Edgar Filing: MICROSEMI CORP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended April 2, 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 No. 0-8866

MICROSEMI CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		95-2110371
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


2381 Morse Avenue, Irvine, California		92614
(Address of principal executive offices)		(Zip Code)

(949) 221-7100

(Registrant’s telephone number, including area code)

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 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. (Check one):

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 number of shares of the issuer’s Common Stock, $0.20 par value, outstanding on April 24, 2006 was 65,830,994.

Table of Contents


Reference		Page

PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Consolidated Balance Sheets as of October 2, 2005 and April 2, 2006 (Unaudited)	4

	Unaudited Consolidated Income Statements for the Quarters and Six Months Ended April 3, 2005 and April 2, 2006	5

	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended April 3, 2005 and April 2, 2006	7

	Notes to Unaudited Consolidated Financial Statements	8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	32

ITEM 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	34

ITEM 1A.	Risk Factors	34

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

ITEM 3.	Default upon Senior Securities	37

ITEM 4.	Submission of Matters to a Vote of Security Holders	37

ITEM 5.	Other Information	38

ITEM 6.	Exhibits	38

PART I - FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

The unaudited consolidated income statements for the quarter and six months ended April 2, 2006 of Microsemi Corporation and Subsidiaries (which we herein sometimes refer to collectively as “Microsemi”, “the Company”, “we”, “our”, “ours” or “us”), the unaudited consolidated statements of cash flows for the six months ended April 2, 2006, and the comparative unaudited consolidated financial information for the corresponding periods of the prior year, together with the balance sheets as of October 2, 2005 and April 2, 2006 (unaudited) are included herein.

MICROSEMI CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Balance Sheets

(amounts in thousands, except per share data)


	October 2, 2005			April 2, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	98,149		$	137,731
Accounts receivable, net of allowance for doubtful accounts, $727 at October 2, 2005 and $841 at April 2, 2006		53,233			59,055
Inventories		55,917			62,131
Deferred income taxes		12,921			12,921
Other current assets		2,101			4,245

Total current assets		222,321			276,083
Property and equipment, net		58,366			57,416
Deferred income taxes		8,074			8,374
Goodwill		3,258			3,258
Other intangible assets, net		4,493			4,050
Other assets		4,069			3,347

TOTAL ASSETS	$	300,581		$	352,528

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Notes payable	$	121		$	124
Current maturity of long-term liabilities		520			400
Accounts payable		15,322			15,774
Accrued liabilities		22,434			19,433
Income taxes payable		3,981			1,098

Total current liabilities		42,378			36,829

Long-term liabilities		3,617			3,546

Stockholders’ equity:
Preferred stock, $1.00 par value; authorized 1,000 shares; none issued		—			—
Common stock, $0.20 par value; authorized 100,000 shares; issued and outstanding 63,504 and 65,783 at October 2, 2005 and April 2, 2006, respectively		12,702			13,159
Capital in excess of par value of common stock		163,134			192,801
Retained earnings		78,774			106,210
Accumulated other comprehensive loss		(24	)		(17	)

Total stockholders’ equity		254,586			312,153

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	300,581		$	352,528

The accompanying notes are an integral part of these statements.

MICROSEMI CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Income Statements

(amounts in thousands, except per share data)


	Quarter Ended
	April 3, 2005			April 2, 2006
Net sales	$	73,318		$	84,853
Cost of sales		43,542			46,712

Gross profit		29,776			38,141

Operating expenses:
Selling, general and administrative		12,891			12,870
Research and development		4,732			4,642
Amortization of intangible assets		230			214
Impairment of assets, restructuring and severance charges		3,027			520

Total operating expenses		20,880			18,246

Operating income		8,896			19,895

Other income (expense):
Interest income		288			1,168
Interest expense		(46	)		(42	)
Other, net		21			—

Total other income		263			1,126

Income before income taxes		9,159			21,021

Provision for income taxes		3,114			7,378

NET INCOME	$	6,045		$	13,643

Earnings per share:
Basic	$	0.10		$	0.21

Diluted	$	0.09		$	0.20

Common and common equivalent shares outstanding:
Basic		61,295			65,321

Diluted		64,492			68,618

The accompanying notes are an integral part of these statements.

MICROSEMI CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Income Statements

(amounts in thousands, except per share data)


	Six Months Ended
	April 3, 2005			April 2, 2006
Net sales	$	143,072		$	167,012
Cost of sales		89,280			89,324

Gross profit		53,792			77,688

Operating expenses:
Selling, general and administrative		23,687			27,291
Research and development		9,603			9,719
Amortization of intangible assets		459			443
Impairment of assets, restructuring and severance charges		3,387			1,161

Total operating expenses		37,136			38,614

Operating income		16,656			39,074

Other income (expense):

Interest income		456			2,016
Interest expense		(97	)		(79	)
Other, net		5			—

Total other income		364			1,937

Income before income taxes		17,020			41,011

Provision for income taxes		5,708			13,575

NET INCOME	$	11,312		$	27,436

Earnings per share:
Basic	$	0.19		$	0.42

Diluted	$	0.18		$	0.40

Common and common equivalent shares outstanding:
Basic		60,798			64,659

Diluted		64,305			68,083

The accompanying notes are an integral part of these statements.

MICROSEMI CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

(amounts in thousands)


	Six Months Ended
	April 3, 2005			April 2, 2006
Cash flows from operating activities:
Net income	$	11,312		$	27,436
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,478			6,098
Provision for doubtful accounts		430			173
Loss on dispositions and retirements of assets		452			55
Tax benefit from stock option exercises		5,906			—
Excess tax benefit from stock option exercise		—			(8,744	)
Changes in assets and liabilities:
Accounts receivable		(6,228	)		(5,995	)
Inventories		(934	)		(6,214	)
Other current assets		184			(2,144	)
Other assets		—			(1,696	)
Deferred income taxes		—			(300	)
Accounts payable		(3,852	)		452
Accrued liabilities		(402	)		(3,001	)
Income taxes payable		(310	)		9,137

Net cash provided by operating activities		13,036			15,257

Cash flows from investing activities:
Purchases of property and equipment		(5,693	)		(4,790	)
Changes in other assets		85			2,471
Change in liability related to sale of assets		(396	)		—

Net cash used in investing activities		(6,004	)		(2,319	)

Cash flows from financing activities:
Payments of long-term liabilities		(717	)		(191	)
Exercise of employee stock options		8,413			18,091
Excess tax benefit from stock option exercises		—			8,744

Net cash provided by financing activities		7,696			26,644

Effect of exchange rate changes on cash		—			—

Net increase in cash and cash equivalents		14,728			39,582
Cash and cash equivalents at beginning of period		45,118			98,149

Cash and cash equivalents at end of period	$	59,846		$	137,731

The accompanying notes are an integral part of these statements.

MICROSEMI CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

April 2, 2006

1.	PRESENTATION OF FINANCIAL INFORMATION

The unaudited consolidated financial statements include the accounts of Microsemi Corporation and its subsidiaries (which we herein sometimes refer to collectively as “Microsemi”, “the Company”, “we”, “our”, “ours” or “us”). Intercompany transactions have been eliminated in consolidation.

The financial information furnished herein is unaudited, but in the opinion of our management, includes all adjustments (all of which are normal, recurring adjustments) necessary for a fair statement of the results of operations for the periods indicated. The results of operations for the first six months ended April 2, 2006 of the current fiscal year are not necessarily indicative of the results to be expected for the full year.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore do not include all information and note disclosures necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto in the Annual Report on Form 10-K for the fiscal year ended October 2, 2005.

Critical Accounting Policies and Estimates

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States that require us to make estimates and assumptions that may materially affect the reported amounts of assets and liabilities at the date of the unaudited consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ materially from those estimates.

Reclassifications

Certain reclassifications have been made to prior year balances to conform to the current year presentation.

2.	INVENTORIES

Inventories were as follows (amounts in thousands):


	October 2, 2005		April 2, 2006
Raw Materials	$	14,219	$	16,460
Work in Progress		26,274		31,604
Finished Goods		15,424		14,067

	$	55,917	$	62,131

3.	CONTINGENCY

In Broomfield, Colorado, the owner of a property located adjacent to a manufacturing facility owned by Microsemi Corp.—Colorado (“the Subsidiary”) had notified the subsidiary and other parties, of a claim that contaminants migrated to his property, thereby diminishing its value. In August 1995, the subsidiary, together with Coors Porcelain Company, FMC Corporation and Siemens Microelectronics, Inc. (former owners of the manufacturing facility), agreed to settle the claim and to indemnify the owner of the adjacent property for remediation costs. Although TCE and other contaminants previously used by former owners at the facility are present in soil and groundwater on the subsidiary’s property, we vigorously contest any

assertion that the subsidiary caused the contamination. In November 1998, we signed an agreement with the three former owners of this facility whereby they have 1) reimbursed us for $530,000 of past costs, 2) assumed responsibility for 90% of all future clean-up costs, and 3) promised to indemnify and protect us against any and all third-party claims relating to the contamination of the facility. An Integrated Corrective Action Plan was submitted to the State of Colorado. Sampling and management plans were prepared for the Colorado Department of Public Health & Environment. State and local agencies in Colorado are reviewing current data and considering study and cleanup options. The most recent forecast estimated that the total project cost, up to the year 2020, would be approximately $5,300,000; accordingly, by assuming that this amount is accurate and that the indemnifying parties will pay 90% of this amount as agreed without need for us to incur material costs to enforce that agreement, we reserved for this contingency by recording a one-time charge of $530,000 for the life of this project in fiscal year 2003. There has not been any significant development since September 28, 2003.

