking evidence of approval		89			(2	)		140			5			4			—			149
(D) Grants modified after ratification		1,380			745			4,020			410			112			3			4,545
(E) Post-termination arrangements		20,080			124			20,743			—			111			—			20,854
(F) Pricing exceptions		135			67			713			7			12			1			733

	$	38,114		$	14,107		$	79,611		$	9,535		$	5,586		$	1,447		$	96,179
Adjustment for duplications		(1,604	)		(810	)		(4,610	)		(422	)		(115	)		(4	)		(5,151	)

Total pre-tax adjustments		36,510			13,297			75,001			9,113			5,471			1,443			91,028
Amount capitalized into inventory		(156	)		104			(401	)		121			166			84			(30	)

Total pre-tax compensation expense	$	36,354		$	13,401		$	74,600		$	9,234		$	5,637		$	1,527		$	90,998
Tax benefits		(12,465	)		(3,912	)		(24,032	)		(2,566	)		(1,657	)		(433	)		(28,688	)

Net adjustment	$	23,889		$	9,489		$	50,568		$	6,668		$	3,980		$	1,094		$	62,310

(V)	Effect of the Restatement Adjustments on the Previously Reported Financial Statements

Income Statement Data

related to fiscal years 1996 through 2001 is included in the restated 2002 balance sheet as a reduction in stockholders’ equity.

increase (decrease)

in thousands, except per share data


	Fiscal Year Ended
	Jan 29 2006			Jan 30 2005			Jan 25 2004			Jan 26 2003			Jan 27 2002
NET SALES	$	—		$	—		$	—		$	—		$	—
Cost of sales		213			702			1,303			1,811			3,335

Gross profit		(213	)		(702	)		(1,303	)		(1,811	)		(3,335	)

Operating costs and expenses:
Selling, general and administrative		920			3,115			4,983			6,562			23,974
Product development and engineering		394			1,820			2,948			5,028			9,045
Acquisition-related items		—			—			—			—			—

Total operating costs and expenses		1,314			4,935			7,931			11,590			33,019

Operating income		(1,527	)		(5,637	)		(9,234	)		(13,401	)		(36,354	)
Interest expense		—			—			—			—			—
Interest and other income		—			—			—			—			—

Income before taxes	$	(1,527	)	$	(5,637	)	$	(9,234	)	$	(13,401	)	$	(36,354	)
Provision for taxes		433			1,657			2,566			3,912			12,465

NET INCOME	$	(1,094	)	$	(3,980	)	$	(6,668	)	$	(9,489	)	$	(23,889	)

Earnings per share -
Basic	($	0.02	)	($	0.05	)	($	0.09	)	($	0.13	)	($	0.34	)
Diluted	($	0.02	)	($	0.05	)	($	0.09	)	($	0.12	)	($	0.30	)

The additional non-cash compensation expense is allocated among cost of sales; selling, general and administrative; and product development and engineering based on the classification of the employees to whom the stock option causing the adjustment was awarded. The adjustments related to stock options did not affect our revenues or net cash flows for any fiscal year reported.

See Note 1A to the consolidated financial statements included in Item 8 of this report for a side by side comparison of the previously reported amounts with the restated amounts for fiscal years 2006, 2005, and 2004 and Item 7 of this report for a side by side comparison for fiscal years 2003 and 2002.

Balance Sheet Data

The table below shows the effect of the Restatement Adjustments on our previously reported Consolidated Balance Sheets. As noted above, the additional non-cash compensation expense related to fiscal years 1996 through 2001 is included as a reduction in stockholders’ equity as of the beginning of fiscal year 2002. As detailed below, the primary balance sheet impact in each year was a reclassification between additional paid-in capital and retained earnings.

increase (decrease) in thousands


	Jan 29 2006			Jan 30 2005			Jan 25 2004			Jan 26 2003			Jan 27 2002
ASSETS
Current assets:
Cash and cash equivalents	$	—		$	—		$	—		$	—		$	—
Temporary investments		—			—			—			—			—
Receivables, less allowances		—			—			—			—			—
Inventories		30			114			281			403			506
Income taxes refundable		—			—			—			—			—
Deferred income taxes		—			—			—			—			—
Other current assets		—			—			—			—			—

Total current assets		30			114			281			403			506
Property, plant and equipment, net		—			—			—			—			—
Investments, maturities in excess of 1 year		—			—			—			—			—
Deferred income taxes		(800	)		945			1,382			88			(2,113	)
Goodwill		—			—			—			—			—
Other intangibles		—			—			—			—			—
Other assets		—			—			—			—			—

TOTAL ASSETS	$	(770	)	$	1,059		$	1,663		$	491		$	(1,607	)

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	—		$	—		$	—		$	—		$	—
Accrued liabilities		—			—			—			—			—
Income taxes payable		—			—			—			—			—
Deferred revenue		—			—			—			—			—
Deferred income taxes		—			—			—			—			—
Other current liabilities		96			96			96			96			96

Total current liabilities		96			96			96			96			96
Convertible subordinated debentures		—			—			—			—			—
Deferred income taxes		—			—			—			—			—
Other long-term liabilities		—			—			—			—			—
Commitments and contingencies		—			—			—			—			—
Stockholders’ equity:
Common stock, $0.01 par value		—			—			—			—			—
Treasury stock, at cost		—			—			—			—			—
Additional paid-in capital		61,446			62,180			58,804			50,964			39,376
Retained earnings		(62,312	)		(61,217	)		(57,237	)		(50,569	)		(41,079	)
Accumulated other comprehensive loss

Total Stockholders’ equity		(866	)		963			1,567			395			(1,703	)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	(770	)	$	1,059		$	1,663		$	491		$	(1,607	)

For a side by side comparison of the previously reported balance sheet line items with the restated amounts for the January 29, 2006 and January 30, 2005 balance sheets, see Note 1A to the financial statements included in Item 8 of this report. See Item 7 of this report for a side by side comparison of the previously reported balance sheet and the restated balance sheet at the end of fiscal years 2004, 2003 and 2002.

Cash Flow Data

The Restatement Adjustments had no impact on net cash provided by operating activities or on investing or financing cash flows for the periods presented and had no impact on the Company’s total cash balances. The table below shows

the amount of changes in certain captions within the operating section of the cash flow statement due to the Restatement Adjustments. The net impact of these changes on operating cash flow was zero. For a side by side comparison of the previously reported amounts with the restated amounts, see Note 1A to the consolidated financial statements included in Item 8 of this report.

increase (decrease) in thousands


	Fiscal Year Ended
	Jan. 29, 2006			Jan. 30, 2005			Jan. 25, 2004
Cash flows from operating activities:
Net Income	$	(1,094	)	$	(3,980	)	$	(6,668	)
Adjustments to reconcile net income to net cash provided by operations:
Stock-based compensation		1,442			5,471			9,113
Deferred income taxes		1,744			437			(1,294	)
Tax benefit of stock option exercises		(2,177	)		(2,094	)		(1,272	)
Changes in inventory		85			166			121

Net cash provided by operations		—			—			—
Net cash provided by (used in) investing activities		—			—			—
Net cash used in financing activities		—			—			—
Net increase (decrease) in cash and cash equivalents		—			—			—

Interim Financial Statements

The impact of the Restatement Adjustments on our previously reported interim results was to decrease income from operations by approximately 11% in the first quarter, 7% in the second quarter, 6% in the third quarter, and 7% in the fourth quarter of fiscal year 2005 and approximately 5% in each of the first two quarters, 3% in the third quarter, and less than one-half of one percent in the fourth quarter of fiscal year 2006. A side by side comparison of previously reported results with the restated results for each of the eight quarterly periods ended January 29, 2006 is presented in Note 21 of the financial statements included in Item 8 of this report.

Tax Matters

The recognition of additional non-cash stock-based compensation expense reduced the tax provision for fiscal year 2006 from $11.7 million to $11.2 million and it was further reduced to $11.1 million by the Audit Adjustments. The recognition of additional non-cash stock-based compensation expense reduced the tax provisions for fiscal years 2005 and 2004 from $17.4 million to $15.7 million and from $10.3 million to $7.7 million, respectively.

As a result of the determination that certain grants were issued in prior periods with exercise prices below the market price of our stock on the actual grant date, we have evaluated potential tax consequences under Sections 162(m) and 409A of the Internal Revenue Code (IRC). Section 409A was effective as of January 1, 2005.

We have determined that certain non-cash stock-based compensation expense deducted on our income tax returns for some prior periods was not qualified performance based compensation, as defined in IRC Section 162(m). Our federal and state net operating loss carryforwards have been reduced to reflect this determination. For states in which the available amount of net operating loss carryforwards were inadequate, state tax credit carryforwards have been adjusted. The cumulative effect of this change was to reduce the federal and state non-current deferred tax assets by $9.6 million, of which $1.7 million relates to periods before fiscal year 2002 and $7.9 million relates to fiscal year 2002. We have established a contingency reserve of approximately $96,000 to reflect the anticipated tax, penalties and interest associated with these adjustments. Of this amount, approximately $60,000 is recognized in beginning retained earnings for fiscal year 2002 and approximately $36,000 is recognized as expense in fiscal year 2002.

As applied to stock options, Section 409A generally requires income recognition prior to the exercise date, if the option was granted with an exercise price below the fair market value on the date of grant. To the extent that the Company was required to withhold and remit, and failed to withhold and remit, payroll taxes upon income recognition, the Company is subject to substantial penalties and interest charges. The Company has determined that nearly all of the options subject to 409A had no recognizable income on each of the relevant tax measurement dates. Accordingly, the impact of penalties and interest for failure to withhold and remit payroll taxes does not have a material impact on the Company’s financial statements for fiscal years 2005 or 2006.

Certain transition rules are in effect that allow remediation of the condition that subjects an option to Section 409A. To be effective, the remediation with respect to executive level employees must have been completed by December 31, 2006 and must be complete for other employees by December 31, 2007. The Company has not taken any actions to remediate these options, since the material options that have been determined to be subject to 409A were issued at exercise prices that are substantially higher than the current price of the Company’s stock. Therefore, the future impact of Section 409A is not expected to present a material exposure to the Company under these transitional rules. However, exposure for this item can not ultimately be determined until final guidance is issued. If the final guidance differs significantly from the guidance published to date, the Company’s exposure could be material.

(VI)	Judgments and Interpretations

To calculate the additional stock-based compensation expense to record, we had to make assumptions and interpretations and draw conclusions about factual, legal, and accounting matters. There is the risk that these assumptions, interpretations, and conclusions could be incorrect or could be disputed by others.

Assumptions, interpretations and conclusions as to facts

The risk of an incorrect assumption, interpretation or conclusion as to facts is intensified in situations where the documentation is incomplete. If documentation was incomplete, all reasonably available relevant information was considered in forming conclusions as to the most likely actions that occurred and the dates on which those actions occurred. This is in accordance with a September 19, 2006 letter from the SEC’s Office of the Chief Accountant (“OCA Letter”).

Incomplete documentation was an issue particularly with respect to the grants in categories A and C. In category A, there was inadequate contemporaneous evidence to corroborate the stated grant dates for grants made by the Former CEO to continuing employees. This lack of corroboration, when considered with the significant prevalence of evidence that other grants in this category were manipulated and the fact that the control environment, in terms of compensating controls, was the same throughout the period, led to the conclusion that the measurement date should be revised for all grants in Category A. Grants in category C lacked evidence of Compensation Committee ratification. Available relevant information, including personnel records and Compensation Committee records, was used to determine the most likely grant date.

The risk of an incorrect assumption, interpretation or conclusion as to facts also extends to the Special Committee’s findings, including those regarding individual behavior. It is important to note that the Former CEO and Former HR VP, who have been determined to be central to the matters under investigation, declined to be interviewed by the Special Committee. The Special Committee and its legal advisors and forensic accountants had to make numerous judgments and assumptions in the process of gathering, reviewing and evaluating the evidence, beginning with the selection of methods to ascertain the available body of evidence and the selection of paper and electronic documents for further examination. The Special Committee also made assumptions and judgments with respect to other matters, such as the credibility of witnesses, the intent behind the wording of emails and other documents, whether and to what extent documents were received, read, or understood by the intended recipients, and the probable date of undated documents.

Legal interpretations and conclusions

We made certain legal interpretations regarding, among other things, the requirements under Delaware law for the granting of stock options, the effectiveness of actions taken by our Board and the Compensation Committee, and the status of certain individuals as employees.

Accounting interpretations and conclusions

We also made a number of judgments with respect to accounting matters, including interpreting relevant accounting rules and literature and applying those interpretations to our facts and circumstances. For each category A through F we had to interpret and apply APB 25 and related accounting guidance. Specifically, we had to make a determination of the correct measurement dates, which APB 25 defines as the first date on which are known both the option price and the number of shares that an individual employee is entitled to receive.

In coming to our conclusions regarding the correct measurement dates for the grants in each of the categories, we evaluated possible alternatives in situations where there appeared to be more than one potentially feasible measurement date. In choosing from among the alternatives, our conclusions were ultimately based on our good faith assessment of the facts and circumstances and our best effort application of accounting principles to those facts and circumstances. Some of the alternatives considered would have increased the additional non-cash compensation expense and some

would have decreased it. In some cases, proposed alternatives were rejected as inappropriate without measuring the impact on the compensation expense on those dates because the alternatives were clearly not viable.

For category A Grants made by Former CEO from April 1997 to May 2002 to Existing Employees, we considered three possible measurement dates in addition to the selected date (Compensation Committee ratification). Identified alternatives considered, but ultimately rejected, included the date of SEC Form 4 filings for employees subject to Section 16 of the Securities Act of 1934, the date that grant data was entered into the Company’s option management database, and the date grant notification paperwork was generated and distributed. The Form 4 dates were not selected because Form 4s were filed prior to the date of the Compensation Committee approval on only two occasions, there is evidence that changes were made to grants up to the date of the Compensation Committee meeting and there is evidence that other Form 4s had been filed in error. The date of data entry into the option database was not selected because awards are entered into the system near the end of the quarter, in support of preparation of the quarterly financial statements, and there is no correlation between the date information is entered into the database and the date of grant. We concluded that the grant notification paperwork date was not an appropriate measurement date after considering the informal nature of the notification process, the fact that notification regarding the grant details does not occur simultaneously for all employees, and the lack of accurate tracking logs for the period under review. After considering these alternatives against the relative certainty associated with the Compensation Committee approval date, we determined the date of Compensation Committee approval was the correct measurement date for grants in category A.

With respect to the notification process discussed above, we also note that prior to the Company’s implementation of SFAS 123(R), which is discussed in this Item 7 under the heading “Recently Issued Accounting Standards,” the Company did not believe that notification was a requirement for establishing a measurement date under APB 25, so it had no reason to gather or maintain evidence of the notification date. Based on the review of historical practices, the Company has concluded that it was likely that notification took place within a reasonable time period of the APB 25 measurement date. Thus, using an analogy to FASB Staff Position No. 123R-2, both the consolidated financial statements included in Item 8 of this Report and the SFAS 123 pro-forma footnote included in Note 1 to those financial statements use the APB 25 measurement date.