We are involved in other normal litigation matters, arising out of the ordinary routine conduct of our business, including from time to time litigation relating to commercial transactions, contracts, and environmental matters. In the opinion of management, the final outcome of these matters will not have a material adverse effect on our financial position, results of operations or cash flows.

4.	COMPREHENSIVE INCOME

Comprehensive income is defined as the change in equity (net assets) of a business enterprise during the period from transactions and other events and circumstances from non-owner sources. Our comprehensive income consists of net income and the change of the cumulative foreign currency translation adjustment. Accumulated other comprehensive loss consists of the cumulative foreign currency translation adjustment. Total comprehensive income for the quarters and six months ended April 3, 2005 and April 2, 2006 were calculated as follows (amounts in 000’s):


	Quarters Ended					Six Months Ended
	April 3, 2005		April 2, 2006			April 3, 2005		April 2, 2006
Net income	$	6,045	$	13,643		$	11,312	$	27,436
Translation adjustment		—		(3	)		—		7

Comprehensive income	$	6,045	$	13,640		$	11,312	$	27,443

5.	EARNINGS PER SHARE

Basic earnings per share have been computed based upon the weighted average number of common shares outstanding during the respective periods. Diluted earnings per share have been computed, when the result is dilutive, using the treasury stock method for stock options outstanding during the respective periods.

Earnings per share (“EPS”) for the respective quarters and six months ended April 3, 2005 and April 2, 2006 were calculated as follows (amounts in thousands, except per share data):


	Quarters Ended				Six Months Ended
	April 3, 2005		April 2, 2006		April 3, 2005		April 2, 2006
BASIC

Net income	$	6,045	$	13,643	$	11,312	$	27,436

Weighted-average common shares outstanding for basic		61,295		65,321		60,798		64,659

Basic earnings per share	$	0.10	$	0.21	$	0.19	$	0.42

DILUTED

Net income	$	6,045	$	13,643	$	11,312	$	27,436

Weighted-average common shares outstanding for basic		61,295		65,321		60,798		64,659

Dilutive effect of stock options		3,197		3,297		3,507		3,424

Weighted-average common shares outstanding on a diluted basis		64,492		68,618		64,305		68,083

Diluted earnings per share	$	0.09	$	0.20	$	0.18	$	0.40

In the second quarter of fiscal years 2005 and 2006, approximately 186,000 and 140,000 options, respectively, were excluded in the computation of diluted EPS and in the first six months of fiscal years 2005 and 2006, approximately 93,000 and 70,000 options, respectively, were excluded in the computation of diluted EPS, as in each period, these options would have been antidilutive.

6.	RECENTLY ADOPTED ACCOUNTING ANNOUNCEMENTS

Statement of Financial Accounting Standards No. 151

In November 2004, the Financial Accounting Standards Board issued FAS No. 151, “Inventory costs, an amendment of ARB No. 43 Chapter 4”. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). It requires that those items be recognized as current-period charges regardless of whether they meet the criteria in the earlier guidance of “so abnormal”. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement shall be applied prospectively for inventory costs incurred during fiscal years beginning after June 15, 2005 (our fiscal year 2006). The adoption of this statement did not have a material impact on our results of operations, financial position or cash flow.

Statement of Financial Accounting Standards No. 123 (revised 2004)

In December 2004, the Financial Accounting Standards Board issued a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123R”). FAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance and eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. FAS 123R requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). On March 29, 2005, the SEC issued Staff Accounting Bulletin 107 (“SAB 107”) which expresses the views of the SEC regarding the interaction between FAS 123R and certain SEC rules and regulations and provides the SEC’s views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instrument issues under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of FAS 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payments arrangements upon adoption of FAS 123R, the modification of employee share options prior to adoption of FAS 123R, and disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of FAS 123R. We adopted FAS 123R in the first quarter of fiscal year 2006. As a result, we recorded $681,000 and $702,000 of compensation expense, net of tax, in the quarter and six months ended April 2, 2006. The future effects may be higher but are currently not estimable.

Statement of Financial Accounting Standards No. 153

In December 2004, the Financial Accounting Standards Board issued FAS No. 153, “Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29”. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance only if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this statement did not have a material impact on our results of operations, financial position or cash flow.

FASB Staff Position No. FAS 109-1 and FASB Staff Position No. FAS 109-2

In December 2004, the FASB issued FASB Staff Position No. FAS 109-1 “Application of FASB Statement No. 109, ‘Accounting for Income Taxes’, to the Tax Deduction on Qualified Production Activities by the American Jobs Creation Act of 2004” (“FSP FAS No. 109-1”) and FASB Staff Position No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004” (“FSP FAS No. 109-2”). The American Jobs Creation Act of 2004 (“AJCA”) provides several incentives for U.S. multinational corporations and U.S. manufacturers, subject to certain limitations. The incentives include an 85% dividends received deduction for certain dividends from controlled foreign corporations that repatriate accumulated income abroad, and a deduction for domestic qualified production activities taxable income. The adoptions of FSP FAS 109-1 and FSP 109-2 did not have a material impact on our consolidated financial position, results of operations or cash flows.

7.	RECENTLY ISSUED ACCOUNTING STANDARD

Statement of Financial Accounting Standards No. 154

In June 2005, the Financial Accounting Standards Board issued FAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“FAS 154”). This Statement generally requires retrospective application to prior periods’ financial statements of changes in accounting principle. Previously, Opinion No. 20 required that most voluntary changes in accounting principle were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. FAS 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (our fiscal year 2007). We do not expect the adoption of this statement will have a material impact on our results of operations, financial position or cash flow.

8.	STOCK-BASED COMPENSATION

In December 1986, the Board of Directors adopted an incentive stock option plan (the “1987 Plan”), as amended, which reserved 3,400,000 shares of common stock for issuance. The 1987 Plan was approved by the stockholders in February 1987 and amended in February 1994, and is for the purpose of securing for us and our stockholders the benefits arising from stock ownership by selected officers, directors and other key executives and certain key employees. The plan provides for the grant by the Company of stock options, stock appreciation rights, shares of common stock or cash. As of April 2, 2006, we had granted only options under the 1987 Plan. Options granted prior to February 22, 2006, must be exercised within ten years from the date they are granted, subject to early termination upon death or cessation of employment, and are exercisable in installments determined by the Board of Directors. Options granted on or after February 22, 2006 have the same terms with the exception that they must be exercised within six years from the date they are granted. If an employee owns more than 10% of the total combined voting power of all classes of our stock, the exercise period is limited to five years and the exercise price is 10% higher than the closing price on the grant date. It is our policy to satisfy the exercise of employee stock options with newly issued shares of common stock.

At the annual meeting on February 29, 2000, the stockholders approved several amendments to the 1987 Plan which: 1) extended its termination date to December 15, 2009; 2) increased initially by 1,060,800 the number of shares available for grants; 3) effected annual increases on the first day of each fiscal year of the number of shares available for grant in increments of 4% of our issued and outstanding shares of common stock; and 4) added flexibility by permitting discretionary grants to non-employee directors and other non-employees. At April 2, 2006, there were 3,329,000 shares available for grant under the Plan.

Beginning in fiscal year 2006, we adopted FAS 123R on a modified prospective transition method to account for our employee stock options. Under the modified prospective transition method, fair value of new and previously granted but unvested stock options are recognized as compensation expense in the income statement, and prior period results are not restated. In the quarter and six months ended April 2, 2006, operating income decreased by $1,048,000 and $1,078,000, respectively, net income decreased by $681,000 and $702,000, respectively, and basic and diluted earnings per share were reduced by $0.01 in each period. Compensation expense for the quarter and six months ended April 2, 2006 for stock options granted during the quarter was calculated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:


	April 2, 2006
	Quarter Ended		Six Months Ended
Risk free interest rate	4.6	%	4.5	%
Expected dividend yield	None		None
Expected life (years)	3.8		3.7
Expected volatility	70.3	%	71.0	%

Expected term was estimated based on historical exercise data that was stratified between members of the Board of Directors, executive and non-executive employees. Expected volatility was estimated based on historical volatility using equally weighted daily price observations over approximately a four year period. The risk free interest rate is based on the implied yield currently available on U.S. Treasury securities with an equivalent remaining term. Additionally, no dividends are expected to be paid.

For the six months ended April 2, 2006, the company granted 60,000 options to members of the Board of Directors which immediately vest and expire six years from the date of grant. A further 103,200 were granted to employees, of which 100,200 vest annually in equal amounts over a four year period and expire ten years from the date of grant and 3,000 vest annually in equal amounts over a three year period and expire six years from the date of grant. Options granted in the quarter and six months ended April 2, 2006 had a weighted-average grant date fair value of $16.62 and $16.25, respectively. The fair value of all grants during the six months ended April 2, 2006 was $2,548,000.

The total intrinsic value of options exercised during the six months ended April 2, 2006 was approximately $47,287,000.

At April 2, 2006, unamortized compensation expense related to unvested options, net of forfeitures, was approximately $1,577,000. The weighted average period over which compensation expense related to these options will be recognized is 3.7 years.

A summary of stock option activity, vesting and price information is as follows:


	Stock Options		Weighted- Average Exercise Price
Outstanding at October 2, 2005	12,080,655		$	14.11
Granted	163,200			29.84
Exercised	(2,308,352	)		8.19
Forfeited	(26,295	)		21.06

Outstanding at April 2, 2006	9,909,208		$	15.72


Vested	9,800,194		$	15.59
Unvested	109,014		$	27.94

At April 2, 2006, the intrinsic value and average remaining life were $132,868,000 and 8.2 years for outstanding options and $132,620,000 and 8.2 years for vested options.

Prior to our adoption of FAS 123R, Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (FAS 123) provided an alternative to APB 25 in accounting for stock-based compensation issued to employees. FAS 123 provided for a fair value based method of accounting for employee stock options and similar equity instruments. However, companies that continued to account for stock-based compensation arrangements under APB 25 were required by FAS 123 to disclose, in the notes to financial statements, the pro forma effects on net income and net income per share as if the fair value based method prescribed by FAS 123 had been applied. Prior to our adoption of FAS 123R, we accounted for stock-based compensation using the provisions of APB 25 and presented the pro forma information required by FAS 123 as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (FAS 148).

The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding awards for the quarter and six months ended April 3, 2005 (amounts in thousands, except earnings per share):


	April 3, 2005
	Quarter Ended			Six Months Ended
Net income, as reported	$	6,045		$	11,312

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,544	)		(5,039	)

Pro forma net income	$	3,501		$	6,273

Earnings per share:
Basic - as reported	$	0.10		$	0.19

Basic - pro forma	$	0.06		$	0.10

Diluted - as reported	$	0.09		$	0.18

Diluted - pro forma	$	0.06		$	0.10

In August 2005, we announced that we would accelerate the vesting of certain unvested stock options, previously awarded to eligible participants under our 1987 Stock Plan, as amended. Upon our planned adoption of FASB Statement No. 123R, “Share-Based Payment,” effective for fiscal year 2006, vesting of unvested options would have added to our compensation expense. Therefore, we accelerated vesting into fiscal year 2005 before the new accounting rule took effect. We restrict sales of any shares acquired upon the exercise of accelerated options (except as necessary to cover the exercise price and satisfy taxes) until the dates on which such options would have vested under their original vesting schedules.

As a result of this vesting acceleration, options to purchase approximately 5,148,000 shares of common stock became vested and exercisable on September 21, 2005, including approximately 1,324,000 options granted to executive officers. The intrinsic value of the accelerated options was approximately $76,903,000, of which $20,431,000 related to options held by executive officers. Compensation expense that would have been recorded absent the accelerated vesting was approximately $35,746,000, of which approximately $13,169,000 would have been recorded in fiscal year 2006.

In the fourth quarter of fiscal year 2005, we recorded a $5,463,000 non-cash compensation charge as a result of the accelerated vesting related for the excess of the intrinsic value over the fair market value of the Company’s stock on the acceleration date of those options that would have been forfeited had the vesting not been accelerated. In determining the forfeiture rates, the Company reviewed the impact of divisions that were previously sold or consolidated, one-time events that are not expected to recur and whether options were held by executive officers of the Company. The compensation charge will be adjusted in future periods as actual forfeitures are realized. For the quarter and six months ended April 2, 2006, the charge was reduced by $1,065,000 related primarily to the intrinsic value of options that would have vested absent the acceleration.

9.	SEGMENT INFORMATION

We manage our business on the basis of one reportable segment, as a manufacturer of semiconductors in different geographic areas, including the United States, Europe and Asia.

We derive revenue from sales of our high performance analog/mixed signal integrated circuits and power and high reliability individual component semiconductors. These products include individual components as well as integrated circuit solutions that enhance customer designs by improving performance, reliability and battery optimization, reducing size or protecting circuits. The principal markets that we serve include medical, defense/aerospace, notebook computers, monitors and LCD TVs, automotive and mobile connectivity applications. We evaluate direct OEM sales by end-market based on our understanding of end market uses of our products and sales by channel.

Net sales by the originating geographic area, end market and channel, and long lived assets by geographic area are as follows (amounts in thousands):


	Quarter Ended				Six Months Ended
	April 3, 2005		April 2, 2006		April 3, 2005		April 2, 2006
Net Sales:
United States	$	64,355	$	74,748	$	125,266	$	147,446
Europe		8,063		8,775		16,172		16,995
Asia		900		1,330		1,634		2,571

Total	$	73,318	$	84,853	$	143,072	$	167,012


Defense/Aerospace	$	19,032	$	21,292	$	37,017	$	40,860
Medical		8,241		7,966		13,962		17,192
Notebook/Monitor/LCD Television		5,418		7,773		10,315		16,902
Mobile Connectivity		6,647		5,311		12,738		10,069
Automotive		2,959		2,800		6,334		5,519
Others		3,233		3,138		6,320		6,294
Distributor		27,788		36,573		56,386		70,176

Total	$	73,318	$	84,853	$	143,072	$	167,012


	October 2, 2005		April 2, 2006
Long lived assets:
United States	$	56,547	$	55,698
Europe		860		772
Asia		959		946

Total	$	58,366	$	57,416

10.	RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS

Phase I

In 2001, we commenced our Capacity Optimization Enhancement Program (the “Plan”) to increase company-wide capacity utilization and operating efficiencies through consolidations and realignments of operations.

We started phase 1 of the Plan in fiscal year 2001, which included (a) the closure of most of our operations in Watertown, Massachusetts (“Watertown”) and relocation of those operations to other Microsemi operations in Lawrence and Lowell, Massachusetts (“Lawrence” and “Lowell”) and Scottsdale, Arizona (“Scottsdale”) and (b) the closure of the Melrose, Massachusetts operations and relocation of those operations to Lawrence. This phase was completed as of October 2, 2005.

Phase II

In October 2003, we announced the consolidation of our operations in Santa Ana, California (“Santa Ana”) into operations at Garden Grove, California (“Garden Grove”) and Scottsdale, Arizona (“Scottsdale”). Santa Ana had approximately 380 employees and occupied 123,000 square feet in two facilities, including 93,000 square feet in owned facilities and 30,000 square feet in facilities that are leased by us from a third party under a 30-year capital lease. Santa Ana accounted for approximately 13% of our net sales in fiscal year 2004. In the fourth quarter of fiscal 2004, Scottsdale began to ship all products that had previously been shipped by Santa Ana.

Restructuring-related costs have been and will be recorded in accordance with FAS 112, “Employers’ Accounting for Postemployment Benefits (“FAS 112”) or FAS 146, “Accounting for the Costs Associated with Exit or Disposal Activities” (“FAS 146”), as appropriate. The severance payments totaled approximately $4.5 million and covered approximately 350 employees, including 55 management positions. Approximately 30 employees have been transferred to other Microsemi operations. In fiscal year 2006, we recorded an additional $14,000 of severance costs and $335,000 for other restructuring related expenses, primarily for relocation of equipment, environmental compliance reports and facility restoration, in accordance with FAS 146. We have not incurred any material charge for cancellations of operating leases. Any other change of estimate will be recognized as an adjustment to the accrued liabilities in the period of change. Production in Santa Ana ceased in the third quarter of fiscal year 2005.

The following table reflects the activities related to the consolidation of Santa Ana and the accrued liabilities in the consolidated balance sheets at the dates below (amounts in thousands):


	Employee Severance			Other Related Costs			Total
Balance at September 26, 2004	$	3,869		$	—		$	3,869

Provisions		207			408			615
Reduction of benefits		(837	)		—			(837	)
Cash expenditures		(2,986	)		(408	)		(3,394	)

Balance at October 2, 2005	$	253		$	—		$	253

Provisions		14			335			349
Cash expenditures		(199	)		(335	)		(534	)

Balance at April 2, 2006	$	68		$	—		$	68

In the second quarter of fiscal year 2004, we started to consolidate the remainder of our Watertown operations. We moved production to our operations in Scottsdale and Lowell. Restructuring-related costs were recorded in accordance with FAS 112 or FAS 146, as appropriate. Severance payments totaled $372,000 and covered approximately 30 employees, including 4 management positions. The consolidation of the Watertown operations was completed in December 2004.

The following table reflects the activities of the final phase of the consolidation in Watertown and the liabilities included in accrued liabilities in the consolidated balance sheets at the dates below (amounts in thousands):


	Employee Severance			Other Related Costs			Total
Balance at September 26, 2004	$	461		$	—		$	461

Provisions		15			100			115
Reversal of prior provision		(104	)		—			(104	)
Cash expenditures		(372	)		(100	)		(472	)

Balance at October 2, 2005	$	—		$	—		$	—

In the first quarter of fiscal year 2005, we recorded $267,000 of severance for 22 employees at our operations in Broomfield, Colorado (“Broomfield”), including 1 management position, in accordance with FAS 112. This severance amount was paid by the end of the third quarter of fiscal year 2005.

Phase III

We are in the process of establishing a plan to determine the future use of assets from the Broomfield and Ireland operations. Currently, there has been no impairment charge required in accordance with FAS 144 (Accounting for the Impairment or Disposal of Long-Lived Assets). We currently do not expect any material impairment charge. Other consolidation associated costs such as inventory, workforce reduction, relocation, transitional idle capacity and reorganization charges will be reported, when incurred, as restructuring costs in accordance with FAS 146 (Accounting for Costs Associated with Exit or Disposal Activities), FAS 112 or FAS 151 (Inventory Costs—an amendment of ARB No. 43, Chapter 4), as applicable.

Broomfield has approximately 150 employees and occupies a 130,000 square foot owned facility. Broomfield accounted for approximately 9% and 7% of our net sales in the first six months of fiscal years 2005 and 2006, respectively. In the second quarter of fiscal year 2005, we recorded estimated severance payments of $1,134,000 in accordance with FAS 112. The severance payments cover approximately 148 employees, including 14 management positions. Severance payments commenced in the second quarter of fiscal year 2006. In fiscal year 2006, we recorded $662,000 for other restructuring related expenses, primarily for planning of equipment relocation, in accordance with FAS 146.