For category B Grants to new employees, we considered using the hire date as the measurement date for all grants in the category, but rejected that concept because there is evidence of management’s willingness to intentionally select favorable grant dates for new hires from April 1997 through August 2002 and a majority of the new hires during this period received options on dates after the hire date. The correct measurement date was determined to be the later of the date that the Compensation Committee approved these grants or the date of employment, since that is the first date for which we can confirm that the elements of APB 25 were satisfied. If the hire date had been used for all grants in this category, the pretax restatement charge would have been reduced by approximately $7.4 million.

Grants lacking evidence of Compensation Committee approval (category C) were individually evaluated using all available information in order to compile the most comprehensive set of facts and determine the most likely measurement date. Given the lack of complete information, we evaluated alternative measurement dates. Specifically, we made a judgment that the most likely period in which the grant terms were finalized began with the grant date (or earlier hire date, if applicable) and ended with the filing date of the quarterly or annual financial statements that reflect the shares with no record of approval. We then calculated the impact on compensation expense using the hire date (when applicable) and the period high share price. The pretax restatement charge would have increased by approximately $112,000 if the hire date were used for all new hire grants in this category. Use of the period high share price for all grants in this category would have increased the pretax restatement charge by approximately $628,000. We rejected the use of an arbitrary standardized measurement date for grants in this category and instead determined measurement dates based on individual analysis of the facts and circumstances surrounding each grant.

In category D Grants modified after ratification by the Compensation Committee, the list attached to the final Compensation Committee meeting minutes, which were ratified at the next meeting, differed from the list that was originally submitted for approval. Upon identification of the exceptions, we reassessed our primary conclusion that all grants from the 23 grant dates involved were finalized when they were submitted to the Compensation Committee. Each modification was investigated and evaluated and, based on this reassessment, we concluded that the errors are administrative in nature and not indicative of an open-allocation process, except for (i) one grant date in May 1999 for which there is evidence indicating the grant process for ten employees in two departments was incomplete on the award approval date, (ii) 21 grants to continuing employees on one grant date in May 2000 for which the grant process was

found to be incomplete on the award approval date, and (iii) five grants to new hires on one grant date in December 2000 that were made prior to the employees’ start dates.

With respect to (i), after concluding that the May 1999 grant process was incomplete for the ten identified employees in two departments, we revised the measurement date for all grants to employees in those departments from the May 1999 Compensation Committee meeting to the date of the next Compensation Committee meeting in September 1999. Based on our evaluation of the unique facts surrounding the modified grants, we concluded that an open-allocation process did not exist outside of these two departments. Therefore, the correct measurement date for grants to employees in other departments is the date of the May 1999 Compensation Committee meeting. In forming these conclusions about the correct measurement date for the May 1999 grants, we considered relevant guidance in the OCA Letter about changes subsequent to the award date. Given the level of judgment required in reaching these conclusions, we considered two alternatives for the May 1999 grant. The first assumed only the grants for the ten employees were modified and the second assumed grants for all employees were modified. If the first alternative had been selected, the pretax restatement charge would have been decreased by approximately $1.2 million; if the second alternative had been selected, the pretax restatement charge would have increased by approximately $2.6 million. These alternatives, representing each end of the spectrum, were rejected in favor of the less arbitrary and more reasoned approach described above.

With respect to (ii), if we had revised the measurement date only for the 21 grants that were modified after the Compensation Committee meeting rather than for all employees who were on the second quarter grant list, the additional pre-tax compensation expense would have been reduced by $7.8 million.

With respect to (iii), if we had used the hire date as the measurement date for the five grants to new hires on one grant date in December 2000, rather than the date of the Compensation Committee meeting, the additional pre-tax compensation expense would have increased by approximately $81,000.

For category E Post-Employment Arrangements, we considered the provisions of APB 25, FASB Interpretation No. 44 Accounting for Certain Transaction involving Stock Compensation, and other relevant accounting literature regarding modification of options. We concluded that because options held by employees continued to vest and the time in which to exercise vested options was extended, option modifications occurred for the grants in this category. For the options affected by these 21 agreements, the modification date is the date the Company notified the employee of their leave of absence status or changed employment status, including the related modification to the terms of the grant. The measurement date for the modification to the grants affected by these agreements is the modification date. Given the level of factual information available and the accounting guidance on this issue, we did not assess alternative measurement dates for the modification other than with respect to the on-call agreements. One executive exercised all his vested options one week after entering into an on-call agreement. That is, he exercised them within the original time period permitted by the award agreements. The other executive exercised a portion of his vested options within the original time period permitted. Had we concluded that these vested shares were not modified by the on-call agreements, compensation expense would have been reduced by approximately $10.7 million with respect to the first employee and $1.1 million with respect to the second employee.

With respect to category F Pricing Exceptions, we concluded, and our accounting advisors and the Special Committee’s forensic accountant have concurred, that using the prior date closing methodology set forth in our 1994 stock option plans to determine the exercise price and measure the compensation cost of our employee stock options was reasonable and acceptable, even though establishing the exercise price in this manner was inconsistent with the terms of our later option plans, which call for using the weighted-average traded price on date of grant. Compensation cost for the options in this category has been remeasured using the prior day closing price. Therefore, compensation cost for all grants during the restatement period has been measured using the prior day closing price methodology. In October 2006, the Board also concurred with the conclusion and ratified past use of the prior date closing methodology.

(VII)

Going Forward

Going forward, we do not expect the restatement or the underlying circumstances to have an impact on our fundamental business operations, except to the extent of the disruption caused by the resignations described above and the associated loss of corporate history and knowledge base. Although the financial statement impact of adjustments for past option practices will be immaterial in fiscal year 2007 and future years, we have incurred, and will continue to incur, significant accounting, consulting and legal fees related to the restatement and associated matters such as government inquiries and litigation. These expenses are expected to be significant for some time. We may also incur significant

expense with respect to claims by optionees who were prohibited from exercising expiring or lapsing options during the restatement process. See Note 19 to the consolidated financial statements in Item 8 of this report for additional information about the SEC inquiry and other matters associated with the restatement and its underlying circumstances.

In keeping with our goal of continuous improvement in all areas of our business, we have improved our system of internal controls in recent years. Since the end of fiscal year 2006, we have instituted, or are instituting, additional changes to further enhance our entity level controls, controls with respect to stock options, and our corporate governance practices. Some of these modifications reflect recommendations made by the Special Committee. These improvements include the establishment of an internal audit function in February 2006, the addition of two new independent directors in October 2006, and the Board’s adoption of a policy in November 2006 that clarifies its views as to matters requiring prior Board review and provides guidance to the Chief Executive Officer and senior management in identifying matters to be brought to the Board’s attention.

We believe that the past intentional manipulation of the stock option granting process discussed above is contrary to the high ethical standards we endeavor to apply to all aspects of our operations. In the second quarter of fiscal year 2007, our senior management formalized a set of Core Values to complement the Code of Conduct adopted in 2004. These Core Values, which have been disseminated to all employees, include Honesty and Integrity in All We Do. To the extent portions of the restatement were due to lack of understanding, documentation or procedural lapses, and/or administrative errors, we are recommitted to excellence in carrying out job functions at every level.

Having completed its work, the Special Committee will stand down and be dissolved upon the filing of this Form 10-K/A and the FY2007 Form 10Qs.

We intend to honor the exercise price of options specified in outstanding executory award agreements, except as to those options that the Special Litigation Committee has directed be cancelled or modified.

SEMTECH CORPORATION

INDEX TO FORM 10-K/A

Amendment No. 1

FOR THE YEAR ENDED JANUARY 29, 2006


		Page
EXPLANATORY NOTE		1

PART I

Item 1	Business	18
Item 1A	Risk Factors	27
Item 1B	Unresolved Staff Comments	39
Item 2	Properties	39
Item 3	Legal Proceedings	40
Item 4	Submission of Matters to a Vote of Security Holders	40

PART II

Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	41
Item 6	Selected Financial Data	43
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operation	45
Item 7A	Quantitative and Qualitative Disclosures About Market Risks	74
Item 8	Financial Statements and Supplementary Data	76
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	124
Item 9A	Controls and Procedures	124
Item 9B	Other Information	127

PART III

Item 10	Directors and Executive Officers of the Registrant	128
Item 11	Executive Compensation	129
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	129
Item 13	Certain Relationships and Related Transactions	129
Item 14	Principal Accounting Fees and Services	130

PART IV

Item 15	Exhibits, Financial Statement Schedules	130

	Signatures	134

Forward Looking and Cautionary Statements

This Amendment No. 1 to Annual Report on Form 10-K (the “Form 10-K/A”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may also make forward-looking statements in other reports filed with the Securities and Exchange Commission (“SEC”), in materials delivered to shareholders and in press releases. In addition, Company representatives may make oral forward-looking statements from time to time. Forward-looking statements are statements other than historical information or statements of current condition and relate to matters such as our future financial performance, future operational performance, and our plans, objectives and expectations. Some forward-looking statements may be identified by use of terms such as “expects,” “anticipates,” “intends,” “estimates,” “believes,” “projects,” “should,” “will,” “plans” and similar words.

Forward-looking statements should be considered in conjunction with the cautionary statements contained in Item 1A “Risk Factors” and elsewhere in this Form 10-K/A, in our other filings with the SEC, and in material incorporated herein and therein by reference. In light of the risks and uncertainties inherent in all such projected matters, forward-looking statements should not be regarded as a representation by the Company or any other person that our objectives or plans will be achieved or that any of our operating expectations or financial forecasts will be realized. Financial results could differ materially from those projected in forward-looking statements due to known or unknown risks. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

ITEM 1.

BUSINESS

The only portions of this item that have been updated substantively are the product development and engineering expenses presented under the caption Intellectual Capital and Product Development and the sales by region data under the caption Customers, Sales Data and Backlog.

General

We are a leading supplier of analog and mixed-signal semiconductors and were incorporated in Delaware in 1960. We design, produce and market a broad range of products that are sold principally to customers in the computer, communications and industrial markets. Our products are designed into a wide variety of end applications, including notebook and desktop computers, personal digital assistants (PDAs), cellular phones, wireline networks, high-end consumer devices and semiconductor test platforms. Our end-customers are primarily original equipment manufacturers and their suppliers, including Apple, Cisco, Compal Electronics, Curitel Communications, Dell, Hewlett Packard, Intel, LG Electronics, Motorola, Nortel, Panasonic, Phonak, Quanta Computer and Samsung.

Overview of the Semiconductor Industry

The semiconductor industry is broadly divided into analog and digital semiconductor products. Analog semiconductors condition and regulate “real world” functions such as temperature, speed, sound and electrical current. Digital semiconductors process binary information, such as that used by computers. Mixed-signal devices incorporate both analog and digital functions into a single chip and provide the ability for digital electronics to interface with the outside world.

The market for analog and mixed-signal semiconductors differs from the market for digital semiconductors. The analog and mixed-signal industry is typically characterized by longer product life cycles than the digital industry. In addition, analog semiconductor manufacturers tend to have lower capital investment requirements for manufacturing because

their facilities tend to be less dependent than digital producers on state-of-the-art production equipment. The end-product markets for analog and mixed-signal semiconductors are smaller, more varied and more specialized than the relatively standardized digital semiconductor product markets.

Another difference between the analog and digital markets is the amount of available talented labor. The analog industry relies more heavily than the digital industry on design and applications talent to distinguish its products from one another. Digital expertise is extensively taught in universities due to its overall market size, while analog and mixed-signal expertise tends to be learned over time based on experience and hands-on training. Consequently, personnel with analog training are more scarce than digital trained engineers. This has historically made it more difficult for new suppliers to quickly gain significant market share.

The electronics market is characterized by several trends that we believe drive demand for our products. Electronic systems are being designed to operate at increasingly lower operating voltages, battery-powered devices such as handheld computers and cellular telephones are proliferating, and devices are becoming smaller and requiring higher levels of integration. Our products are designed to address these needs by providing solutions that protect low voltage circuits, extend battery life, meet tighter voltage requirements, improve interface between systems, and support higher transmission and processor speeds. Additionally, as communications functions are increasingly integrated into a range of systems and devices, these products require analog processing capabilities, which increases the number and size of our end-markets. Finally, industrial, medical, consumer and other end-market applications have increasingly incorporated data processing and communications features into their finished systems, which in turn have broadened the opportunities for selling our analog and mixed-signal devices.

Advancements in digital processing technology typically drive the need for corresponding advancements in analog and mixed-signal solutions. We believe that the diversity of our applications allows us to take advantage of areas of relative market strength and reduces our vulnerability to competitive pressure in any one area.

Semtech End-Markets

A majority of our products are sold to customers in the computer, communications and industrial markets. Until the mid-1990s, we largely focused on serving the military and aerospace end-market. In calendar year 1996, we used the desktop segment of the computer market as our first major entry into the commercial marketplace for our circuits. Nearly ten years ago, approximately half of our revenues were derived from desktop computer related applications. In recent years, we have seen relative growth from the communications and industrial markets as a percentage of the total. We have also seen a greater diversification within our computer market segment, beyond our initial focus on desktop computer applications.

For the fiscal year ended January 29, 2006, our revenues from the computer end-market were 30% of net sales, the communications end-market, which includes cellular phones applications, was 46%, and the remaining 24% of net sales were from industrial, military and aerospace, and various other end-markets.

Computer market applications include notebook and desktop computers, computer graphics and PDAs. End-product applications for our products within the communication market include cellular phones and base stations, set-top-boxes, and local and wide-area networks. Industrial and other applications include automated test equipment (ATE), power supplies, hearing aids and other medical devices, and meter reading and factory automation systems. We believe that our diversity in end-markets provides stability to our business and opportunity for growth. Presented below is our estimated breakdown of sales by various end-applications for the last three fiscal years.

(fiscal years, percentage of net sales)


End-Application	2006		2005		2004
Cell phone	27	%	32	%	27	%
Notebook computers and PDA	18	%	21	%	22	%
Desktop computers/server	11	%	9	%	12	%
Graphics/gaming	1	%	3	%	6	%
Wireline equipment	19	%	15	%	13	%
ATE	4	%	10	%	12	%
Industrial/other	20	%	10	%	8	%

	100	%	100	%	100	%

The following table depicts our main product lines and their end-product applications:


Semtech’s Main Product Lines	Specific End-Product Applications
	Computer	Communications	Industrial / Other
Power Management	Desktop PCs, servers, workstations, notebook computers, add-on cards, PDAs, computer gaming systems	Cellular phones, network cards, routers and hubs, telecom network boards	Power supplies, industrial systems

Protection	Notebook computers, PDAs, USB ports, LAN cards	Cellular phones, base stations, DSL equipment, routers and hubs	Handheld measurement or instrumentation devices

Test and Measurement	Workstations	Cellular base stations, routers and hubs, SONET networks	Automated test equipment

Advanced Communications		SONET networks, routers, hubs, switches, fiber modems

Wireless and Sensing		Wireless headsets and Bluetooth™ devices	Automated metering reading, industrial control and hearing aids (medical).

Historically, our results have reflected some seasonality, with demand levels generally being higher in the computer and consumer products segments during the third and fourth quarters of our fiscal year in comparison to the first and second quarters. In recent years, macro-level industry trends and end-application cycles have had a more significant impact than seasonality on our results.