The following table reflects the activities related to the consolidation of Broomfield and the accrued liabilities in the consolidated balance sheets at the date below (amounts in thousands):


	Employee Severance			Other Related Costs			Total
Provisions	$	1,134		$	977		$	2,111
Cash expenditures		—			(977	)		(977	)

Balance at October 2, 2005		1,134			—			1,134

Provisions		—			662			662
Cash expenditures		(41	)		(662	)		(703	)

Balance at April 2, 2006	$	1,093		$	—		$	1,093

Ireland has approximately 70 manufacturing employees and occupies a 62,500 square foot owned facility. Ireland accounted for approximately 2% and 1% of our net sales in the first six months of fiscal years 2005 and 2006, respectively. In the second quarter of fiscal year 2005, we recorded estimated severance payments of $1,405,000, in accordance with FAS 112. The severance payments cover approximately 46 employees, including 5 management positions. Severance payments commenced in the second quarter of fiscal year 2006. In fiscal year 2006, we recorded an additional $150,000 in severance costs, in accordance with FAS 146.

The following table reflects the activities related to the consolidation of Ireland and the accrued liabilities in the consolidated balance sheets at the dates below (amounts in thousands):


	Employee Severance			Other Related Costs		Total
Provisions	$	1,405		$	100	$	1,505
Cash expenditures		—			—		—

Balance at October 2, 2005		1,405			100		1,505

Provisions		150			—		150
Cash expenditures		(327	)		—		(327	)

Balance at April 2, 2006	$	1,228		$	100	$	1,328

In the six months ended April 2, 2006, restructuring charges of $1,161,000 included expenses related to the consolidations in Santa Ana, Broomfield and Ireland were as follows (amounts in thousands):


	Santa Ana		Broomfield		Ireland		Total
Severance expense	$	14	$	—	$	150	$	164
Other consolidation related expenses		335		662		—		997

Total	$	349	$	662	$	150	$	1,161

11.	SUBSEQUENT EVENT

On November 2, 2005, we entered into a definitive Agreement and Plan of Merger with Advanced Power Technology, Inc., a Delaware corporation (“APT”), and APT Acquisition Corp., a Delaware corporation that is a wholly owned subsidiary of Microsemi, which was subsequently amended on April 25, 2006 by the Amendment No. 1 to Agreement and Plan of Merger (as so amended, the “Merger Agreement”). The Merger Agreement provides for a merger of our wholly-owned subsidiary with and into APT with APT surviving the merger as a wholly owned subsidiary of Microsemi. We believe that the merger will create a more diverse semiconductor company and provide us with an expanded product portfolio of analog and mixed-signal products, including radio frequency products, as well as high reliability products to address the needs of the defense/aerospace and medical markets, which represent key factors that will result in us recording goodwill. We completed the acquisition of APT on April 28, 2006 and under the terms of the Merger Agreement, we issued 0.435 of a share of Microsemi common stock and paid $2.00 in cash for each outstanding share of APT common stock, resulting in the issuance in the aggregate of approximately 4.9 million shares with a fair market value of approximately $133.7 million and a cash payment of approximately $22.5 million. APT was renamed Microsemi Corp. – Power Products Group upon the completion of the acquisition.

Item 2.

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

Overview

This Quarterly Report on Form 10-Q includes current beliefs, expectations and other forward looking statements, the realization of which may be adversely impacted by any of the factors discussed or referenced under the heading “Important Factors Related to Forward-Looking Statements and Associated Risks,” found in this section or in the section entitled, “Risk Factors” in this report, which should be read in conjunction with the section entitled, “Risk Factors” in our Annual Report on Form 10-K. This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the accompanying unaudited consolidated financial statements and notes should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto in the Annual Report on Form 10-K for the fiscal year ended October 2, 2005.

Microsemi is a leading designer, manufacturer and marketer of high performance analog and mixed-signal integrated circuits and high reliability semiconductors. Our semiconductors manage and control or regulate power, protect against transient voltage spikes and transmit, receive and amplify signals.

Our products include individual components as well as integrated circuit solutions that enhance customer designs by improving performance, reliability and battery optimization, reducing size or protecting circuits.

We currently serve a broad group of customers with none of our customers accounting for more than 10% of our revenue in the first six months of fiscal years 2005 or 2006. We also serve a variety of end markets, which we generally classify as follows:

•

Defense/Aerospace – We offer a broad selection of products including mixed signal analog integrated circuits, JAN, JANTX, JANTXV and JANS high-reliability discrete semiconductors and modules including diodes, zeners, diode arrays, transient voltage suppressors, small signal analog integrated circuits, small signal transistors, SCRs, MOSFETs and IGBTs. These products are utilized in a variety of applications including radar and communications, satellites, cockpit electronics, targeting and fire control and other power conversion and related systems in military and aerospace platforms.

•

Medical – Our medical products, which include zener diodes, high voltage diodes, transient voltage suppressors and thyristor surge protection devices, are designed into implantable pacemakers and defibrillators. We are also a supplier of PIN diode switches and dual diode modules for use in magnetic resonance imaging (MRI) systems.

•

Notebooks/Monitors/LCD TVs – Products in this market are used in notebook computers, monitors, storage devices, and LCD televisions, and include cold cathode fluorescent lamp (CCFL) controllers, LED drivers, visible light sensors, pulse width modulator controllers, voltage regulators, EMI/RFI filters, transient voltage suppressors and class-D audio circuits.

•

Mobile Connectivity – Our mobile connectivity products include broadband power amplifiers and monolithic microwave integrated circuits (MMIC) targeted at 802.11 a/b/g/n/e, multiple-in multiple-out (“MIMO”), wi-max wireless LAN devices and related equipment. Products also include a variety of DC-DC products, such as voltage regulators, PWM controllers, and LED drivers that are sold into the portable device set top box, and some telecom applications.

•

Automotive – Our automotive products consist primarily of visible lights sensors, LED drivers and CCFL controllers for use in automotive telematics and GPS displays, as well as, auto-dimming rear view mirrors.

•

Others – Products in this category include power modules, bridge rectifiers and high voltage assemblies for use primarily in industrial products such as arc welders, power generators and other industrial equipment.

Capacity Optimization Enhancement Program

Phase I

Phase II

Restructuring-related costs have been and will be recorded in accordance with FAS 112, “Employers’ Accounting for Postemployment Benefits” (“FAS 112”) or FAS 146, “Accounting for the Costs Associated with Exit or Disposal Activities” (“FAS 146”), as appropriate. The severance payments totaled approximately $4.5 million and covered approximately 350 employees, including 55 management positions. Approximately 30 employees have been transferred to other Microsemi operations. In fiscal year 2006, we recorded an additional $14,000 of severance costs and $0.3 million for other restructuring related expenses, primarily for relocation of equipment, environmental compliance reports and facility restoration, in accordance with FAS 146. We have not incurred any material charge for cancellations of operating leases. Any other change of estimate will be recognized as an adjustment to the accrued liabilities in the period of change. Production in Santa Ana ceased in the third quarter of fiscal year 2005.

The following table reflects the activities related to the consolidation of Santa Ana and the accrued liabilities in the consolidated balance sheets at the dates below (amounts in thousands):


	Employee Severance			Other Related Costs			Total
Balance at September 26, 2004	$	3,869		$	—		$	3,869

Provisions		207			408			615
Reduction of benefits		(837	)		—			(837	)
Cash expenditures		(2,986	)		(408	)		(3,394	)

Balance at October 2, 2005	$	253		$	—		$	253

Provisions		14			335			349
Cash expenditures		(199	)		(335	)		(534	)

Balance at April 2, 2006	$	68		$	—		$	68

We own a substantial portion of the plant and the real estate it occupies in Santa Ana, California, and we expect to offer the owned property for sale at the prevailing market price which is expected to exceed book value.

In the second quarter of fiscal year 2004, we started to consolidate the remainder of our Watertown operations. We moved production to our operations in Scottsdale and Lowell. Restructuring-related costs were recorded in accordance with FAS 112 or FAS 146, as appropriate. Severance payments totaled $0.4 million and covered approximately 30 employees, including 4 management positions. The consolidation of the Watertown operations was completed in December 2004.


	Employee Severance			Other Related Costs			Total
Balance at September 26, 2004	$	461		$	—		$	461

Provisions		15			100			115
Reversal of prior provision		(104	)		—			(104	)
Cash expenditures		(372	)		(100	)		(472	)

Balance at October 2, 2005	$	—		$	—		$	—

In the first quarter of fiscal year 2005, we recorded $0.3 million of severance for 22 employees at our operations in Broomfield, Colorado (“Broomfield”), including 1 management position, in accordance with FAS 112. This severance amount was paid by the end of the third quarter of fiscal year 2005.

Phase III

In April 2005, we announced 1) the consolidation of operations in Broomfield into other Microsemi facilities and 2) the closure of the manufacturing operations of Microsemi Corp.-Ireland (“Ireland”). Costs related to Phase III of our consolidation program are expected to range from $9.0 million to $12.0 million and be incurred in the next 12 months.

We are in the process of establishing a plan to determine the future use of assets from the Broomfield and Ireland operations. Currently, there has been no impairment charge required in accordance with FAS 144 (Accounting for the Impairment or Disposal of Long-Lived Assets). We currently do not expect any material impairment charge. Other consolidation associated costs such as inventory, workforce reduction, relocation, transitional idle capacity and reorganization charges will be reported, when incurred, as restructuring costs in accordance with FAS 146, FAS 112, or FAS 151 (Inventory Costs—an amendment of ARB No. 43, Chapter 4), as applicable.