Business Strategy

Our objective is to be a leading supplier of analog and mixed-signal devices to the fastest growing segments of our target markets. We intend to leverage our pool of skilled technical personnel to develop new products, or, where appropriate, use acquisitions, to serve the fastest growing segments of these markets. In order to capitalize on our strengths in analog and mixed-signal processing design, developing and marketing, we intend to pursue the following strategies:

Leverage our rare analog design expertise

We have developed a strategy to invest heavily in human resources needed to define, design and market high-performance products. We have built a team of experienced engineers who combine industry expertise with advanced semiconductor design expertise to meet customer requirements and enable our customers to get their products to market rapidly. We intend to leverage this strategy to achieve new levels of integration, power reduction and miniaturization, enabling our customers to achieve leading performance in their products.

Continue to release proprietary new products, achieve new design wins, and cross-sell products

We are focused on developing unique, new, high-margin products to serve our target markets. These markets have experienced growing consumer demand for increased product performance at competitive price points. We also focus on achieving design wins for our products with current and future customers. Design wins are indications by the customers that they intend to incorporate our products into new designs. Our technical talent works closely with our customers in securing design wins, developing new products and in implementing and integrating our products into

their systems. We also focus on selling additional products to our existing customers, as we believe the technical expertise of our marketing department permits it to identify and capitalize on cross-selling opportunities. Our June 2005 acquisition of XEMICS SA (see Note 18 to our consolidated financial statements) should further help us in the areas of development of new products, securing customer design wins and cross-selling multiple products into customer accounts.

Focus on fast-growing market segments

We have chosen to target the analog segments of some of the fastest growing end-markets. We intend to enhance this growth potential by focusing on specific products within the analog and mixed-signal market, including notebook computers, PDAs, cellular phones, wide area networks and certain broad-based industrial markets. These markets are characterized by their need for leading-edge, high-performance analog and mixed-signal semiconductor technology.

Leverage outsourced semiconductor fabrication capacity

We outsource most of our manufacturing in order to focus more of our resources on defining, developing and marketing our products. We use outside wafer foundries that are based in Asia, the United States and Europe. Our largest wafer source is a foundry based in China. We believe that outsourcing provides us numerous benefits, including capital efficiency, the flexibility to adopt and leverage emerging process technologies without significant investment risk and a more variable cost of goods, which provides us with greater operating flexibility.

Increase sales efforts in certain geographic areas

We believe that certain geographic markets, such as China, Japan and Europe represent opportunities for added sales and end-customer diversity. China is an emerging market with quickly developing opportunities that range from portable consumer devices up to expensive networking equipment. Our subsidiary, Semtech International AG, has developed a local presence in China to provide qualified activities, such as marketing, technical advice and market trends and has leveraged its relationship with its Taiwanese and Korean-based customers that are transferring business into China. Japan and Europe have been major consumers of analog and mixed-signal components for many years. We have bolstered our sales efforts in these regions in hopes of finding added success in these large markets.

Product Segments

We have two product segments, both of which are comprised of semiconductor products. A majority of our sales come from our Standard Semiconductor Products, which we consider to be our most strategic product segment. The balance of sales come from our Rectifier, Assembly and Other Products segment. The products in that segment are older-technology products, in many cases dating back to the earliest days of our Company when our focus was primarily the military and aerospace end-markets.

Standard Semiconductor Products. Included in Standard Semiconductor Products are integrated circuits (ICs) and discrete components designed for use in standard and specific applications. Standard Semiconductor Products represented approximately 96%, 96% and 95% of our overall net sales for fiscal years 2006, 2005 and 2004, respectively. The main product lines within our Standard Semiconductor Products are described below.

Power Management Circuits. Power management circuits control, alter, regulate and condition the electrical pulses that flow through electronics. The highest volume product types within the power management product line are switching voltage regulators, combination switching and linear regulators, smart regulators and charge pumps. The primary application for these products is power regulation for computer, communications and industrial systems. Internally, we divide the power management product line into three sub-product groups, entitled portable power management, desktop/server power management and networking/industrial power management.

Protection Products. We design and market protection products, which are often referred to as transient voltage suppressors (TVS). TVS devices provide protection for electronic systems where voltage spikes (called transients), such as electrostatic discharge generated by the human body, can permanently damage voltage-sensitive components. We also have developed filter and termination devices that can be sold as a complement to TVS devices. Specific protection product applications are found in computer, data-communications, telecommunications and industrial markets.

Test and Measurement Circuits. We design and market a wide variety of test and measurement products, namely pin electronics, timing, clock distribution, parametric measurement, and clock products for use in ATE, workstations and communication infrastructure equipment.

Advanced Communication Circuits. We have developed a line of highly proprietary advanced communication ICs, which perform specialized timing and synchronization functions in high-speed networks. Our primary product offering in this area is our “SETS” product family that is used in metropolitan, wide area, and wireless networks.

Wireless and Sensing Products. Through our June 2005 acquisition of XEMICS, we now offer a line of wireless and sensing products that can be used in a wide variety of industrial, medical, personal area network, and other applications. Our wireless and sensing products include the ability to perform radio frequency (RF) capabilities in the products we sell, along with other sensing and converter technology.

Human Input Devices (HID). Following our acquisition of USAR in fiscal year 2000, we offered a line of HID devices that included touch-screen and touch-pad controllers, pointing stick devices and battery management circuits designed to handle human input and battery functions in portable systems such as notebook computers, PDAs and cellular phones. In the fourth quarter of fiscal year 2006, we made a strategic decision not to further invest in this product offering. Customers have been given a period of time in which to make last time orders for most of our HID products. In fiscal year 2006, HID products represented 2% of Standard Semiconductor Products segment sales.

Rectifier, Assembly and Other Products. Rectifiers, assemblies and other products are older-technology products. Rectifier, Assembly and Other Products represented approximately 4%, 4% and 5% of our overall net sales for fiscal years 2006, 2005 and 2004, respectively.

Rectifiers. We have several different categories of silicon rectifiers, which are primarily used to convert alternating current to direct current. These products are sold mainly to military, aerospace, industrial equipment and medical equipment customers.

Assemblies. A rectifier assembly is a package of rectifiers of one or more types, sometimes encased in epoxy or silicon by various molding techniques, constituting one or more basic rectifier circuits. We also offer some non-rectifier assemblies such as voltage multipliers. Assemblies are used in x-ray scanners, microwave ovens, aircraft engines, avionics equipment, airport radar and other specialized applications.

For further financial information on these segments, refer to the information contained in Note 17 to the Consolidated Financial Statements included in Item 8.

Intellectual Capital and Product Development

We believe that our emphasis on the development of our intellectual properties and introduction of new proprietary product designs are key to our success. Recruiting and retaining technical talent is the foundation for developing and selling new products into the marketplace. One of our strategies to recruit this talent is the establishment of multiple design center locations. We have dedicated design centers in San Jose, California; Raleigh, North Carolina; Glasgow, Scotland; Romsey, England; Swindon, England and Neuchatel, Switzerland. In addition, dedicated test and measurement circuit design occurs at our San Diego location.

Circuit design engineers are some of our most valuable engineers. Circuit designers perform the critical task of designing and laying out integrated circuits. As of January 29, 2006, we employed more than 80 circuit designers and layout engineers. Many of these individuals have senior-level expertise in the design, development and layout of circuits targeted for use in power management, protection, test, measurement and communication applications. We also employ a very limited number of engineers that specialize in the development of software that is incorporated into certain of our advanced communications and wireless and sensing products.

We incurred $37.9 million or 16% of net sales on product development and engineering in fiscal year 2006. Product development and engineering costs were $35.3 million or 14% of net sales and $33.3 million or 17% of net sales in fiscal years 2005 and 2004, respectively. We intend to make further investments in research and development in the future, which may include including increasing our employee headcount and investing in design and development equipment.

Sales and Marketing

Sales made directly to original equipment manufacturers during fiscal year 2006 were approximately 57% of net sales. The remaining 43% of net sales were made through independent distributors. We have direct sales personnel located throughout the United States who manage the sales activities of independent sales representative firms and independent distributors within North America. We expense our advertising costs as they are incurred.

We operate internationally primarily through our wholly-owned Swiss subsidiary, Semtech International AG. Semtech International serves the European markets from its headquarters in St. Gallen, Switzerland and through its wholly-owned subsidiaries based in France; Germany; Neuchatel, Switzerland; and the United Kingdom. Semtech International maintains branch sales offices, either directly or through one of its wholly owned subsidiaries, in Hong Kong, Taiwan, Korea and Japan. Semtech International also has small representative offices located in Shanghai and Shenzhen, China. Independent representatives and distributors are also used to serve customers throughout the world. Some of our distributors and sales representatives may also offer products from our competitors, as is customary in the industry.

Customers, Sales Data and Backlog

For fiscal year 2006, we estimate that more than 1,000 customers purchased our products either directly from us or through our authorized distributors. The following is a sample of our customers by end-markets:

Representative Customers by End-Markets:


Computer	Communications	Industrial/Other

Apple	Alcatel	Credence

Dell	Motorola	LTX

Hewlett Packard	Nortel	Rockwell

Intel	Samsung	Siemens

LG Electronics	Sony	Phonak

Our customers include major computer and peripheral manufacturers and their subcontractors, ATE manufacturers, data communications and telecommunications equipment vendors, and a variety of large and small companies serving the industrial, medical, automotive, aerospace and military markets. Customers tend to make their decision on whether to buy our products or our competitors’ products based on such key factors as price, technical support and product performance.

During fiscal year 2006, 2005 and 2004, U.S. sales contributed 18%, 26% and 31%, respectively of our net sales. Conversely, during fiscal years 2006, 2005 and 2004, foreign sales constituted 82%, 74% and 69%, respectively, of our net sales. A majority of foreign sales were to customers located in the Asia-Pacific region. The remaining foreign sales were primarily to customers in Europe, Canada, and Mexico.

A summary of net sales by region follows:

(fiscal years, in thousands)


	2006
	As Previously Reported		Audit Adjustments			As Restated (1)		2005		2004
North America	$	42,678	$	(67	)	$	42,611	$	65,884	$	59,927
Asia-Pacific		168,796		—			168,796		167,336		115,936
Europe		27,931		—			27,931		20,392		16,216

Total Net Sales	$	239,405	$	(67	)	$	239,338	$	253,612	$	192,079

(1)	See Notes 1A and 20 to the financial statements included in Item 8 of this report.

One end-customer that is a major manufacturer of cellular phone handsets and other electronic equipment, accounted for 11% of net sales in fiscal year 2006. No end-customer accounted for 10% or more of net sales in fiscal years 2005 and 2004. One of our Asian distributors accounted for approximately 12%, 10% and 14%, respectively, of net sales in fiscal years 2006, 2005 and 2004. For fiscal year 2005 and fiscal year 2004, an Asian distributor formerly used by the Company accounted for approximately 10% of net sales in each year.

Our backlog of orders as of the end of fiscal years 2006, 2005 and 2004 were approximately $46.6 million, $35.6 million and $45.4 million, respectively. Nearly all backlog is deliverable within six months; experience has shown that short-delivery lead times are required by most customers. A backlog analysis at any given time gives little indication of our future business except on a short-term basis, principally within the next 45 days. We do not have any significant contracts with our customers calling for shipments over a period of more than 18 months.

Manufacturing Capabilities

Unlike digital products, our products are less reliant on state-of-the-art manufacturing and more reliant on design and applications support. As part of our business strategy, we outsource a majority of our manufacturing functions to third-party contractors that fabricate silicon wafers and package and test our products. We believe this outsourcing permits us to take advantage of the best available technology, leverage the capital investment of others and reduce our operating costs associated with manufacturing assets and increase the variable component of our cost of goods sold.

We perform a very limited amount of probe and final test activities in our Camarillo and San Diego, California; Neuchatel, Switzerland; and Reynosa, Mexico facilities. Our rectifier and assembly product lines are packaged and tested in-house in Reynosa. Almost all of our other products are packaged and tested by outside subcontractors.

In keeping with our business model, we have no wafer fabrication facilities except for our operation in Reynosa, Mexico. For fiscal year 2006, the Reynosa facility provided almost all of the silicon for our rectifier and assembly products, which were approximately 4% of our end product sales. The remaining 96% of our end products were supported with finished silicon wafers purchased from outside wafer foundries in Asia, the United States and Europe. We anticipate that again in fiscal year 2007, virtually all the silicon wafers we require will come from outside foundries.

Despite our use of outside wafer foundries for sourcing a majority of our silicon needs, we do maintain internal process development capabilities. Our process engineers work closely with our outside foundries on the improvement and development of process capabilities. In fiscal year 2006, we purchased the vast majority of our wafers from eight different third-party wafer foundries and used more than 20 different manufacturing processes, including various Bipolar, High-Speed Bipolar, CMOS, and Bi-CMOS processes.

While we do have some redundancy of fab processes by using multiple outside foundries, any interruption of supply by one or more of these foundries could materially impact us. Likewise, we maintain some amount of business interruption insurance to help reduce the risk of wafer supply interruption, but we are not fully insured against such risk.

Although our products are made from basic materials (principally silicon, metals and plastics), all of which are available from a number of suppliers, capacity at wafer foundries sometimes becomes constrained. The limited availability of certain materials, such as silicon wafer substrates, may impact our suppliers’ ability to meet our needs or impact the price we are charged. Certain other basic materials, such as metals, gases and chemicals used in the production of circuits have all increased in recent years as demand has grown for these basic commodities. In most cases we do not procure these materials ourselves but we are nevertheless reliant on such materials for producing our products because our outside foundry and package and test subcontractors must procure them. To help minimize risks associated with constrained capacity, we use multiple foundries and have taken other steps to reserve capacity at certain foundries.

Our largest wafer source is a foundry in China. In fiscal year 2006, this Chinese foundry provided 58% of our total silicon requirements in terms of finished wafers purchased. We have consigned certain equipment to this foundry to support our specialized processes run at the foundry and to ensure a specified level of capacity over the next few years. The provision of these assets to the wafer foundry is factored into our long-term pricing arrangement with the foundry for any reserved wafers we may purchase.

In fiscal year 2005, we made a prepayment for wafers at our second largest wafer source, a foundry based in Germany. This foundry provided 13% of our total silicon requirements in terms of finished wafers purchased in fiscal year 2006.

In exchange for the prepayment, the foundry has reserved a specified level of capacity for us through calendar year 2006. We also negotiated favorable wafer pricing with this foundry for any reserved wafers purchased. Any unused capacity at the end of calendar year 2006 will either be applied to purchases made in calendar year 2007 or the corresponding portion of the prepayment will be returned. The balance of our unsecured prepaid account with this foundry is included in other current assets and other assets.

We use third-party contractors to perform almost all of our assembly and test operations. A majority of our assembly and test activity is conducted by third-party contractors based in Malaysia, the Philippines and China. Our subsidiary, Semtech International AG, has an operations office located in the Philippines that supports and coordinates some of the worldwide shipment of products. We have installed our own test equipment at some of our packaging and testing subcontractors in order to ensure a certain level of capacity, assuming the subcontractor has ample employees to operate the equipment. We have a prepayment arrangement with one of our assembly and test contactors to provide us with guaranteed capacity and preferred pricing. The balance with this contractor does not have collateral backing.

Our arrangements with both outside wafer foundries and package and test subcontractors are designed to provide some assurance of capacity but are not expected to assure access to all the manufacturing capacity we may need in the future.