Broomfield has approximately 150 employees and occupies a 130,000 square foot owned facility. Broomfield accounted for approximately 9% and 7% of our net sales in the first six months of fiscal years 2005 and 2006, respectively. In the second quarter of fiscal year 2005, we recorded estimated severance payments of $1.1 million in accordance with FAS 112. The severance payments cover approximately 148 employees, including 14 management positions. Severance payments commenced in the second quarter of fiscal year 2006. In fiscal year 2006, we recorded $0.7 million for other restructuring related expenses, primarily for travel, planning and equipment relocation, in accordance with FAS 146.

The consolidation of Broomfield is expected to result, subsequent to its completion, in annual cost savings of $5.0 million to $7.0 million from the elimination of redundant facilities and related expenses and employee reductions.

The following table reflects the activities related to the consolidation of Broomfield and the accrued liabilities in the consolidated balance sheets at the date below (amounts in thousands):


	Employee Severance			Other Related Costs			Total
Provisions	$	1,134		$	977		$	2,111
Cash expenditures		—			(977	)		(977	)

Balance at October 2, 2005		1,134			—			1,134

Provisions		—			662			662
Cash expenditures		(41	)		(662	)		(703	)

Balance at April 2, 2006	$	1,093		$	—		$	1,093

Costs associated with the closure of the manufacturing operations in Ireland are estimated to range from $3.0 million to $4.0 million, excluding any gain or loss from future dispositions of the plant and property. Ireland has approximately 70 manufacturing employees and occupies a 62,500 square foot owned facility. Ireland accounted for approximately 2% and 1% of our net sales in the first six months of fiscal years 2005 and 2006, respectively. In the second quarter of fiscal year 2005, we recorded estimated severance payments of $1.4 million, in accordance with FAS 112. The severance payments cover approximately 46 employees, including 5 management positions. Severance payments commenced in the second quarter of fiscal year 2006. In fiscal year 2006, we recorded an additional $0.2 million in severance costs, in accordance with FAS 146.

The closure of the manufacturing operations in Ireland is expected to result, subsequent to its completion, in annual cost savings of $1.0 million to $3.0 million from the elimination of redundant facilities and related expenses and employee reductions.

The following table reflects the activities related to the consolidation of Ireland and the accrued liabilities in the consolidated balance sheets at the dates below (amounts in thousands):


	Employee Severance			Other Related Costs		Total
Provisions	$	1,405		$	100	$	1,505
Cash expenditures		—			—		—

Balance at October 2, 2005		1,405			100		1,505

Provisions		150			—		150
Cash expenditures		(327	)		—		(327	)

Balance at April 2, 2006	$	1,228		$	100	$	1,328

Key Reporting Unit Metrics

In order to manage our manufacturing capacity for current requirements and anticipated future growth of our business and to assess the performance of our industry segment, we review factory utilization, headcount and overhead expenses at each of our manufacturing locations. The table below sets forth metrics at these locations:


	Wafer Fabrication Utilization				Headcount		Overhead Expense
	2005 YTD		2006 YTD		2005 YTD	2006 YTD	2005 YTD		2006 YTD
Garden Grove	65	%	95	%	239	244	$	17,851	$	18,715
Lawrence	35	%	35	%	342	374	$	9,441	$	10,246
Lowell	40	%	45	%	116	112	$	3,391	$	3,683
Scottsdale	70	%	80	%	310	464	$	8,786	$	11,789

Wafer fabrication utilization provides an indication of available capacity and is utilized to determine items such as production allocation, headcount needs and capital expenditure requirements. Wafer fabrication is a significant process in our operations. Increases in utilization at our manufacturing locations from 2005 YTD to 2006 YTD reflect higher production levels to meet increasing orders and the results of the consolidation activities related to our Capacity Optimization Enhancement Program. Currently, we do not anticipate the need to increase capital expenditures beyond historical levels to accommodate growth of our business. Though our Garden Grove facility is currently at 95% utilization we do not anticipate a need to increase the capacity due to the fact that all future high performance analog mixed signal product originally designed for this facility are being designed using outside foundry.

Headcount is used to measure our ability to meet current demand and anticipated growth as well as assimilating new acquisitions. It is also used to forecast manufacturing spending. Increases in headcount at our Scottsdale and Lawrence facilities reflect higher personnel requirements following the relocations of product lines of closed facilities to these locations. Lowell headcount in 2005 YTD included personnel from Watertown that eventually separated from the Company.

Overhead expenses have a material impact on our operating profits. It is also significantly impacted by our decisions made in response to the review of the other factors above. Operating expense is reviewed to assure that we achieve anticipated savings or do not exceed our expected expenditures. It also affects our management of available cash for operating activities. The increases in overhead expense from 2005 YTD to 2006 YTD at these facilities reflect the additional cost from the consolidation of Santa Ana, increased sales and to a lesser extent, costs from initial consolidation activities from Colorado.

RESULTS OF OPERATIONS FOR THE QUARTER ENDED APRIL 3, 2005 COMPARED TO THE QUARTER ENDED APRIL 2, 2006.

Net sales increased $11.5 million or 16% from $73.3 million for the second quarter of fiscal year 2005 (“Q2 2005”) to $84.9 million for the second quarter of fiscal year 2006 (“Q2 2006”). Sales by end markets are based on our understanding of end market uses of our products. Certain sales through distributors have been reclassified to appropriate end markets when we have reasonable supporting data to do so. A breakout of net sales by end markets and by sales channels for Q2 2005 and Q2 2006 is as follows (amounts in thousands):


	Q2 2005		Q2 2006
Defense/Aerospace	$	19,032	$	21,292
Medical		8,241		7,966
Notebooks/Monitors/LCD Televisions		5,418		7,773
Mobile Connectivity		6,647		5,311
Automotive		2,959		2,800
Others		3,233		3,138
Distributor		27,788		36,573

	$	73,318	$	84,853

Sales in the defense and aerospace end market increased $2.3 million from $19.0 million in Q2 2005 to $21.3 million in Q2 2006. This increase was driven primarily by continued demand from commercial air products, satellite products, and defense related products. These three end markets continue to drive growth. Other factors contributing to the increase in revenues are favorable contract negotiations, product mix shift towards satellite products which generally have higher selling prices, and strategic price positioning in certain product lines. Based on a forecasted increase in the Department of Defense budget, growth in international markets for defense related product, and continued demand in the commercial air space, the business in this end market should remain solid.

Sales in the medical end market decreased $0.2 million, from $8.2 million in Q2 2005 to $8.0 million in Q2 2006. Sales are slightly down from the prior year primarily due to the impact of product recalls at several of our customers resulting in abnormally high shipments in Q2 2005. The company did see an increase in demand following the recalls leading to some level of inventory in the channels that should dissipate during this fiscal year. Increasing functionality and device integration in the implantable medical devices such as defibrillators and pacemakers has resulted in increases in both dollar and unit content per device which partially offset lower sales after the recalls.

Sales in the notebook computer, monitor and LCD television end market increased $2.4 million, from $5.4 million in Q2 2005 to $7.8 million in Q2 2006. This increase was due primarily to higher shipments of our lighting product solutions to notebook computer and LCD television manufacturers as well as for storage devices. We have noted that the LCD television market continues to gain momentum in the 21” and greater display size where our products are strongly positioned. Also, our product introductions into the notebook market have been well accepted and demand for disk storage, which utilizes our DC to DC products, has grown in the last year.

Sales in the mobile connectivity end market decreased $1.3 million, from $6.6 million in Q2 2005 to $5.3 million in Q2 2006. Sales in this end market have grown in the last three quarters, but are still lower than Q2 2005. This was primarily due to significant demand in Q2 2005 of 802.11 pre-n product that decreased substantially in subsequent quarters from diminished market acceptance after the ratification of this wireless protocol was delayed by the Institute of Electrical and Electronics Engineers Standards Association (“IEEE-SA”). We expect that market acceptance of new power amplifier introductions targeted at multiple-in-multiple-out (“MIMO”) and wi-max applications will contribute to increases in net sales over the coming fiscal year.

Sales in the automotive end market decreased $0.2 million, from $3.0 million in Q2 2005 to $2.8 million in Q2 2006. This was primarily driven by legacy product that was designed into older platforms not focused on our lighting applications. The demand for backlighting product has been robust as more mid-tier vehicles move toward using navigation systems and rear seat entertainment applications.

Sales in the others end market decreased $0.1 million, from $3.2 million in Q2 2005 to $3.1 million in Q2 2006. The primary end market addressed by this product has been the industrial market which has been solid, however, through the closing of our Colorado facility the company has reassessed its focus in some products due to the low margins associated with them.

Distributor sales increased $8.8 million, from $27.8 million Q2 2005 to $36.6 million in Q2 2006 and constituted 37.9% and 43.1%, respectively, of total net sales. The primary reason for the growth is the continued strength in the focus markets, such as defense/aerospace, notebooks/monitors/LCD TVs and mobile connectivity, that Microsemi serves. An additional factor driving the percentage increase in distributor sales was a trend toward servicing our smaller customers through our distributor network and a trend of some of our customers preferring distributors to manage their inventory.

On April 27, 2006, we announced that for the third quarter of fiscal year 2006, we expect our sales, including the impact of our acquisition of Advanced Power Technology, Inc., will increase between 15% and 19% sequentially. We expect that the strong demand for our products for defense/aerospace, notebooks, monitors, and LCD televisions will continue during fiscal year 2006.

Gross profit increased $8.3 million, from $29.8 million (40.6% of sales) for Q2 2005 to $38.1 million (44.9% of sales) for Q2 2006. The improvement in gross profit was favorably affected by: 1) improved factory utilization from our consolidations at each division; 2) increased sales and 3) higher margin products. Costs of sales included $3.0 million and $5.2 million related to transitional idle capacity and inventory abandonments in Q2 2005 and Q2 2006, respectively. The $2.2 million increase between Q2 2005 and Q2 2006 was due to the different stages of restructuring activities between the two quarters. In Q2 2006, we started to incur substantial transition costs related to Phase III shutdown activities. Transitional idle capacity and inventory abandonments resulted from our restructuring activities which involved the closure and consolidation of our manufacturing facilities. Transitional idle capacity relates to unused manufacturing capacity and non-productive manufacturing expenses during the period from when shutdown activities commence to when a facility is closed. Inventory abandonments relate to identification and disposal of inventory that will not be utilized after a product line is transferred to a new manufacturing location.

Selling, general and administrative expense was $12.9 million for both Q2 2005 and Q2 2006.

Research and development expense was $4.7 million in Q2 2005 and $4.6 million in Q2 2006.

We had higher cash and cash equivalents in Q2 2006 compared to Q2 2005; consequently, we had $0.9 million higher interest income in Q2 2006 compared to Q2 2005.

The effective tax rates were 34.0% for Q2 2005 and 35.0% for Q2 2006.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 3, 2005 COMPARED TO THE SIX MONTHS ENDED APRIL 2, 2006.

Net sales increased $23.9 million or 17% from $143.1 million for the first six months of fiscal year 2005 (“2005 YTD”) to $167.0 million for the first six months of fiscal year 2006 (“2006 YTD”). Sales by end markets are based on our understanding of end market uses of our products. Certain sales through distributors have been reclassified to appropriate end markets when we have reasonable supporting data to do so. A breakout of net sales by end markets and by sales channels for 2005 YTD and 2006 YTD is as follows (amounts in thousands):


	2005 YTD		2006 YTD
Defense/Aerospace	$	37,017	$	40,860
Medical		13,962		17,192
Notebooks/Monitors/LCD Televisions		10,315		16,902
Mobile Connectivity		12,738		10,069
Automotive		6,334		5,519
Others		6,320		6,294
Distributor		56,386		70,176

	$	143,072	$	167,012

Sales in the defense and aerospace end market increased $3.9 million from $37.0 million in 2005 YTD to $40.9 million in 2006 YTD. This increase was driven primarily by continued demand from commercial air products, satellite products, and defense related products. These three end markets continue to drive growth. Other factors contributing to the increase in revenues are favorable contract negotiations, product mix shift towards satellite products which generally have higher selling prices, and strategic price positioning in certain product lines. Based on a forecasted increase in the Department of Defense budget, growth in international markets for defense related product, and continued demand in the commercial air space, the business in this end market should remain solid.

Sales in the medical end market increased $3.2 million, from $14.0 million in 2005 YTD to $17.2 million in 2006 YTD. Increasing functionality and device integration in implantable medical devices such as defibrillators and pacemakers has resulted in increases in both dollar and unit content per device. In mid 2005 several customers did go through product recalls which led to an increase in business in excess of typical market growth rates in the later half of the calendar year. This contributed to the increase in business over the same YTD period in 2005.

Sales in the notebook computer, monitor and LCD television end market increased $6.6 million, from $10.3 million in 2005 YTD to $16.9 million in 2006 YTD. This increase was due primarily to higher shipments of our lighting product solutions to notebook computer and LCD television manufacturers as well as for storage devices. We have noted that the LCD television market continues to gain momentum in the 21” and greater display size where our products are strongly positioned. Also, our product introductions into the notebook market have been well accepted and demand for disk storage, which utilizes our DC to DC products, has grown in the last year.

Sales in the mobile connectivity end market decreased $2.6 million, from $12.7 million in 2005 YTD to $10.1 million in 2006 YTD. Sales in this end market have grown in the last three quarters, but are still lower than 2005 YTD. This was primarily due to significant demand in Q2 2005 of 802.11 pre-n product that decreased substantially in subsequent quarters from diminished market acceptance after the ratification of this wireless protocol was delayed by the Institute of Electrical and Electronics Engineers Standards Association (“IEEE-SA”). We expect that market acceptance of new power amplifier introductions targeted at multiple-in-multiple-out (“MIMO”) and wi-max applications will contribute to increases in net sales over the coming fiscal year.

Sales in the automotive end market decreased $0.8 million, from $6.3 million in 2005 YTD to $5.5 million in 2006 YTD. This was primarily driven by lower shipments of legacy product that was designed into older platforms not focused on our lighting applications. The demand for backlighting product has been robust as more mid-tier vehicles move toward using navigation systems and rear seat entertainment applications.

Sales in the others end market remained unchanged at $6.3 million for both 2005 YTD and 2006 YTD. The primary end market addressed by product in this category has been the industrial market which has been solid; however, through the closing of our Colorado facility the company has reassessed its focus in some products due to the low margins associated with them.

Distributor sales increased $13.8 million, from $56.4 million 2005 YTD to $70.2 million in 2006 YTD and constituted 39.4% and 42.0%, respectively, of total net sales. The primary reason for the growth is the continued strength in the focus markets, such as defense/aerospace, notebooks/monitors/LCD TVs and mobile connectivity, that Microsemi serves. An additional factor driving the percentage increase in distributor sales was a trend toward servicing our smaller customers through our distributor network and a trend of some of our customers preferring distributors to manage their inventory.

Gross profit increased $23.9 million, from $53.8 million (37.6% of sales) for 2005 YTD to $77.7 million (46.5% of sales) for 2006 YTD. The improvement in gross profit was favorably affected by: 1) improved factory utilization from our consolidations at each division; 2) increased sales and 3) higher margin products. Costs of sales included $7.7 million and $6.7 million related to transitional idle capacity and inventory abandonments in 2005 YTD and 2006 YTD, respectively. Costs incurred in 2005 YTD substantially related to Phase II while costs incurred in 2006 YTD related and Phase III activities. Transitional idle capacity and inventory abandonments resulted from our restructuring activities which involved the closure and consolidation of our manufacturing facilities. Transitional idle capacity relates to unused manufacturing capacity and non-productive manufacturing expenses during the period from when shutdown activities commence to when a facility is closed. Inventory abandonments relate to identification and disposal of inventory that will not be utilized after a product line is transferred to a new manufacturing location.

Selling, general and administrative increased $3.6 million, from $23.7 million for 2005 YTD to $27.3 million for 2006 YTD, primarily due to higher costs associated with compliance of Section 404 of the Sarbanes-Oxley Act of $1.0 million, higher profit sharing expense of $0.8 million, higher commissions and selling expense associated with higher sales of $0.8 million and higher legal costs of $0.6 million.

We had higher cash and cash equivalents in Q2 2006 compared to Q2 2005; consequently, we had $1.6 million higher interest income in 2006 YTD compared to 2005 YTD.

The effective tax rates were 33.5% for 2005 YTD and 33.1% for 2006 YTD.

CAPITAL RESOURCES AND LIQUIDITY

In 2006 YTD, we financed our operations with cash from operations.

Net cash provided by operating activities increased $2.3 million from $13.0 million in 2005 YTD to $15.3 million in 2006 YTD. The increase in cash flow from operating activities was primarily a result of the increase in revenue and income, partially offset by the combined effect of non-cash items included in income or expense, such as inventory, other assets, accounts payable and accrued liabilities. In addition, prior to our adoption of FAS 123R in 2005 YTD, the tax benefit from stock option exercises of $5.9 million was presented separately, whereas following our adoption of FAS 123R, the comparable amount in 2006 YTD of $12.0 million, is included in income taxes payable. As required by FAS 123R, $8.7 million of excess tax benefit from stock option exercises is included in operating activities with a corresponding offset amount included in financing activities.

Accounts receivable increased $5.9 million from $53.2 million at October 2, 2005 to $59.1 million at April 2, 2006. The increase in accounts receivable was primarily due to higher sales in Q2 2006 compared with sales in the last quarter of fiscal year 2005. The Days Sales Outstanding (“DSO”) were 60 and 63 days at October 2, 2005 and at April 2, 2006, respectively.

Inventories increased $6.2 million from $55.9 million at October 2, 2005 to $62.1 million at April 2, 2006. The increase in inventories was primarily due to a planned ramp up of production at our Broomfield, Colorado facility to cover shipments during a bridge period in which production will be transferred from our Broomfield, Colorado facility to our Scottsdale, Arizona facility.

Current liabilities decreased $5.6 million from $42.4 million at October 2, 2005 to $36.8 million at April 2, 2006. The decrease was due primarily to lower accrued liabilities of $3.0 million related to payments of

accrued severance and timing of payments and a $2.9 million decrease in income taxes payable. A $12.0 million tax benefit from disqualifying dispositions of stock options was included in the decrease of income taxes payable.

Net cash used in investing activities was $6.0 million and $2.3 million in 2005 YTD and 2006 YTD, respectively. In 2005 YTD, we recorded a $0.4 million reduction of accrued liabilities related to a sale of assets in a prior year. Purchase of capital equipment was $5.7 million and $4.8 million in 2005 YTD and 2006 YTD, respectively. In 2006 YTD, we collected a $3.1 million note related to the sale of real property in Watertown, Massachusetts and paid approximately $0.7 million in cash related to the acquisition of Advanced Power Technology, Inc., which will be included in the purchase price allocation in the third quarter of fiscal year 2006.