For further information regarding our arrangements with suppliers and the location of our long-lived assets, see Note 5, 8 and 17 to the Consolidated Financial Statements included in Item 8.

Competition

The analog and mixed-signal semiconductor industry is highly competitive, and we expect competitive pressures to continue. Our ability to compete effectively and to expand our business will depend on our ability to continue to recruit applications and design talent, our ability to introduce new products, and the rate at which we introduce these new products to offset the generally short product life cycles. Our industry is characterized by decreasing unit selling prices over the life of a product and these decreases are sometimes quite rapid. We believe we compete effectively based upon our ability to capitalize on efficiencies and economies of scale in production and sales, and our ability to maintain or improve our productivity and product yields to reduce manufacturing costs.

We are in direct and active competition, with respect to one or more of our product lines, with at least 30 manufacturers of varying size, technical capability and financial strength. A number of these competitors are dependent on semiconductor products as their principal source of income, and some are much larger than we are. The number of our competitors has grown due to expansion of the market segments in which we participate. We consider our primary competitors to include Texas Instruments, National Semiconductor, Linear Technology, Maxim Integrated Products, Fairchild Semiconductor, Advanced Analogic Technologies, Monolithic Power Systems and Intersil Semiconductor, all with respect to our power management products; ST Microelectronics N.V., Philips ON Semiconductor, Protek and California Micro Devices with respect to our protection products; Analog Devices and Maxim Integrated Products with respect to our test and measurement products; Silicon Laboratories and Zarlink Semiconductor with respect to our advanced communications products; and Marvell and Micrel Semiconductor with respect to our wireless and sensing products.

Intellectual Property and Licenses

We own many U.S. and foreign patents and have numerous patent applications pending with respect to our products and to technologies associated with our business. The expiration dates of issued patents range from 2010 to 2025. Although we consider patents to be helpful in maintaining a competitive advantage, we do not believe they create definitive competitive barriers to entry. There can be no assurance that our patent applications will lead to issued patents, that others will not develop or patent similar or superior products or technologies, or that our patents will not be challenged, invalidated, or circumvented by others.

Semtech Neuchatel licenses certain patents and other intellectual property to others in exchange for use of the other party’s intellectual property and/or royalties or other fees which, in the aggregate, were not material in fiscal year 2006.

We license some intellectual property from other companies and we believe the duration and other terms of the licenses are appropriate for our needs. At January 29, 2006, other current liabilities and other long-term liabilities include

approximately $155,000 and approximately $150,000, respectively, of fees payable in connection with Semtech Neuchatel’s license of certain intellectual property through various dates ranging up to at least 2016.

We have registered many of our trademarks in the U.S. and in various foreign jurisdictions. Registration generally provides rights in addition to basic trademark protections and are typically renewable upon proof of continued use. We have registered, or are in the process of registering, our SEMTECH trademark in many jurisdictions. In one location use of this trademark is prohibited, but we are permitted to use our Semtech International tradename. This restriction has not had a material impact on our business to date and we do not anticipate it will have a material impact in the future.

We also register certain materials in which we have copyright ownership, which provides additional protection for this intellectual property.

Employees

As of January 29, 2006, we had 659 full-time employees. There were 148 employees in research and development, 137 in sales, marketing and field services, and 75 in general, administrative and finance. The remaining employees support operational activities, including product and test engineering, assembly, manufacturing, distribution and quality functions. Approximately 44% of our employees are assigned to the Standard Semiconductor Products segment and approximately 19% are assigned to the Rectifier, Assembly and Other Products segment, with the remaining employees, approximately 37%, serving both segments.

We have not had a work stoppage in at least the last decade and the only unionized employees are the approximately 110 Mexican nationals who work at our Reynosa facility, a part of our Rectifier, Assembly and Other Products segment. Our employee relations during the last fiscal year have been, and remain, satisfactory.

We readjust our workforce from time to time to meet the changing needs of our business. Competition for key design and application engineers is significant.

Government Regulations

We are required to comply, and it is our policy to comply, with numerous government regulations that are normal and customary to businesses in our industry and that operate in our markets and operating locations.

Our sales that serve the military and aerospace markets primarily consist of products from the Rectifier, Assembly, and Other Products segment that have been qualified to be sold in these markets by the U.S. Department of Defense (DOD). In order to maintain these qualifications, we must comply with certain specifications promulgated by the DOD. As part of maintaining these qualifications, we are routinely audited by the DOD. Based on current specifications, we believe we can maintain our qualifications for the foreseeable future. However, these specifications could be modified by the DOD in the future or we could become subject to other government requirements, which could make the manufacturing of these products more difficult and thus could adversely impact our profitability in those product lines. The U.S. State Department has determined that a small number of special assemblies from the Rectifier, Assembly, and Other Products segment are subject to the International Traffic in Arms Regulations (ITAR). We have a Technical Assistance Agreement in place that permits us to assemble these products in Mexico. International shipments of these products require a State Department license. Sales of products subject to ITAR are not material relative to the total sales of the Company.

Our facilities throughout the world are subject to various environmental laws and regulations and we believe our operations are in substantial compliance with those laws and regulations. Due to the limited nature of our manufacturing operations, the expense related to environmental compliance for our ongoing operations was immaterial for fiscal years 2006, 2005, and 2004 and has not had any material adverse effect on our capital expenditures, net income, or competitive position. New laws or regulations or changes to existing laws or regulations could subject our ongoing operations to different or additional environmental standards that could increase our cost of compliance in the future. In addition, our cost of doing business could increase if our suppliers increase prices to recoup the cost of their compliance with new or revised laws or regulations.

We have incurred, and may continue to incur, liabilities under various statutes for the cleanup of pollutants at locations we have operated and at third-party disposal and recycling sites (see Note 12 to our consolidated financial statements). During fiscal years 2006, 2005, and 2004, the expense incurred with respect to these clean up matters was not material.

We use an environmental firm, specializing in hydrogeology, to perform periodic monitoring of the groundwater at the facility in Newbury Park, California that we leased for approximately forty years. We vacated the building in May 2002. Certain contaminants have been found in the local groundwater. Monitoring results over a number of years indicate that contaminants are from adjacent facilities. It is currently not possible to determine the ultimate amount of future clean-up costs, if any, that may be required of us for this site. There are no claims pending with respect to environmental matters at the Newbury Park site. Accordingly, no reserve for clean-up has been provided at this time.

Available Information

General information about us can be found on our website at www.semtech.com. The information on our website is for information only and should not be relied on for investment purposes. The information on our website is not incorporated by reference into this report and should not be considered part of this or any other report filed with the Securities and Exchange Commission (“SEC”).

We make available free of charge, either by direct access on our website or a link to the SEC website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available directly at the SEC’s website at www.sec.gov.

Financial statements and the related reports of our independent public accounting firms, earnings press releases, and similar communications issued prior to July 20, 2006 should no longer be relied upon and are superseded by the information contained in the Form 10-K/A; our Quarterly Reports on Form 10-Q for the quarterly periods ended April 30, 2006, July 30, 2006, and October 29, 2006 which were filed concurrently with the Form 10-K/A; and in reports filed with the SEC subsequent to the filing of the Form 10-K/A.

ITEM 1A.

RISK FACTORS

You should carefully consider and evaluate all of the information in this report, including the risk factors listed below. The risks described below are not the only ones facing our company. Additional risks not now known to us or that we currently deem immaterial may also impair our business operations. If any of these risks actually occur, our business could be materially harmed. If our business is harmed, the trading price of our common stock could decline.

As discussed earlier in “Forward Looking and Cautionary Statements,” this report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors including the risks faced by us described below and elsewhere in this report, in our other filings with the SEC, and in material incorporated herein and therein by reference. We undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Only the risk factors under the following headings have been updated substantively with respect to the restatement and its underlying circumstances. None of the risk factors have been updated due to the Audit Adjustments.

We are subject to an SEC inquiry, a Federal Grand Jury subpoena, and shareholder litigation related to our historical stock option practices

We may be required to further amend our financial statements

We could face claims by individuals prevented from exercising stock options due to the restatement

We are ineligible to use SEC Form S-3 to register securities

The costs associated with our general product warranty policy and our indemnification of certain customers, distributors, and other parties could be higher in future periods

Our share price could be subject to extreme price fluctuations, and shareholders could have difficulty trading shares

The loss of any of our key personnel or the failure to attract or retain specialized technical and management personnel could impair our ability to grow our business

We are subject to review by taxing authorities, including the Internal Revenue Service

Changes in stock option accounting rules will impact our reported operating results prepared in accordance with generally accepted accounting principles, and may impact our stock price and our competitiveness in the employee marketplace.

Failure to maintain effective internal controls could have a material adverse effect on our business and stock price.

We are subject to an SEC inquiry, a Federal Grand Jury subpoena, and shareholder litigation related to our historical stock option practices

See Note 19 to the consolidated financial statements included in Item 8 of this report for information regarding inquiries into our historical stock option practices being conducted by the SEC and under a Federal Grand Jury subpoena. The filing of our restated financial statements does not resolve these matters. In the event that either or both of these investigations lead to action against any of our current or former directors, officers, or employees, or the Company itself, the trading price of our common stock may be adversely impacted. If we are subject to adverse findings in either of these matters, we could be required to pay damages or penalties or have other remedies imposed upon us, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Also see Note 19 to the financial statements included in Item 8 of this report with respect to shareholder derivative litigation and other matters related to the restatement and its underlying circumstances that could have a material adverse effect on our business and the price of our common stock.

If one or more of these matters continues for a prolonged period of time, they may have the same impact regardless of the ultimate outcome.

We may be required to further amend our financial statements

We believe this Form 10-K/A, and the FY2007 Form 10-Qs that are being filed concurrently with this report, correct the accounting errors arising from our past stock option practices. However, if the SEC disagrees with the accounting methods we used, objects to the manner in which we disclosed the restated financial information or related qualitative information, or otherwise imposes additional requirements with respect to our restated financial statements or stock option restatements in general, we could be required to further amend these filings. Further restatement could also be required if new facts become available as a result of the SEC inquiry, the Federal Grand Jury subpoena, the shareholder litigation or through other means. A further revision of our financial statements could result in delays in filing subsequent SEC reports, which could in turn result in the delisting of the Company’s common stock.

We could face claims by individuals prevented from exercising stock options due to the restatement

The exercise of stock options was prohibited during the restatement process because our filings with the SEC were not current. We could face claims from optionees who were prevented from exercising expiring options or from former employees with options that lapsed because exercise was prohibited during the short post-termination period provided for by their award agreements. In this regard, the Compensation Committee has authorized cash payments to some current and former employees and we have made an accrual for certain other potential claims. See Note 19 to the financial statements included in Item 8 of this report.

We could also face claims from individuals whose options have been cancelled or repriced by the Special Litigation Committee. See the discussion of Special Litigation Committee actions in Item 7 of this report.

We are ineligible to use SEC Form S-3 to register securities

As a result of our failure to file Quarterly Reports on Form 10-Q for the first three quarters of fiscal year 2007 on a timely basis, we are no longer eligible to use the short-form (Form S-3) to register our securities with the SEC until all

required reports under the Securities Exchange Act of 1934 have been timely filed for the 12 months prior to the filing of the registration statement for those securities. Although inconvenient, this restriction will not affect our ability to access the capital markets.

Economic decline may have adverse consequences for our business

We sell our products into several commercial markets, primarily the computer, communication and industrial end-markets, whose performance is tied to the overall economy. Many of these industries were severely impacted in calendar years 2001 and 2002 due to an economic slowdown in the United States and globally. Our business during these periods reflected the weak economic conditions. Market research analysts have claimed that historically the semiconductor industry is impacted by broad economic factors, such as United States gross domestic product (GDP) and worldwide oil prices.

If economic conditions were to once again worsen or a wider global slowdown were to occur, demand for our products may be reduced. In addition, economic slowdowns may also affect our customers’ ability to pay for our products. Accordingly, economic slowdowns may harm our business.

The cyclical nature of the electronics and semiconductor industries may limit our ability to maintain or increase revenue and profit levels during industry downturns

The semiconductor industry is highly cyclical and has experienced significant downturns, which are characterized by reduced product demand, production overcapacity, increased levels of inventory, industry-wide fluctuations in the demand for semiconductors and the significant erosion of average selling prices. The occurrence of these conditions has adversely affected our business in the past. In fiscal year 2002, our net sales declined by 26% compared to the prior year as a result of a dramatic slowdown in the industry. Past downturns in the semiconductor industry have resulted in a sudden impact on the semiconductor and capital equipment markets. Consequently, any future downturns in the semiconductor industry may harm our business.

We compete against larger, more established entities and our market share may be reduced if we are unable to respond to our competitors effectively

The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change, and design and other technological obsolescence. We compete with domestic and international semiconductor companies, many of which have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing and distribution of their products. Some of these competitors include: Texas Instruments, National Semiconductor, Linear Technology, Maxim Integrated Products, Fairchild Semiconductor, Advanced Analogic Technologies, Monolithic Power Systems and Intersil Semiconductor, with respect to our power management products; ST Microelectronics N.V., Philips and California Micro Devices, with respect to our protection products; Analog Devices and Maxim Integrated Products, with respect to our test and measurement products; Zarlink Semiconductor and Silicon Laboratories, with respect to our advanced communications products; and Marvell and Micrel Semiconductor, with respect to our wireless and sensing products. We expect continued competition from existing competitors as well as competition from new entrants in the semiconductor market. Our ability to compete successfully in the rapidly evolving area of integrated circuit technology depends on several factors, including:

•

success in designing and manufacturing new products that implement new technologies;

•

protection of our processes, trade secrets and know-how;

•

maintaining high product quality and reliability;

•

pricing policies of our competitors;

•

performance of competitors’ products;

•

ability to deliver in large volume on a timely basis;

•

marketing, manufacturing and distribution capability; and

•

financial strength.

To the extent that our products achieve market success, competitors typically seek to offer competitive products or lower prices, which, if successful, could harm our business.

A majority of our net sales are into larger, vertical end-market applications. Fluctuations, seasonality and economic downturns in any of our end-markets may have adverse consequences for our business

A majority of our net sales are into larger, vertical end-market applications such as notebook computers, desktop computers and cellular phones. Vertical end-market applications tend to be highly cyclical over time and highly competitive given the significant unit opportunities they represent. Horizontal markets tend to be less cyclical, but unit volume opportunities are much lower. We consider the industrial market to be a horizontal end-market, because it is much more broad-based and comprised of many non-standardized end-applications.

Many of our products are used in personal computers and related peripherals. For fiscal year 2006, we estimate that 30% of our sales were used in computer applications, including 18% tied to notebook computers and PDAs. Industry-wide fluctuations in demand for desktop and notebook computers have in the past, and may in the future, harm our business. In addition, our past results have reflected some seasonality, with demand levels being higher in computer segments during the third and fourth quarters of the year in comparison to the first and second quarters.

For fiscal year 2006, shipment of our products to ATE customers represented approximately 4% of our net sales. In recent years, shipment of our products to ATE customers have represented 10% or more of net sales. Products sold into the ATE end-market tend to have above average gross margin. Consequently, downturns in the ATE market and declines in the sales of our products used in ATE systems may adversely affect our business.