Net cash provided by financing activities was $7.7 million and $26.6 million in 2005 YTD and 2006 YTD, respectively. We recorded $8.4 million and $18.1 million from exercises of employee stock options and $0.0 million and $8.7 million for excess tax benefits from exercises of stock options in 2005 YTD and 2006 YTD, respectively.

We had $98.1 million and $137.7 million in cash and cash equivalents at October 2, 2005 and April 2, 2006, respectively.

Current ratios were 5.2 to 1 and 7.5 to 1 at October 2, 2005 and April 2, 2006, respectively.

We have a $30.0 million credit line with a bank, which expires in March 2008 and includes a facility to issue letters of credit. As of April 2, 2006, $0.4 million was outstanding in the form of a letter of credit; consequently, $29.6 million was available under this credit facility.

As of April 2, 2006, we were in compliance with the covenants required by our credit facility.

The estimated cost to consolidate the Broomfield and Ireland plants will be between $6.0 million to $8.0 million and $3.0 million to $4.0 million, respectively, with substantial expenditures expected in the current fiscal year. We anticipate that our cash and cash equivalents will be our primary source for paying such expenditures.

As of April 2, 2006, we had no material commitments for capital expenditures.

We have been incurring costs associated with compliance under Section 404 of the Sarbanes-Oxley Act. We estimate that compliance costs will be approximately one-half of one percent (1/2%) to 1% of annual revenues in current and subsequent years.

The following table summarizes our contractual payment obligations and commitments as of April 2, 2006:


	Payments due by period (in 000’s)
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years		Imputed Interest
Capital leases	$	3,165	$	293	$	586	$	586	$	5,261	$	(3,561	)
Operating leases		10,037		2,942		4,105		2,990		—		—
Purchase obligations		5,753		5,003		750		—		—		—
Other long-term liabilities		764		97		132		132		403		—

Total	$	19,719	$	8,335	$	5,573	$	3,708	$	5,664	$	(3,561	)

Based upon information currently available to us, we believe that we can meet our cash requirements and capital commitments in the foreseeable future with cash balances, internally generated funds from ongoing operations and, if necessary, from the available line of credit.

RECENTLY ADOPTED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 151

In November 2004, the Financial Accounting Standards Board issued FAS No. 151, “Inventory costs, an amendment of ARB No. 43 Chapter 4”. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). It requires that those items be recognized as current-period charges regardless of whether they meet the criteria in the earlier guidance of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement were applied prospectively for inventory costs incurred beginning in our fiscal year 2006. The adoption of this statement did not have a material impact on our results of operations, financial position or cash flow.

Statement of Financial Accounting Standards No. 123 (revised 2004)

In December 2004, the Financial Accounting Standards Board issued a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123R”). FAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance and eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. FAS 123R requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). On March 29, 2005, the SEC issued Staff Accounting Bulletin 107 (“SAB 107”) which expresses the views of the SEC regarding the interaction between FAS 123R and certain SEC rules and regulations and provides the SEC’s views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from non-public to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instrument issues under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of FAS 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payments arrangements upon adoption of FAS 123R, the modification of employee share options prior to adoption of FAS 123R, and disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of FAS 123R. We adopted FAS 123R in the first quarter of fiscal year 2006. As a result, we recorded $0.7 million and $0.8 million of compensation expense, net of tax, in the quarter and six months ended April 2, 2006. The future effects may be higher but are currently not estimable.

Statement of Financial Accounting Standards No. 153

In December 2004, the Financial Accounting Standards Board issued FAS No. 153, “Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29”. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance only if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement was effective for nonmonetary asset exchanges that began in the four quarter of our fiscal year 2005). The adoption of this statement did not would have a material impact on our results of operations, financial position or cash flow.

RECENTLY ISSUED ACCOUNTING STANDARD

Statement of Financial Accounting Standards No. 154

to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (our fiscal year 2007). We do not expect the adoption of this statement will have a material impact on our results of operations, financial position or cash flow.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States that require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended October 2, 2005.

IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

Some of the statements in this report or incorporated by reference are forward-looking, including, without limitation, the statements under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Forward-looking statements include all those statements that contain words like “may,” “will,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “maintain,” “continue” and variations of these words or comparable words. In addition, all of the information herein that does not state an historical fact is forward-looking, including any statement or implication about an estimate or a judgment, an expectation as to a future time, future result or other future circumstance. For various reasons, actual results may differ substantially from the results that the forward-looking statements suggest. Therefore, forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

The forward-looking statements included in this report are based on, among other items, current assumptions that we will be able to meet our current operating cash and debt service requirements, that we will be able to successfully complete announced and to-be-announced plant consolidations on the anticipated schedules and without unanticipated costs or expenses, that we will continue to retain the full-time services of all of our present executive officers and key employees, that we will be able to successfully resolve any disputes and other business matters as anticipated, that competitive conditions within the analog, mixed signal and discrete semiconductor, integrated circuit or custom component assembly industries will not affect us adversely, that our customers will not cancel orders or terminate or renegotiate their purchasing relationships with us, that we will retain existing key personnel, that our forecasts will reasonably anticipate market demand for our products, and that there will be no other material adverse changes in our operations or business. Other factors that could cause results to vary materially from current expectations are referred to elsewhere in this report. Assumptions relating to the foregoing involve judgments that are difficult to make and future circumstances that are difficult to predict accurately or correctly. Forecasting and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on historic experience and business developments, the impact of which may cause us to alter our internal forecasts, which may in turn affect our subsequent expectations and our future results. We do not undertake to announce publicly the changes that may occur in our expectations. Readers are cautioned against giving undue weight to any of the forward-looking statements.

Adverse changes to our results could result from any number of factors, including but not limited to fluctuations in economic conditions, potential effects of inflation, lack of earnings visibility, dependence upon certain customers or markets, dependence upon suppliers, future capital needs, rapid technological changes, difficulties in integrating acquired businesses, ability to realize cost savings or productivity gains, potential cost increases, dependence on key personnel, difficulties regarding hiring and retaining qualified

personnel in a competitive labor market, risks of doing business in international markets, and problems of third parties upon whom we rely in our business or operations.

The inclusion of forward-looking information should not be regarded as a representation by us or any other person that all of our estimates shall necessarily prove correct or that all of our objectives or plans shall necessarily be achieved.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from adverse changes in foreign currency exchange rates, interest rates, or the stock market. We are exposed to various market risks, which are related to changes in certain foreign currency exchange rates and changes in certain interest rates.

We conduct business in a number of foreign currencies, principally those of Europe and Asia, directly or through our foreign operations. We may receive some revenues in foreign currencies and purchase some inventory and services in foreign currencies. Accordingly, we are exposed to transaction gains and losses that could result from changes in exchange rates of these foreign currencies relative to the U.S. dollar. Transactions in foreign currencies have represented a relatively small portion of our business and these currencies have been relatively stable against the U.S. dollar for the past several years. As a result, foreign currency fluctuations have not had a material impact historically on our revenues or results of operations. Nonetheless, foreign currency fluctuations relative to the U.S. dollar have tended to increase in recent years. There can be no assurance that those currencies will remain stable relative to the U.S. dollar or that future fluctuations in the value of foreign currencies will not have material adverse effects on our results of operations, cash flows or financial condition. Our largest foreign currency exposure results from activity in British Pounds and the European Union Euro. We have not conducted a foreign currency hedging program thus far. We have considered and may continue to consider the adoption of a foreign currency hedging program.

We did not enter into derivative financial instruments and did not enter into any other financial instruments for trading or speculative purposes or to hedge exposure to interest rate risks. Our other financial instruments consist primarily of cash, accounts receivable, accounts payable and long-term obligations. Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations. As a result, we do not expect fluctuations in interest rates to have a material impact on the fair value of these instruments. Accordingly, we have not engaged in transactions intended to hedge our exposure to changes in interest rates.

We currently have a $30,000,000 revolving line of credit, which expires in March 2008. At April 2, 2006, $400,000 was utilized for a letter of credit; consequently, $29,600,000 was available under this line of credit. It bears interest at the bank’s prime rate plus 0.75% to 1.5% per annum or, at our option, at the Eurodollar rate plus 1.75% to 2.5% per annum. The interest rate is determined by the ratio of total funded debt to Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”). For instance, if we were to borrow presently the entire $30,000,000 from this credit line, a one-percent increase in the interest rate would result in an additional $300,000 of pre-tax interest expense annually. Market forces recently have been tending to increase short-term interest rates, although the prime rate and the Eurodollar rate move independently of the Federal Funds Rate. The ratio of funded debt to EBITDA also would increase as amounts are borrowed under the line of credit. These factors could have the effect of potentially increasing the effective interest rate on future incremental borrowings.

Item 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Our Chief Executive Officer and Chief Financial Officer, with the assistance of other management, conducted an evaluation of our disclosure controls and procedures as of the end of the period covered by this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

(b) Changes in internal control over financial reporting.

During the first six months of fiscal year 2006, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

In our most recent Form 10-K as filed with the SEC on December 16, 2005, we previously reported litigation in which we are involved, and no material changes in such litigation occurred during the fiscal period that is the subject of this Report on Form 10-Q, except as set forth below.