We estimate that sales related to cellular phone applications represented 27% of our sales in fiscal year 2006. In fiscal year 2005, sales tied to cellular phone applications were estimated at 32% of our sales. Any decline in the number of cellular phones made, especially feature-rich phones with color displays, could adversely affect our business.

We obtain many essential components and materials and certain critical manufacturing services from a limited number of suppliers and subcontractors, which are principally foreign-based entities

Our reliance on a limited number of outside subcontractors and suppliers for silicon wafers, packaging, test and certain other processes involves several risks, including potential inability to obtain an adequate supply of required components and reduced control over the price, timely delivery, reliability and quality of components. These risks are attributable to several factors, including limitations on resources, labor problems, equipment failures or the occurrence of natural disasters. There can be no assurance that problems will not occur in the future with suppliers or subcontractors. Disruption or termination of our supply sources or subcontractors could significantly delay our shipments and harm our business. Delays could also damage relationships with current and prospective customers. Any prolonged inability to obtain timely deliveries or quality manufacturing or any other circumstances that would require us to seek alternative sources of supply or to manufacture or package certain components internally could limit our growth and harm our business.

Most of our outside subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Malaysia, Korea, the Philippines and Germany. For fiscal year 2006, approximately 58% of our silicon in terms of finished wafers, was supplied by a third-party foundry in China, and this percentage could be even higher in future periods. For fiscal year 2005, approximately 59% of our silicon in terms of finished wafers was supplied by this third-party foundry in China. While we do have some redundancy of fab processes by using multiple outside foundries, any interruption of supply by one or more of these foundries could materially impact us. Likewise, we maintain some amount of business interruption insurance to help reduce the risk of wafer supply interruption, but we are not fully insured against such risk.

A majority of our package and test operations are performed by third-party contractors based in Malaysia, Korea, the Philippines and China. Our international business activities, in general, are subject to a variety of potential risks resulting from political and economic uncertainties. Any political turmoil or trade restrictions in these countries, particularly China, could limit our ability to obtain goods and services from these suppliers and subcontractors. The effect of an economic crisis or a political turmoil on our suppliers located in these countries may impact our ability to meet the demands of our customers. If we find it necessary to transition the goods and services received from our

existing suppliers or subcontractors to other firms, we would likely experience an increase in production costs and a delay in production associated with such a transition, both of which could have a significant negative effect on our operating results, as these risks are substantially uninsured.

We may be unsuccessful in developing and selling new products required to maintain or expand our business

We operate in a dynamic environment characterized by price erosion, rapid technological change, and design and other technological obsolescence. Our competitiveness and future success depend on our ability to achieve design wins for our products with current and future customers and introduce new or improved products that meet customer needs while achieving favorable margins. A failure to achieve design wins, to introduce these new products in a timely manner, or to achieve market acceptance for these products could harm our business.

The introduction of new products presents significant business challenges because product development commitments and expenditures must be made well in advance of product sales. The success of a new product depends on accurate forecasts of long-term market demand and future technological developments, as well as on a variety of specific implementation factors, including:

•

timely and efficient completion of process design and development;

•

timely and efficient implementation of manufacturing and assembly processes;

•

product performance;

•

the quality and reliability of the product; and

•

effective marketing, sales and service.

•

The failure of our products to achieve market acceptance due to these or other factors could harm our business.

Our products may be found to be defective, product liability claims may be asserted against us and we may not have sufficient liability insurance

One or more of our products may be found to be defective after shipment, requiring a product replacement, recall, or a software solution that would cure the defect but impede performance of the product. We may also be subject to product returns which could impose substantial costs and harm our business. Beyond the potential direct cost associated with product failures, loss of confidence by major customers could cause sales of our other products to drop significantly.

Product liability claims may be asserted with respect to our technology or products. Our products are typically sold at prices that are significantly lower than the cost of the modules or end-products into which they are incorporated. A defect or failure in our product could give rise to failures in the module or the ultimate end-product, so we may face claims for damages that are disproportionately higher than the revenues and profits we receive from the products involved, especially if our customer seeks to recover for damage claims made against it by its own customers. While we maintain some insurance for such events, there can be no assurance that we have obtained a sufficient amount of insurance coverage, that asserted claims will be within the scope of coverage of the insurance, or that we will have sufficient resources to satisfy any asserted claims not covered by insurance.

The costs associated with our general product warranty policy and our indemnification of certain customers, distributors, and other parties could be higher in future periods

Our general warranty policy provides for repair or replacement of defective parts. In some cases a refund of the purchase price is offered. In certain instances, we have agreed to other warranty terms, including some indemnification provisions, that could prove to be significantly more costly than repair, replacement or refund. If there is a substantial increase in the rate of customer claims, if our estimate of probable losses relating to identified warranty exposures prove inaccurate, or if our efforts to contractually limit liability prove inadequate, we may record a charge against future cost of sales.

In the normal course of our business, we indemnify other parties, including customers, distributors, and lessors, with respect to certain matters. These obligations typically arise pursuant to contracts under which we agree to hold the other party harmless against losses arising from a breach of representations and covenants related to certain matters,

such as acts or omissions of our employees, infringement of third-party intellectual property rights, and certain environmental matters. We have also entered into agreements with our current and former directors and certain of our current and former executives indemnifying them against certain liabilities incurred in connection with their duties. Our Certificate of Incorporation and Bylaws contain similar indemnification obligations with respect to our current and former directors and employees, as does the California Labor Code. In some cases there are limits on and exceptions to our potential indemnification liability. We cannot estimate the amount of potential future payments, if any, that we might be required to make as a result of these agreements. Over at least the last decade, we have not incurred any significant expense as a result of agreements of this type. Accordingly, we have not accrued any amounts for such indemnification obligations during fiscal year 2006. However, there can be no assurances that we will not incur expense under these indemnification provisions in the future.

See Note 19 to the consolidated financial statements included in Item 8 of this report for information regarding indemnification expenses associated with the restatement and its underlying circumstances.

Our share price could be subject to extreme price fluctuations, and shareholders could have difficulty trading shares

The market for the stock of high technology companies has been volatile, and the market price of our common stock has been and may continue to be subject to significant fluctuations. Fluctuations could be in response to items such as operating results, announcements of technological innovations, or market conditions for technology stocks in general. Additionally, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated to the operating performance of individual companies. These market fluctuations, as well as general economic conditions, may adversely affect the price of our common stock.

In the past, securities class action litigation has often been instituted against a company following periods of volatility in the company’s stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management’s attention and resources.

In addition, the future sale of a substantial number of shares of common stock by us or by our existing stockholders or option holders (including directors, officers, and employees) may have an adverse impact on the market price of the shares of common stock. There can be no assurance that the trading price of our common stock will remain at or near its current level.

The market price of our common stock may be adversely affected by the restatement and its underlying circumstances as well as by press commentary on the Company’s situation and option granting practices in general.

We sell and trade with foreign customers, which subjects our business to increased risks applicable to international sales

Sales to foreign customers accounted for approximately 73% of net sales in the fiscal year ended January 29, 2006. Sales to our customers located in Taiwan and Korea constituted 29% and 26%, respectively, of net sales for fiscal year 2006. International sales are subject to certain risks, including unexpected changes in regulatory requirements, tariffs and other barriers, political and economic instability, difficulties in accounts receivable collection, difficulties in managing distributors and representatives, difficulties in staffing and managing foreign subsidiary and branch operations and potentially adverse tax consequences. These factors may harm our business. Our use of the Semtech name may be prohibited or restricted in some countries, which may negatively impact our sales efforts. In addition, substantially all of our foreign sales are denominated in U.S. dollars and currency exchange fluctuations in countries where we do business could harm us by resulting in pricing that is not competitive with prices denominated in local currencies.

The outbreak of an avian influenza (bird flu) pandemic, severe acute respiratory syndrome (SARS), or other heath related issues, could impact our customer or supply base, especially in Asia

A large percentage of our sales are to customers located in Asia and a large percentage of our products are manufactured in Asia. One of our largest customer bases in Asia is located in Taiwan. Our largest wafer source is located in China. SARS or other health related issues, such as an avian influenza (bird flu) pandemic, could have a negative impact on consumer demand, on travel needed to secure new business or manage our operations, on

transportation of our products from our suppliers or to our customers, or on workers needed to sell or manufacture our products or our customers’ products.

Our foreign currency exposures may change over time as the level of activity in foreign markets grows and could have an adverse impact upon financial results

As a global enterprise, we face exposure to adverse movements in foreign currency exchange rates. Certain of our assets, including certain bank accounts, exist in non U.S. dollar-denominated currencies, which are sensitive to foreign currency exchange rate fluctuations. The non U.S. dollar-denominated currencies are principally the Euro, Swiss Francs, and British Pounds Sterling. We also have a significant number of employees that are paid in foreign currency, the largest groups being United Kingdom-based employees who are paid in British Pounds Sterling and Swiss-based employees who are paid in Swiss Francs.

If the value of the U.S. dollar weakens relative to these specific currencies, as it has done in recent years, the cost of doing business in terms of U.S. dollars rises. With the growth of our international business, our foreign currency exposures may grow and under certain circumstances, could harm our business.

Changes in foreign currency exchange rates, particularly Swiss Francs, also impacts our provision for income taxes and other tax-related balance sheet accounts. By impacting our provision for income taxes, foreign currency exchange rates also impact our reported earnings per share.

In the past we have done a limited amount of hedging of our foreign exchange exposure. In fiscal year 2004, we purchased forward contracts that locked in our right to purchase Swiss Francs at an agreed upon rate. Those contracts matured in fiscal year 2005. As a means of managing our foreign exchange exposure, we routinely convert U.S. dollars into foreign currency in advance of the expected payment. Any future use of forward contracts to hedge foreign exchange exposure may be required to be marked-to-market each quarter and can create volatility in net income not directly tied to our operating results.

Our future results may fluctuate, fail to match past performance or fail to meet expectations

Our results may fluctuate in the future, may fail to match our past performance or fail to meet the expectations of analysts and investors. Our results and related ratios, such as gross margin, operating income percentage and effective tax rate may fluctuate as a result of:

•

general economic conditions in the countries where we sell our products;

•

seasonality and variability in the computer market and our other end-markets;

•

the timing of new product introductions by us and our competitors;

•

product obsolescence;

•

the scheduling, rescheduling or cancellation of orders by our customers;

•

the cyclical nature of demand for our customers’ products;

•

our ability to develop new process technologies and achieve volume production;

•

changes in manufacturing yields;

•

capacity utilization;

•

product mix and pricing;

•

movements in exchange rates, interest rates or tax rates;

•

the availability of adequate supply commitments from our outside suppliers;

•

the manufacturing and delivery capabilities of our subcontractors; and

•

litigation and regulatory matters.

As a result of these factors, our past financial results are not necessarily indicative of our future results.

We receive a significant portion of our revenues from a small number of customers and the loss of any one of these customers or failure to collect a receivable from them could adversely affect our operations and financial position

The identity of our largest customers has varied from year to year. Historically, we have had significant customers that individually accounted for 10% or more of consolidated revenues in certain quarters or represented 10% or more of net accounts receivables at any given date. One of our end-customers, a major manufacturer of cellular phone handsets and other electronic equipment, accounted for 11% of net sales in fiscal year 2006. In addition, we had several end-customers in fiscal year 2006 that on an annual basis accounted for more than 5% of net sales, but less than 10% of net sales.

Several of our authorized distributors have regularly accounted for more than 10% of net sales on an annual basis. Depending on the authorized distributor and their strategic focus, they can support anywhere from a few end-customers to many end-customers. For fiscal year 2006, two of our Asian distributors accounted for approximately 12% and 9%, respectively, of net sales. As of the end of fiscal year 2006, these two Asian distributors accounted for approximately 12% and 11%, respectively, of our net accounts receivable.

Sales to our customers are generally made on open account, subject to credit limits we may impose, and the receivables are subject to the risk of being uncollectible.

We primarily conduct our sales on a purchase order basis, rather than pursuant to long-term contracts. The loss of any significant customer, any material reduction in orders by any of our significant customers, the cancellation of a significant customer order or the cancellation or delay of a customer’s significant program or product could harm our business.

Most of our authorized distributors, which together represent more than half of our net sales, can terminate their contract with us with little or no notice. The termination of a distributor could negatively impact our business, including net sales and accounts receivable

In fiscal year 2006, authorized distributors accounted for approximately 57% of our net sales. We generally do not have long-term contracts with our distributors and most can terminate their agreement with us with little or no notice. For fiscal year 2006, our two largest distributors were based in Asia.

The termination of any distributor could impact our net sales and limit our access to certain end-customers. It could also result in the return of excess inventory of our product they hold as the distributor. Since many distributors simply resell finished products, they generally operate on very thin profit margins. If a distributor were to terminate its agreement with us or go out of business, our unsecured accounts receivable from it would be subject to significant collection risk.

We face risks associated with companies we have acquired in the past and may acquire in the future

We have expanded our operations through strategic acquisitions, such as the acquisition of XEMICS SA in June 2005, and we may continue to expand and diversify our operations with additional acquisitions. Acquisitions could use a significant portion of our available liquid assets and/or we could incur debt or issue equity securities to fund acquisitions. Issuance of equity securities could be dilutive to existing shareholders. Debt financing could subject us to restrictive covenants that could have an adverse effect on our business. Although we undertake detailed reviews of proposed acquisition candidates and attempt to negotiate acquisition terms favorable to us, we may encounter difficulties or incur liabilities for which we have no recourse against the selling party. We cannot provide any assurance that any acquisition will have a positive impact on our future performance.

If we are unsuccessful in integrating acquired companies into our operations or if integration is more difficult than anticipated, then we may not achieve anticipated cost savings or synergies and may experience disruptions that could harm our business. Some of the risks that may affect our ability to successfully integrate acquired companies include those associated with:

•

conforming the acquired company’s standards, processes, procedures and controls with our operations;

•

coordinating new product and process development, especially with respect to highly complex technologies;

•

assuring acquired products meet our quality standards;

•

loss of key employees or customers of the acquired company;

•

hiring additional management and other critical personnel;

•

increasing the scope, geographic diversity and complexity of our operations;

•

consolidation of facilities and functions;

•

the geographic distance between the companies; and disparate corporate cultures.

Acquisitions could have a negative impact on our future earnings by way of poor performance by the acquired company or, if we later conclude we are unable to use or sell an acquired product or technology, we could be required to write down the related intangible assets and goodwill. If such write-downs are significant, they could materially harm our business.

We must commit resources to product production prior to receipt of purchase commitments and could lose some or all of the associated investment

Sales are made primarily on a current delivery basis, pursuant to purchase orders that may be revised or cancelled by our customers without penalty, rather than pursuant to long-term contracts. Some contracts require that we maintain inventories of certain products at levels above the anticipated needs of our customers. As a result, we must commit resources to the production of products without binding purchase commitments from customers. Our inability to sell products after we devote significant resources to them could harm our business.

The loss of any of our key personnel or the failure to attract or retain specialized technical and management personnel could impair our ability to grow our business

Our future success depends upon our ability to attract and retain highly qualified technical, marketing and managerial personnel. We are dependent on a relatively small group of key technical personnel with analog and mixed-signal expertise. Personnel with highly skilled managerial capabilities, and analog and mixed-signal design expertise, are scarce and competition for personnel with these skills is intense. There can be no assurance that we will be able to retain key employees or that we will be successful in attracting, integrating or retaining other highly qualified personnel in the future. If we are unable to retain the services of key employees or are unsuccessful in attracting new highly qualified employees, our business could be harmed.

Our business could be harmed, especially in the near term, by the disruption and associated loss of corporate history and knowledge base caused by the personnel actions described under Restatement of Consolidated Financial Statements Based on Review of Stock Option Practices in Item 7 of this report.

If our stock price declines below the exercise price of stock options held by employees, which is now the case for many options held by many employees, the retention incentive aspect of the stock options is lost and there is a greater likelihood we will be unable to retain key talent. If employees prohibited from exercising expiring stock options during the restatement process are not compensated in some fashion, our ability to retain our workforce could be harmed significantly.

We are subject to government regulations and other standards that impose operational and reporting requirements

We, our suppliers, and our customers are subject to a variety of United States federal, foreign, state and local governmental laws, rules and regulations, including those related to the use, storage, handling, discharge or disposal of certain toxic, volatile or otherwise hazardous chemicals and the incorporation of such substances into products available for sale. If we or our suppliers were to incur substantial additional expenses to acquire equipment or otherwise comply with environmental regulations, product costs could significantly increase, thus harming our business. We are also subject to laws, rules, and regulations related to export licensing and customs requirements, including the North American Free Trade Agreement and State Department and Commerce Department rules.

The Sarbanes-Oxley Act of 2002 required us to change or supplement some of our corporate governance and securities disclosure and compliance practices. The SEC and NASDAQ have revised, and continue to revise, their regulations and listing standards. These developments have increased, and may continue to increase, our legal compliance and financial reporting costs. These developments also may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. This, in turn, could make it more difficult for us to attract and retain qualified members of our board of directors, or qualified executive officers.

Failure to comply with present or future laws, rules and regulations of any kind that govern our business could result in suspension of all or a portion of production, cessation of all or a portion of operations, or the imposition of significant administrative, civil, or criminal penalties, any of which could harm our business.

Earthquakes or other natural disasters may cause us significant losses; the aftermath of Hurricane Katrina could interrupt our supply chain or disrupt our customer base

Our corporate headquarters, a portion of our assembly and research and development activities and certain other critical business operations are located near major earthquake fault lines. We do not maintain earthquake insurance and could be harmed in the event of a major earthquake. We generally do not maintain flood coverage, including in our Asian locations where we have certain operations support and sales offices. Such flood coverage has become very expensive; as a result the Company has elected not to purchase this coverage.

Our business could be harmed if natural disasters interfere with production of wafers by our suppliers, assembly and testing of products by our subcontractors, or our distribution network. We maintain some business interruption insurance to help reduce the effect of such business interruptions, but we are not fully insured against such risks. Likewise, our business could be adversely impacted if a natural disaster were to shut down or significantly curtail production at one or more of our end customers. Any such loss of revenue due to a slowdown or cessation of end customer demand is uninsured.

None of our facilities was affected by Hurricane Katrina that struck in August 2005 or by the subsequent flooding. We do not have a significant customer base in the devastated portions of the southeastern States. An issue related to potential disruption of the hydrogen supply for our Rectifier, Assembly and Other Products segment due to the hurricane has been favorably resolved.

Terrorist attacks, war and other acts of violence may negatively affect our operations and your investment

Terrorist attacks, such as the attacks that took place on September 11, 2001, wars, such as the war in Iraq, and other acts of violence, such as those that may result from the tension in the Middle East and the Korean peninsula, or any other national or international crisis, calamity or emergency, may result in interruption to the business activities of many entities, business losses and overall disruption of the U.S. economy at many levels. These events may directly impact our physical facilities or those of our customers and suppliers. Additionally, these events or armed conflicts may cause some of our customers or potential customers to reduce the level of expenditures on their services and products that ultimately may reduce our revenue. The consequences of these reductions are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business. For example, as a result of these events, insurance premiums for businesses may increase and the scope of coverage may be decreased. Consequently, we may not be able to obtain adequate insurance coverage for our business and properties. A “high” or “Orange” or “severe” or “Red” threat condition announced by the Homeland Security Advisory System or similar agency and any consequent effect on the transportation industry may adversely affect our ability to timely import materials from our suppliers located outside the United States or impact our ability to deliver our products to our customers without incurring significant delays. To the extent that these disruptions result in delays or cancellations of customer orders, a general decrease in corporate spending, or our inability to effectively market our services and products, our business and results of operations could be harmed.

We may be unable to adequately protect our intellectual property rights

We pursue patents for some of our new products and unique technologies, but we rely primarily on a combination of nondisclosure agreements and other contractual provisions, as well as our employees’ commitment to confidentiality and loyalty, to protect our know-how and processes. We intend to continue protecting our proprietary technology,

including through trademark and copyright registrations and patents. Despite this intention, we may not be successful in achieving adequate protection. Our failure to adequately protect our material know-how and processes could harm our business. There can be no assurance that the steps we take will be adequate to protect our proprietary rights, that our patent applications will lead to issued patents, that others will not develop or patent similar or superior products or technologies, or that our patents will not be challenged, invalidated, or circumvented by others. Furthermore, the laws of the countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as laws in the United States.

The semiconductor industry is characterized by frequent claims of infringement and litigation regarding patent and other intellectual property rights. Due to the number of competitors, intellectual property infringement is an ongoing risk since other companies in our industry could have intellectual property rights that may not be identifiable when we initiate development efforts. Litigation may be necessary to enforce our intellectual property rights and we may have to defend ourselves against infringement claims. Any such litigation could be very costly and may divert our management’s resources. If one of our products is found to infringe, we may have liability for past infringement and may need to seek a license going forward. If a license is not available or if we are unable to obtain a license on terms acceptable to us, we would either have to change our product so that it does not infringe or stop making the product.

We could be required to register as an investment company and become subject to substantial regulation that would interfere with our ability to conduct our business

The Investment Company Act of 1940 requires the registration of companies which are engaged primarily in the business of investing, reinvesting or trading in securities, or which are engaged in the business of investing, reinvesting, owning, holding or trading in securities and which own or propose to acquire investment securities with a value of more than 40% of the company’s assets on an unconsolidated basis (other than U.S. government securities and cash). We are not engaged primarily in the business of investing, reinvesting or trading in securities, and we intend to invest our cash and cash equivalents in U.S. government securities to the extent necessary to take advantage of the 40% safe harbor. To manage our cash holdings, we invest in short-term instruments consistent with prudent cash management and the preservation of capital and not primarily for the purpose of achieving investment returns. U.S. government securities generally yield lower rates of income than other short-term instruments in which we have invested to date. Accordingly, investing substantially all of our cash and cash equivalents in U.S. government securities could result in lower levels of interest income and net income.

If we were deemed an investment company and were unable to rely upon a safe harbor or exemption under the Investment Company Act, we would among other things be prohibited from engaging in certain businesses or issuing certain securities. Certain of our contracts might be voidable, and we could be subject to civil and criminal penalties for noncompliance.

We are subject to review by taxing authorities, including the Internal Revenue Service

We are subject to review by domestic and foreign taxing authorities, including the Internal Revenue Service (IRS). In fiscal year 2005, the IRS completed a routine review of our 1995 through 2001 tax filings. The final audit adjustments did not have a material impact on our financial statements. However, future audits by taxing authorities could impact us.

We understand that the IRS has established a task force to focus on issues relating to stock option grants. While we have not received an inquiry from any taxing authority regarding this matter, we believe we are likely to be audited with respect to these issues in the future.

Certain transition rules are in effect that allow remediation of the condition that subjects a stock option to Section 409A of the Internal Revenue Code. To be effective, the remediation with respect to executive level employees must have been completed by December 31, 2006 and must be complete for other employees by December 31, 2007. The Company has not taken any actions to remediate these options. Since the material options that have been determined to be subject to 409A were issued at exercise prices that are substantially higher than the current price of the Company’s stock, the future impact of Section 409A is not expected to present a material exposure to the Company under these transitional rules. However, exposure for this item can not ultimately be determined until final guidance is issued. If the final guidance differs significantly from the guidance to date, the Company’s exposure could be material.

Technology companies like ours have a history of using broad based employee stock option programs to hire, incentivize and retain their workforces in a competitive marketplace. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) allows companies the choice of either using a fair value method of accounting for options, which would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method. We have elected to apply APB 25 and accordingly we generally do not recognize any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant.

See Note 1A Restatement of Consolidated Financial Statements of the Notes to Consolidated Financial Statements in Item 8 of this report for a detailed discussion of the restatement related to historical stock option practices. Also see the discussion under Restatement of Consolidated Financial Statements Based on Review of Stock Option Practices in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

A revised standard, SFAS No. 123 (revised 2004), “Share Based Payment” (“SFAS 123(R)”), which requires all companies to measure compensation cost for all share-based payments (including stock options) at fair value, is effective beginning with a company’s first interim or annual reporting period of the first fiscal year beginning on or after June 15, 2005. This means SFAS 123(R) is effective for us beginning with the first quarter of fiscal year 2007, which began on January 30, 2006. We have adopted the new standard using the modified prospective transition method.

Had we adopted SFAS 123(R) in prior periods, the impact of this pronouncement would approximate the impact of SFAS 123 described in the disclosure of the pro forma results in Note 1, under the heading “Stock-Based Compensation” in our Notes to Financial Statements included elsewhere in this report. As indicated in the First Quarter Form 10-Q filed concurrently with this report, stock option expense under SFAS 123(R) reduced earnings for the first quarter of fiscal year 2007 by $3.8 million, pre-tax, or approximately 5 cents per share.

The implementation of SFAS 123(R) will result in lower reported earnings per share, which could negatively impact our future stock price. In addition, this could impact our ability to utilize broad based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace.

Failure to maintain effective internal controls could have a material adverse effect on our business and stock price.

Section 404 of the Sarbanes-Oxley Act requires an annual management assessment of the effectiveness of internal controls over financial reporting and an annual report by our independent registered public accounting firm addressing the assessment.

Management’s report for fiscal year 2006 is included in Item 9A of this report and the required attestation report of our independent registered public accounting firm is included in Part II, Item 8 of this report. Our controls and procedures are also discussed in Item 9A of this report. These assessments and reports have been updated in light of the restatement and its underlying circumstances.

If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Effective internal controls are necessary for us to produce reliable financial reports and are important in the prevention of financial fraud. If we cannot produce reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and there could be a material adverse effect on our stock price.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the information in this report and in the documents that are incorporated by reference, including the risk factors in this section, contains forward-looking statements. Forward-looking statements are statements other than historical information or statements of current condition and relate to matters such as our future financial performance, future operational performance, and our plans, objectives and expectations. Some forward-looking statements may be identified by use of terms such as “expects,” “anticipates,” “intends,” “estimates,” “believes”, “projects”, “should”, “will”, “plans” and similar words. In light of the risks and uncertainties inherent in all such projected matters, forward-looking statements should not be regarded as a representation by the Company or any other person that our objectives or plans will be achieved or that any of our operating expectations or financial forecasts will be realized. Financial results could differ materially from those projected in forward-looking statements. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.

PROPERTIES

Our headquarters is located in Camarillo, California where we own an approximately 85,000 square foot facility that was completed in 2002. The original parcel on which the headquarters is located will accommodate substantial expansion, and we purchased a vacant lot adjacent to the headquarters when it became available in fiscal year 2003. The Camarillo facility houses a very limited amount of test and probe activity, as well as inside sales, marketing and administrative offices. The Camarillo facility serves as the business headquarters for our Rectifier, Assembly and Other Products segment and all of the product lines that make up the Standard Semiconductor Products segment, with the exception of our test and measurement product line that is headquartered in San Diego, California and our wireless and sensing product line that is headquartered in Neuchatel, Switzerland.

We own a 30,000 square foot building in Reynosa, Mexico that supports the assembly and production needs of our rectifier and assembly product lines.

We also lease a 44,000 square foot facility in Corpus Christi, Texas, which housed a wafer fabrication line, production testing and certain engineering functions for our protection product line (part of the Standard Semiconductor Products segment). In December 2002, we stopped production in the Corpus Christi facility as part of the strategic move to obtain nearly all of our silicon wafers from outside sources. The Corpus Christi lease runs through December 2021, but we have the ability to terminate it in 2011. While we continue to pay rent on this vacant facility, we are investigating sublease opportunities and other alternatives.

Our San Diego, California facility is an approximately 25,000 square foot building that houses design, test and administrative functions and serves as the business headquarters for our test and measurement product line (part of the Standard Semiconductor Product segment). The lease on this facility runs through September 2009.

We also lease space to house certain of our other design, sales and marketing and operations facilities in San Jose, California; Raleigh, North Carolina; China; England; France; Germany; Japan; Korea; the Philippines; Scotland; Switzerland; and Taiwan. The space in New York City that previously housed our HID product group has been sublet.

In December 2000, we purchased a parcel of land in San Diego, California for approximately $7.9 million and began exploring plans to build a facility to support our test and measurement product line. We deferred the project due to the significant downturn in the product line’s business. We are contemplating the sale of this parcel of land.

We believe that our existing leased and owned space is more than adequate for our current operations, and that suitable replacement and additional space will be available in the future on commercially reasonable terms.

ITEM 3.

LEGAL PROCEEDINGS

From time to time we become subject to legal proceedings in the ordinary course of our business. We are not currently involved in any legal proceedings that we believe will, either individually or in the aggregate, materially and adversely affect our business.

In June 2001, we were notified by the California Department of Toxic Substances Control (“State”) that we may have liability associated with the clean-up of the one-third acre Davis Chemical Company site in Los Angeles, California. We have been included in the clean-up program because we are one of the companies that used the Davis Chemical Company site for waste recycling and/or disposal between 1949 and 1990. We have joined with other potentially responsible parties in an effort to resolve this matter with the State. The group has entered into a Consent Order with the State that requires the group to perform a soils investigation at the site and submit a draft remediation plan. In March 2007, the State approved the group’s draft remediation plan, which will be published for public comment before the final remediation plan is submitted. The State has not yet responded to the draft remediation plan. The State has the right to require the removal of contaminated soils and to expand the scope of work to include further investigation of groundwater contamination. The Consent Order does not require the group to remediate the site. To date, our share of the group’s expenses has not been material and has been expensed. At this time there is not a specific proposal or budget with respect to any additional studies or the clean-up of the site. Thus, no reserve has been established for this matter.

During fiscal year 2006 we were not subjected to any penalties requiring disclosure under Section 6707A(e) of the Internal Revenue Code.

Significant legal events occurring through the date of filing of this Amendment No. 1 that are related to the restatement or its underlying cause are described in Note 19 Matters Related to Stock Option Review and Restatement of the Notes to Consolidated Financial Statements in Item 8 of this Amendment No. 1.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded on the NASDAQ National Market under the symbol “SMTC.” The following table sets forth, for the periods indicated, the high and low sale prices of our common stock, as reported on the NASDAQ National Market, giving effect to all stock splits through the date hereof.


	High		Low
Fiscal year ending January 30, 2005:
First Quarter	$	26.47	$	20.58
Second Quarter	$	25.42	$	18.92
Third Quarter	$	21.50	$	15.94
Fourth Quarter	$	22.43	$	17.54
Fiscal year ending January 29, 2006:
First Quarter	$	20.86	$	16.15
Second Quarter	$	18.86	$	16.36
Third Quarter	$	19.47	$	13.89
Fourth Quarter	$	21.06	$	14.42

Holders

On April 3, 2006, the reported last sale price of our common stock on the NASDAQ National Market was $18.01 per share. As of April 3, 2006, we had 448 stockholders of record.

Dividends

The payment of dividends on our common stock is within the discretion of our board of directors. Currently, we intend to retain earnings to finance the growth of our business. We have not paid cash dividends on our common stock during the two most recent fiscal years and our board of directors has not indicated an intent to declare a cash dividend on the common stock in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

See the information set forth in Item 12 of this Form 10-K.

Sales of Unregistered Securities

We did not make any unregistered sales of equity securities during fiscal year 2006.

Purchases of Equity

This table provides information with respect to purchases by the Company of shares of common stock during the fourth quarter of fiscal year 2006.


Fiscal Month	Total Number of Shares Purchased (2)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program (1)	Approximate Dollar Value of Shares That MayYet Be Purchased Under The Program (1)
November
(10-31-05 to 11-27-05)	—		—	—	$	28.4 million
December
(11-28-05 to 12-25-05)	378,000	$	19.46	378,000	$	22.0 million
January
(12-26-05 to 01-29-06)	346,000	$	18.77	346,000	$	14.5 million

Total fourth quarter fiscal year 2006	724,000	$	19.13	724,000

(1)

On February 24, 2004 the Company announced that the Board of Directors authorized the repurchase of up to $50 million of the Company’s common stock from time to time through negotiated or open market transactions (the “2004 Program”). On July 6, 2005, the Company announced that it had exhausted the initial authorization and that its Board of Directors had approved an additional $50.0 million for the 2004 Program. The 2004 Program does not have an expiration date. No publicly announced plan or program of the Company for the purchase of shares expired during the period covered by the table.

(2)	As shown in the table, all shares purchased by the Company during the fourth quarter were purchased through the 2004 Program. The table does not include shares surrendered to the Company in connection with the cashless exercise of stock options by employees and directors.

ITEM 6.

SELECTED FINANCIAL DATA

Information that has been previously filed or otherwise reported for the periods presented in this Item 6 is superseded by the information in this report, and the previously filed financial statements and related financial information and opinions of our independent public accounting firms contained in such reports should no longer be relied upon.

The consolidated statement of income data set forth below for fiscal years 2006, 2005 and 2004, and the consolidated balance sheet data as of the end of fiscal years 2006 and 2005, are derived from, and qualified by reference to, the audited restated consolidated financial statements in Item 8 of this report. The consolidated statement of income data for fiscal years 2003 and 2002, and the consolidated balance sheet data as of the end of fiscal years 2004, 2003 and 2002 have been restated to reflect the impact of the Restatement Adjustments and are derived from the books and records of the Company.

This information should be read in conjunction with the Explanatory Note at the beginning of this report, Management’s Discussion and Analysis contained in Item 7 of this report, and the audited financial statements and accompanying notes included in Item 8 of this report.

The fiscal year ended January 30, 2005 consisted of fifty-three weeks and all other fiscal years presented consisted of fifty-two weeks. Our past results are not necessarily indicative of our future performance.

Income Statement Data

Restated Consolidated Statement of Income Data:

(In thousands, except earnings per share data)


	Fiscal Year Ended
	Jan 29 2006 (restated) (1)			Jan 30 2005 (restated) (1)		Jan 25 2004 (restated) (1)			Jan 26 2003 (restated) (2)		Jan 27 2002 (restated) (2)
Net Sales	$	239,338		$	253,612	$	192,079		$	192,958	$	191,210
Cost of Sales		105,236			106,407		82,635			84,908		101,255

Gross Profit		134,102			147,205		109,444			108,050		89,955
Operating costs and expenses:
Selling, general & administrative		45,600			46,935		42,190			40,988		57,772
Product development & engineering		37,928			35,312		33,319			36,364		38,789
Acquisition-related items		4,954			—		—			—		—
One-time costs		(129	)		629		—			13,202		2,727

Total operating costs and expenses		88,353			82,876		75,509			90,554		99,288

Operating income		45,749			64,329		33,935			17,496		(9,333	)
Interest and other income (expense), net		7,286			6,304		(451	)		15,187		9,095

Income before taxes		53,035			70,633		33,484			32,683		(238	)
Provision for taxes		11,084			15,725		7,686			7,991		(2,352	)

Net income	$	41,951		$	54,908	$	25,798		$	24,692	$	2,114

Earnings per share:
Basic	$	0.57		$	0.74	$	0.35		$	0.34	$	0.03
Diluted	$	0.55		$	0.70	$	0.33		$	0.32	$	0.03
Weighted-average number of shares:
Basic		73,436			74,187		73,570			73,013		69,983
Diluted		76,114			78,257		77,634			77,963		78,143

(1)	For a side by side comparison of the previously reported amounts with the restated amounts, see Note 1A

to the Consolidated Financial Statements inlcuded in Item 8 of this report.

(2)	A side by side comparison of the previously reported amounts with the restated amounts is presented in Item 7 of this report.

Acquisition related items for the fiscal year ended January 29, 2006 are related to the June 2005 acquisition of XEMICS SA. The one-time items for fiscal years 2006 and 2005 relate to litigation against our insurers to recoup costs related to a customer dispute settlement in fiscal year 2003.

Interest and other income (expense) for the fiscal year ended January 25, 2004 includes one-time cost of $6.8 million for the retirement of debt and $2.9 million of gain on the extinguishment of debt.

Interest and other income (expense) for the fiscal year ended January 26, 2003 includes $12.7 million of gain on the extinguishment of debt. Operating costs and expenses for the fiscal year ended January 26, 2003 include one-time costs of $13.2 million, which included $12.0 million associated with the settlement of a customer dispute, $852,000 for an expected loss on the sub-lease of our New York office and $350,000 for asset impairment at our previously operated wafer fabrication facility in Corpus Christi, Texas.

Operating costs and expenses for the fiscal year ended January 27, 2002 include one-time cost of $2.0 million associated with an approximate 200-person reduction in headcount made in the first half of the year and one-time cost of $765,000 associated with a Superfund settlement.

Balance Sheet Data


Restated Consolidated Balance Sheet Data
(In thousands)
	Balances as of
	Jan 29 2006 (restated)		Jan 30 2005 (restated)		Jan 25 2004 (restated)		Jan 26 2003 (restated)		Jan 27 2002 (restated)
Cash, cash equivalents and investments	$	278,186	$	301,898	$	275,477	$	489,047	$	543,502
Working capital		235,474		221,434		217,277		421,219		403,380
Total assets		472,946		458,984		410,136		621,037		688,794
Convertible subordinated notes		—		—		—		241,570		364,320
Other long-term liabilities		5,478		2,410		—		—		—
Total stockholders’ equity		437,653		425,329		381,177		341,835		297,092

The following tables show the effects of the restatement on consolidated balance sheet data. Fiscal year 2006 also includes the effect of the Audit Adjustments. The cumulative effect of the related after-tax charges for periods prior to fiscal year 2002 was approximately $17.2 million, which is reflected in stockholders’ equity as of the beginning of fiscal year 2002.


Restated Consolidated Balance Sheet Data
(In thousands)
	Balances as of January 29, 2006
	As Previously Reported		Restatement Adjustments			Audit Adjustments			As Restated
Cash, cash equivalents and investments	$	278,186	$	—		$	—		$	278,186
Working capital		235,563		(66	)		(23	)		235,474
Total assets		473,765		(770	)		(49	)		472,946
Convertible subordinated notes		—		—			—			—
Other long-term liabilities		5,478		—			—			5,478
Total stockholders’ equity		438,459		(866	)		60			437,653

Consolidated Balance Sheet Data

(In thousands)


	Balances as of
	January 30, 2005						January 25, 2004						January 26, 2003						January 27, 2002
	As Previously Reported		Adjs		As Restated		As Previously Reported		Adjs		As Restated		As Previously Reported		Adjs		As Restated		As Previously Reported		Adjs			As Restated
Cash, cash equivalents and investments	$	301,898	$	—	$	301,898	$	275,477	$	—	$	275,477	$	489,047	$	—	$	489,047	$	543,502	$	—		$	543,502
Working capital		221,416		18		221,434		217,092		185		217,277		420,912		307		421,219		402,970		410			403,380
Total assets		457,925		1,059		458,984		408,473		1,663		410,136		620,546		491		621,037		690,401		(1,607	)		688,794
Convertible subordinated notes		—		—		—		—		—		—		241,570		—		241,570		364,320		—			364,320
Other long-term liabilities		2,410		—		2,410		—		—		—		—		—		—		—		—			—
Total stockholders’ equity		424,366		963		425,329		379,610		1,567		381,177		341,440		395		341,835		298,795		(1,703	)		297,092

All adjustments (Adjs) shown for fiscal years 2002-2005 are Restatement Adjustments.

For a side by side comparison of the previously reported balance sheet line items with the restated amounts as of January 29, 2006 and January 30, 2005, see Note 1A to the Consolidated Financial Statements included in Item 8 of this report. A side by side comparison of the previously reported balance sheet line items with the restated amounts as of the end of fiscal years 2004, 2003 and 2002 is presented in Item 7 of this report.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and our audited consolidated financial statements and related notes included elsewhere in this Form 10-K/A.

As discussed in “Forward Looking and Cautionary Statements” earlier in this report, this Form 10-K/A contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward looking statements, including as a result of the risks described in the cautionary statements in Item 1A “Risk Factors” and elsewhere in this Form 10-K/A, in our other filings with the SEC, and in material incorporated herein and therein by reference. Our business and associated risks may have changed since we filed the Original Report. Except for the forward-looking statements included in Notes 1A, 5 and 19 to the financial statements included in Item 8 of this report, in Item 9A “Controls and Procedures,” and under the heading “Restatement of Consolidated Financial Statements Based on Review of Stock Option Practices” in this Item 7, all forward-looking statements contained in this Form 10-K/A, unless they are specifically otherwise stated to be made as of a different date, are made as of the date the Original Report was filed. We undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Management’s discussion and analysis set forth below has been amended to reflect the restatement as described in the Explanatory Note and in Notes 1A and 19 to the Consolidated Financial Statements in Item 8. It has not been otherwise updated. As a result, the information set forth in this Item 7 may not be comparable to discussions and data in our previously filed Annual Reports, which should no longer be relied upon.

Restatement of Consolidated Financial Statements Based on Review of Stock Option Practices

Our discussion of this topic is divided into the following segments:

(I)

Background of the Restatement

(II)

Nature of the Restatement Adjustments

(III)

Findings as to Individual Conduct

(IV)

Amortization of the Restatement Adjustments

(V)

Effect of the Restatement Adjustments on the Previously Reported Financial Statements

(VI)

Judgments and Interpretations

(VII)

Going Forward

(I)	Background of the Restatement

(“Fenwick”), a law firm not previously used by the Company, to assist in conducting this investigation. Fenwick retained Navigant Consulting, Inc. as its forensic accounting advisor. Directors Burra and Hankin, who had previously served on the Compensation Committee, recused themselves from the investigation early in July 2006 after Fenwick learned of a new hire stock option grant to an officer in 1996 approved by the Compensation Committee that would be a subject of the investigation. On July 12, 2006, the Board appointed Directors Lindstrom and Piotrowski as a Special Committee fully authorized and empowered to continue the investigation.

After the initial phase of the investigation, which focused on the processes used to establish option exercise prices and obtain approvals of stock option grants, including procedures relating to initial stock option grants to newly hired employees and the related measurement dates used for financial reporting purposes, the Special Committee concluded that, pursuant to the requirements of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related authoritative guidance, the accounting measurement dates for certain stock options granted primarily during fiscal years 1998 through 2003 required correction. On July 20, 2006, we announced that financial statements and the related reports of our independent public accountants, earnings press releases, and similar communications we previously issued should no longer be relied upon pending restatement of our financial statements for fiscal years 2002 through 2006 to record a material level of additional non-cash compensation expense. We also announced that the restatement would affect financial statements for earlier fiscal years and that adjustments for those earlier years would be reflected as part of the opening balances in the financial statements for the restatement period.

(II)	Nature of the Restatement Adjustments

in thousands, except number of grants


Category	Number of grants	Expense for all grants			Expense for grants to Section 16 group (1)			Percent of total expense related to Section 16 group
(A) Grants to continuing employees	1,153	$	50,473		$	7,567		15	%
(B) Grants to new employees	343		19,425			—		0	%
(C) Grants lacking evidence of approval	33		149			—		0	%
(D) Grants modified after ratification	83		4,545			—		0	%
(E) Post-termination arrangements	68		20,854			16,396		79	%
(F) Pricing exceptions	393		733			107		15	%

		$	96,179		$	24,070		25	%
Adjustment for duplication among categories			(5,151	)		(107	)	2	%

Total pre-tax stock option related adjustments		$	91,028			23,963		26	%

Amount capitalized into inventory			(30	)

Total pre-tax stock option compensation expense		$	90,998
Tax benefits			(28,688	)

Net adjustment (2) (3)		$	62,310

(1)	Expense related to grants made to, or modifications made for, directors, officers and key executives subject to Section 16 of the Securities Exchange Act of 1934 at the time of grant or modification.

(2)	The additional non-cash compensation expense is net of forfeitures related to employee terminations.

(3)	Amortization of the expense by category is shown in Section (IV) below.

(A) Grants made by Former Chief Executive Officer John D. Poe (“Former CEO”) from April 1997 to May 2002 to continuing employees

Based on the reviews conducted by management and the Special Committee, the Company has concluded that the elements of APB 25 were not satisfied as of the stated grant dates for fifteen of the seventeen grant dates selected by the Former CEO from April 1997 through May 2002. There is evidence of intentional manipulation on nine of these grant dates, representing approximately 42% of the shares and approximately 76% of the expense in this category. Based primarily on evidence of the Former CEOs willingness to manipulate grant dates, the Company determined that the grants made during this period were not final until approved by the Compensation Committee. Although the reviews found no specific documentary evidence of manipulation for certain grants, the fact that those grants lack adequate contemporaneous documentation to corroborate the establishment of the grant date, combined with evidence of manipulation of other grants during this period, led to the Company’s conclusion that the original measurement date was in error because the terms of the grant were not determined with finality.

(B) Grants to new employees

In April 1997, the Compensation Committee stated that all option grants communicated via an offer letter would be granted to each employee on his or her start date.

date, amortization related to the first vesting period is accelerated, which could result in more than twelve months of amortization in a fiscal year.

(C) Grants lacking evidence of Compensation Committee approval

The reviews identified 33 grants that lacked evidence of Compensation Committee ratification. The lack of evidence is believed to be the result of administrative issues. For example, some grants to new hires appear in the Company’s stock option database without evidence of having been presented to the Compensation Committee for approval. Others in this group were presented to the Compensation Committee for approval then excluded from the Compensation Committee meeting minutes because the employee had terminated following the meeting or was about to terminate. For grants in this category, management used available relevant information, such as personnel records and Compensation Committee records, to determine the most likely grant date. The Special Committee found these conclusions to be reasonable.

(D) Grants modified after ratification by the Compensation Committee

The reviews revealed 84 grants, out of more than 1,600 grants over 23 grant dates, with changes between the grant lists distributed with the Compensation Committee agendas, on which basis the grants were ratified, and the grant lists attached to the minutes for the related meetings. More specifically, the reviews showed 31 new grants, 32 deleted grants (apparently related to employees who terminated in the interim), 12 increased grants, 8 decreased grants, and 1 addition specifically approved at the Compensation Committee meeting. In most cases, these changes were not significant individually or in the aggregate, were not significantly concentrated within individual grant dates, and appear to be the result of administrative error and not indicative of an open-allocation process. The exceptions to these determinations are (i) one grant date in May 1999 for which there is evidence indicating the grant process for ten employees in two departments was not complete on the award approval date, (ii) 21 grants to continuing employees on one grant date in May 2000 for which the grant process was found to be incomplete on the award approval date, and (iii) five grants to new hires concentrated on one grant date in December 2000 that were made prior to the employees’ start dates, but not indicative of an open allocation process.

(E) Post-termination arrangements

(F) Pricing exceptions

Restatement Charges Related to Officers and Key Employees

The Company’s management team during fiscal years 1996 through 2006 included 28 individuals who at various times were subject to the provisions of Section 16 of the Securities Act of 1934 (“Section 16”) due to their positions as officers or key executives. The eight individuals who served as independent directors at various times during the same period were also subject to Section 16. None of the additional non-cash compensation expense relates to options awarded to independent directors. Approximately 8% of the additional pre-tax non-cash compensation expense is related to options granted to 15 employees after they became officers or key executives subject to Section 16. This expense is almost entirely attributable to Category A, with a small portion attributable to Category F. No Section 16 executive accounted for more than 2.2% of the total pre-tax non-cash compensation expense due to Category A and F errors. An additional 18% of the total pre-tax non-cash compensation expense is related to “on-call” arrangements intended to provide continuity to the Company by transitioning two executives from full-time employment into retirement. Our review indicated that although one executive provided some services during the on-call period, there is no evidence that the other performed any. We determined that since neither employee performed sufficient services to meet the substantive services requirement set forth by current interpretations of applicable accounting standards, the options held by the employees were modified to extend the exercise period and to effectively accelerate vesting on the date they ceased full-time employment and, therefore, a new measurement date was required by APB 25.

(III)

Findings as to Individual Conduct

the filing of the Company’s restated financial statements, on which the Company regains compliance with Nasdaq continued listing standards and the window for trading by officers and directors of the Company is reasonably expected to be open for a period of at least 30 days.

The cancelled, expired and lapsed options had split-adjusted exercise prices ranging from $2.41 to $31.91 per share.

The Special Litigation Committee took no action with respect to the Former HR VP or Former Executive.

The status of the intrinsic value associated with options granted to the five individuals is summarized as follows:

(in thousands)


	Former CEO			Former CFO			Three Other Former Executives			Total
Realized	$	19		$	16		$	193		$	228		5	%
Never Vested		—			—			269			269		6	%
Expired or Lapsed		—			1,649			316			1,965		41	%
Cancelled		1,989			—			—			1,989		42	%
Repriced		—			307			—			307		6	%

Will Not be Realized	$	1,989		$	1,956		$	585		$	4,530		95	%

Total Intrinsic Value	$	2,008		$	1,972		$	778		$	4,758		100	%

Total Intrinsic Value		42.2	%		41.4	%		16.4	%		100	%

(IV)	Amortization of the Restatement Adjustments

In accordance with APB 25, our restated consolidated financial statements reflect additional compensation expense to the extent the fair market value of a share of our common stock on the correct measurement date exceeded the exercise price of the option. The additional non-cash compensation expense was amortized over the required service period, generally over the vesting periods of the respective grants.

The restatement has resulted in additional non-cash stock-based compensation expense related to stock options as follows:

(in thousands)


Fiscal Year	Additional Compensation Expense		Tax Benefit			Additional Compensation Expense, net of tax
1996	$	10	$	(3	)	$	7
1997		95		(37	)		58
1998		1,002		(390	)		612
1999		2,826		(1,034	)		1,792
2000		6,862		(2,174	)		4,688
2001		14,050		(4,017	)		10,033
2002		36,354		(12,465	)		23,889
2003		13,401		(3,912	)		9,489

Subtotal Fiscal Years 1996 - 2003		74,600		(24,032	)		50,568
2004		9,234		(2,566	)		6,668
2005		5,637		(1,657	)		3,980
2006		1,527		(433	)		1,094

Total Fiscal Years 1996 - 2006	$	90,998	$	(28,688	)	$	62,310

The amount related to the restatement that impacts fiscal year 2007 and future years is immaterial.

(in thousands)


	Fiscal Year
Category	1996			1997			1998			1999			2000			2001
(A) Grants to continuing employees	$	2		$	2		$	449		$	1,725		$	4,530		$	9,573
(B) Grants to new employees		3			27			506			1,073			2,003			4,499
(C) Grants lacking evidence of approval		1			1			—			6			21			24
(D) Grants modified after ratification		—			—			—			—			496			1,399
(E) Post-termination arrangements		—			—			—			—			357			182
(F) Pricing exceptions		7			71			80			70			103			180

	$	13		$	101		$	1,035		$	2,874		$	7,510		$	15,857
Adjustment for duplications		(3	)		(2	)		—			(6	)		(588	)		(1,597	)

Total pre-tax adjustments		10			99			1,035			2,868			6,922			14,260
Amount capitalized into inventory		—			(4	)		(33	)		(42	)		(60	)		(210	)

Total pre-tax compensation expense	$	10		$	95		$	1,002		$	2,826		$	6,862		$	14,050
Tax benefits		(3	)		(37	)		(390	)		(1,034	)		(2,174	)		(4,017	)

Net adjustment	$	7		$	58		$	612		$	1,792		$	4,688		$	10,033


	Fiscal Year						Subtotal FY 1996 through FY 2003			Fiscal Year									Total FY 1996 through FY 2006
Category	2002			2003			Subtotal FY 1996 through FY 2003			2004			2005			2006			Total FY 1996 through FY 2006
(A) Grants to continuing employees	$	11,729		$	9,841		$	37,851		$	7,101		$	4,265		$	1,256		$	50,473
(B) Grants to new employees		4,701			3,332			16,144			2,012			1,082			187			19,425
(C) Grants lacking evidence of approval		89			(2	)		140			5			4			—			149
(D) Grants modified after ratification		1,380			745			4,020			410			112			3			4,545
(E) Post-termination arrangements		20,080			124			20,743			—			111			—			20,854
(F) Pricing exceptions		135			67			713			7			12			1			733

	$	38,114		$	14,107		$	79,611		$	9,535		$	5,586		$	1,447		$	96,179
Adjustment for duplications		(1,604	)		(810	)		(4,610	)		(422	)		(115	)		(4	)		(5,151	)

Total pre-tax adjustments		36,510			13,297			75,001			9,113			5,471			1,443			91,028
Amount capitalized into inventory		(156	)		104			(401	)		121			166			84			(30	)

Total pre-tax compensation expense	$	36,354		$	13,401		$	74,600		$	9,234		$	5,637		$	1,527		$	90,998
Tax benefits		(12,465	)		(3,912	)		(24,032	)		(2,566	)		(1,657	)		(433	)		(28,688	)

Net adjustment	$	23,889		$	9,489		$	50,568		$	6,668		$	3,980		$	1,094		$	62,310

(V)	Effect of the Restatement Adjustments on the Previously Reported Financial Statements

Income Statement Data

The table below shows the effect of the additional non-cash compensation expense on our previously reported Consolidated Statements of Income for fiscal years 2002 through 2006. The additional non-cash compensation expense related to fiscal years 1996 through 2001 is included in the restated 2002 balance sheet as a reduction in stockholders’ equity.

increase (decrease)

in thousands, except per share data


	Fiscal Year Ended
	Jan 29 2006			Jan 30 2005			Jan 25 2004			Jan 26 2003			Jan 27 2002
NET SALES	$	—		$	—		$	—		$	—		$	—
Cost of sales		213			702			1,303			1,811			3,335

Gross profit		(213	)		(702	)		(1,303	)		(1,811	)		(3,335	)

Operating costs and expenses:
Selling, general and administrative		920			3,115			4,983			6,562			23,974
Product development and engineering		394			1,820			2,948			5,028			9,045
Acquisition-related items		—

Total operating costs and expenses		1,314			4,935			7,931			11,590			33,019

Operating income		(1,527	)		(5,637	)		(9,234	)		(13,401	)		(36,354	)
Interest expense		—			—			—			—			—
Interest and other income		—			—			—			—			—

Income before taxes		(1,527	)		(5,637	)		(9,234	)		(13,401	)		(36,354	)
Provision for taxes		433			1,657			2,566			3,912			12,465

NET INCOME	$	(1,094	)	$	(3,980	)	$	(6,668	)	$	(9,489	)	$	(23,889	)

Earnings per share -
Basic		(0.02	)		(0.05	)		(0.09	)		(0.13	)		(0.34	)
Diluted		(0.02	)		(0.05	)		(0.09	)		(0.12	)		(0.30	)

See Note 1A to the consolidated financial statements included in Item 8 of this report for a side by side comparison of the previously reported amounts with the restated amounts for fiscal years 2006, 2005, and 2004. The following table shows a side by side comparison for fiscal years 2003 and 2002.

(in thousands, except per share data)


	Fiscal Year 2003									Fiscal Year 2002
	As Previously Reported			Restatement Adjustments			As Restated			As Previously Reported			Restatement Adjustments			As Restated
NET SALES	$	192,958		$	—		$	192,958		$	191,210		$	—		$	191,210
Cost of sales		83,097			1,811			84,908			97,920			3,335			101,255

Gross profit		109,861			(1,811	)		108,050			93,290			(3,335	)		89,955

Operating costs and expenses:
Selling, general and administrative		34,426			6,562			40,988			33,798			23,974			57,772
Product development and engineering		31,336			5,028			36,364			29,744			9,045			38,789
One-time costs		13,202			—			13,202			2,727			—			2,727

Total operating costs and expenses		78,964			11,590			90,554			66,269			33,019			99,288

Operating income		30,897			(13,401	)		17,496			27,021			(36,354	)		(9,333	)
Interest expense		(15,125	)		—			(15,125	)		(18,917	)		—			(18,917	)
Interest and other income		30,312			—			30,312			28,012			—			28,012

Income before taxes		46,084			(13,401	)		32,683			36,116			(36,354	)		(238	)
Provision for taxes		11,903			(3,912	)		7,991			10,113			(12,465	)		(2,352	)

NET INCOME	$	34,181		$	(9,489	)	$	24,692		$	26,003		$	(23,889	)	$	2,114

Earnings per share
Basic	$	0.47		$	(0.13	)	$	0.34		$	0.37		$	(0.34	)	$	0.03
Diluted	$	0.44		$	(0.12	)	$	0.32		$	0.33		$	(0.30	)	$	0.03
Weighted-average number of shares
Basic		73,013			—			73,013			69,983			—			69,983
Diluted		77,789			174			77,963			77,747			396			78,143

Balance Sheet Data

increase (decrease) in thousands


	Jan 29 2006			Jan 30 2005			Jan 25 2004			Jan 26 2003			Jan 27 2002
ASSETS
Current assets:
Cash and cash equivalents	$	—		$	—		$	—		$	—		$	—
Temporary investments		—			—			—			—			—
Receivables, less allowances		—			—			—			—			—
Inventories		30			114			281			403			506
Income taxes refundable		—			—			—			—			—
Deferred income taxes		—			—			—			—			—
Other current assets		—			—			—			—			—

Total current assets		30			114			281			403			506
Property, plant and equipment, net		—			—			—			—			—
Investments, maturities in excess of 1 year		—			—			—			—			—
Deferred income taxes		(800	)		945			1,382			88			(2,113	)
Goodwill		—			—			—			—			—
Other intangibles		—			—			—			—			—
Other assets		—			—			—			—			—

TOTAL ASSETS	$	(770	)	$	1,059		$	1,663		$	491		$	(1,607	)

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	—		$	—		$	—		$	—		$	—
Accrued liabilities		—			—			—			—			—
Income taxes payable		—			—			—			—			—
Deferred revenue		—			—			—			—			—
Deferred income taxes		—			—			—			—			—
Other current liabilities		96			96			96			96			96

Total current liabilities		96			96			96			96			96
Convertible subordinated debentures		—			—			—			—			—
Deferred income taxes		—			—			—			—			—
Other long-term liabilities		—			—			—			—			—
Commitments and contingencies		—			—			—			—			—
Stockholders’ equity:
Common stock, $0.01 par value		—			—			—			—			—
Treasury stock, at cost		—			—			—			—			—
Additional paid-in capital		61,446			62,180			58,804			50,964			39,376
Retained earnings		(62,312	)		(61,217	)		(57,237	)		(50,569	)		(41,079	)
Accumulated other comprehensive loss

Total Stockholders’ equity		(866	)		963			1,567			395			(1,703	)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	(770	)	$	1,059		$	1,663		$	491		$	(1,607	)

For a side by side comparison of the previously reported balance sheet line items with the restated amounts for the January 29, 2006 and January 30, 2005 balance sheets, see Note 1A to the financial statements included in Item 8 of this report. The following tables show the effects of the restatement on the consolidated balance sheet at the end of fiscal years 2004, 2003 and 2002.


in thousands	January 25, 2004						January 26, 2003						January 27, 2002
	As Previously Reported		Restatement Adjustments		As Restated		As Previously Reported		Restatement Adjustments		As Restated		As Previously Reported		Restatement Adjustments			As Restated
ASSETS
Current assets:
Cash and cash equivalents	$	96,314	$	—	$	96,314	$	137,041	$	—	$	137,041	$	46,300	$	—		$	46,300
Temporary investments		93,044		—		93,044		273,382		—		273,382		324,870		—			324,870
Receivables, less allowances		20,362		—		20,362		17,676		—		17,676		19,181		—			19,181
Inventories		22,166		281		22,447		16,351		403		16,754		22,728		506			23,234
Income taxes refundable		5,795		—		5,795		—		—		—		2,019		—			2,019
Deferred income taxes		5,212		—		5,212		11,731		—		11,731		11,786		—			11,786
Other current assets		3,062		—		3,062		2,267		—		2,267		3,372		—			3,372

Total current assets		245,955		281		246,236		458,448		403		458,851		430,256		506			430,762
Property, plant & equipment, net		49,579		—		49,579		51,547		—		51,547		51,516		—			51,516
Investments, maturities in excess of 1 year		86,119		—		86,119		78,624		—		78,624		172,332		—			172,332
Deferred income taxes		25,552		1,382		26,934		27,143		88		27,231		27,659		(2,113	)		25,546
Goodwill		—		—		—		—		—		—		—		—			—
Other intangibles		—		—		—		—		—		—		—		—			—
Other assets		1,268		—		1,268		4,784		—		4,784		8,638		—			8,638

TOTAL ASSETS	$	408,473	$	1,663	$	410,136	$	620,546	$	491	$	621,037	$	690,401	$	(1,607	)	$	688,794

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	8,554	$	—	$	8,554	$	5,725	$	—	$	5,725	$	7,341	$	—		$	7,341
Accrued liabilities		16,894		—		16,894		26,596		—		26,596		16,845		—			16,845
Income taxes payable