On October 7, 2004, we filed a complaint in the United States District Court for the Central District of California entitled Microsemi Corporation v. Monolithic Power System, Inc. (“Monolithic”), Case Number SACV04-1174 CJC (Anx). The Complaint alleged infringement of Microsemi patents and sought an injunction, actual damages, treble damages, declaratory relief and attorneys’ fees. The defendant filed a cross-claim for declaratory relief seeking to invalidate our patents and attorneys’ fees. On March 24, 2006 we entered into a settlement agreement with Monolithic pursuant to which both Microsemi and Monolithic agreed to dismiss all outstanding claims and counterclaims in the litigation with prejudice, Monolithic agreed to make a one-time payment to Microsemi in the amount of $1,500,000 and Microsemi agreed not to sue Monolithic in the future for infringement of the Microsemi patents at issue in the litigation. On March 29, 2006, the United States District Court for the Central District of California dismissed the case with prejudice pursuant to the terms of the settlement agreement.

Item 1A.

RISK FACTORS

In addition to the risk factors described in Microsemi’s Form 10-K for the fiscal year ended October 2, 2005, Microsemi is subject to the following risks:

The merger of Microsemi’s subsidiary with Advanced Power Technology, Inc, which has been renamed Microsemi Corp. – Power Products Group, may divert Microsemi’s management’s attention away from ongoing operations.

The merger of Microsemi’s subsidiary with Advanced Power Technology, Inc. (“APT”), which was renamed Microsemi Corp. – Power Products Group upon the consummation of the merger (the “Power Products Group”), and the integration of Microsemi’s and the Power Product Group’s operations, products and personnel may place a significant burden on Microsemi’s management and internal resources. The diversion of management attention away from day-to-day business concerns and any difficulties encountered in the transition and integration process could harm Microsemi’s business, financial condition and operating results.

Microsemi’s subsidiaries’ manufacturing processes are complex and specialized and will become more complex as a result of the acquisition of the Power Products Group; delays in resolving problems associated with transitions of processes between different facilities, or issues related to government or customer qualification of facilities or processes could adversely affect our manufacturing efficiencies and our ability to realize revenues or cost savings.

The Microsemi consolidated group’s manufacturing efficiency will be an important factor in Microsemi’s future profitability, and Microsemi may be unsuccessful in its efforts to increase or may fail to maintain its manufacturing efficiency. Microsemi’s manufacturing processes are highly complex, require advanced and costly equipment and are sometimes modified in an effort to improve yields and product performance. From time to time Microsemi has experienced difficulty in transitions of manufacturing processes to different facilities or adopting new manufacturing processes. As a consequence, at times Microsemi has experienced delays in product deliveries and reduced yields. Every silicon wafer fabrication facility utilizes very precise processing, and processing difficulties and reduced yields commonly occur, and one of the major causes of these problems is contamination of the material. Reduced manufacturing yields can often result in manufacturing and shipping delays due to capacity constraints. Therefore, manufacturing problems can result in additional operating expense and delayed or lost revenues. In one instance which occurred in fiscal year 2005, Microsemi scrapped

nonconforming inventory at a cost of approximately $1 million and experienced a delay of approximately two months in realizing approximately $1.5 million of revenues. In an additional instance which occurred in fiscal year 2004, Microsemi encountered a manufacturing problem concerning contamination in a furnace that resulted in the quarantine of approximately 1 million units at a cost of approximately $2 million. The identification and resolution of that manufacturing issue required four months of effort to investigate and resolve, which resulted in a concurrent delay in realizing approximately $2 million of revenues. Microsemi may experience manufacturing problems in achieving acceptable yields or experience product delivery delays in the future as a result of, among other things, upgrading existing facilities, relocating processes to different facilities, or changing its process technologies, any of which could result in a loss of future revenues or an increase in manufacturing costs.

Reliance on government contractors for a substantial portion of Microsemi’s sales could have material adverse effects on results of operations.

Some of Microsemi’s sales are derived from customers whose principal sales are to the United States Government. If Microsemi experiences significant reductions or delays in procurements of its products by the United States Government or terminations of government contracts or subcontracts, its operating results could be materially and adversely affected. Generally, the United States Government and its contractors and subcontractors may terminate their contracts with Microsemi or its customers for cause or for convenience. In the past, Microsemi has experienced one termination of a contract due to the termination of the underlying government contracts. All government contracts are also subject to price renegotiation in accordance with U.S. Government Renegotiation Act. By reference to such contracts, all of the purchase orders Microsemi receives that are related to government contracts are subject to these possible events. There is no guarantee that Microsemi will not experience contract terminations or price renegotiations of government contracts in the future. Microsemi’s net sales to defense markets represented approximately 19% of net sales for fiscal years 2003 and 2004 and approximately 20% of net sales for fiscal year 2005. Future sales are subject to the uncertainties of governmental appropriations and national defense policies and priorities. These sales are derived from direct and indirect business with the U.S. Department of Defense and other U.S. government agencies. From time to time, Microsemi has experienced declining defense-related sales, primarily as a result of contract award delays and reduced defense program funding. Defense spending is expected to decline overall in the future due to budgetary constraints. The effects of defense spending declines are difficult to estimate and subject to many sources of uncertainty. Microsemi’s prospects for future defense-related sales may be adversely affected in a material manner by numerous events or actions outside our control.

Interruptions, delays or cost increases affecting Microsemi’s materials, parts, equipment or subcontractors may impair its competitive position.

Microsemi’s manufacturing operations, and the outside manufacturing operations which it uses increasingly, depend upon obtaining, in some instances, a governmental qualification of the manufacturing process, and in all instances, adequate supplies of materials, parts and equipment, including silicon, mold compounds and lead frames, on a timely basis from third parties. Some of the outside manufacturing operations Microsemi uses are based in foreign countries. Microsemi’s results of operations could be adversely affected if it is unable to obtain adequate supplies of materials, parts and equipment in a timely manner or if the costs of materials, parts or equipment increase significantly. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. Although Microsemi generally uses materials, parts and equipment available from multiple suppliers, it has a limited number of suppliers for some materials, parts and

equipment. While Microsemi believes that alternate suppliers for these materials, parts and equipment are available, an interruption could adversely affect its operations. Some of Microsemi’s products are manufactured, assembled and tested by third-party subcontractors.

Some of these contractors are based in foreign countries. Microsemi generally does not have any long-term agreements with these subcontractors. As a result, Microsemi may not have direct control over product delivery schedules or product quality. Outside manufacturers generally will have longer lead times for delivery of products as compared with our internal

manufacturing, and therefore, when ordering from these suppliers, Microsemi will be required to make longer-term estimates of its customers’ current demand for products, and these estimates are difficult to make. Also, due to the amount of time typically required to qualify assemblers and testers, Microsemi could experience delays in the shipment of our products if it is forced to find alternate third parties to assemble or test its products. Any product delivery delays in the future could have material adverse effects on its operating results, financial condition and cash flows. Microsemi’s operations and ability to satisfy customer obligations could be adversely affected if its relationships with these subcontractors were disrupted or terminated.

Microsemi depends on third-party subcontractors for wafer fabrication, assembly and packaging of an increasing portion of its products. Currently, Microsemi utilizes third-party subcontractors for approximately 30% of its assembly and packaging requirements and 13% of its wafer fabrication, and expects that these percentages will increase to as much as approximately 35% and 20%, respectively, in the current fiscal year. A limited group of subcontractors package its products and some of the raw materials included in its products are obtained from a limited group of suppliers. Disruption or termination of any of these sources could occur and such disruptions or terminations could harm its business and operating results. In the event that any of its subcontractors were to experience financial, operational, production or quality assurance difficulties resulting in a reduction or interruption in supply to Microsemi, its operating results could suffer at least until alternate qualified subcontractors, if any, were to become available and active. Microsemi anticipates that many of its next-generation products may be manufactured by third-party subcontractors in Asia, and to the extent that such potential manufacturing relationships develop, they may be with a limited group of subcontractors. Although Microsemi seeks to reduce its dependence on sole or limited source suppliers, Microsemi and the Power Products Group currently use the same third-party subcontractors for not more than 10% of each company’s outside manufacturing. Therefore, any disruptions or terminations of manufacturing could materially harm the Microsemi consolidated group’s business and operating results. Also these subcontractors must be qualified by the U.S. Government or Microsemi’s customer for high-reliability processes. Historically the U.S. Government has rarely qualified any foreign manufacturing or assembly lines for reasons of national security; therefore, the Microsemi consolidated group’s ability to move certain manufacturing offshore may be limited or delayed.

International operations and sales may expose Microsemi to material risks and may increase volatility to the Microsemi consolidated group’s operating results.

Revenues from foreign markets represent a significant portion of Microsemi’s total revenues. Net sales to foreign customers represented approximately 28%, 33% and 33% of net sales for fiscal years 2003, 2004 and 2005, respectively. These sales were principally to customers in Europe and Asia. Foreign sales are classified as shipments to foreign destinations. Microsemi maintains facilities or contracts with entities in Korea, Japan, China, Ireland, Thailand, the Philippines, and Taiwan. There are risks inherent in doing business internationally, including:

•

Legislative or regulatory requirements, including tax laws in the United States and in the countries in which Microsemi manufactures or sells its products;

•

Trade restrictions;

•

Transportation delays;

•

Communication interruptions;

•

Work stoppages, disruption of local labor supply and/or transportation services;

•

Economic and political instability;

•

Political instability and acts of war or terrorism, which could disrupt the Microsemi consolidated group’s manufacturing and logistical activities;

•

Changes in import/export regulations, tariffs and freight rates;

•

Difficulties in collecting receivables and enforcing contracts generally; and

•

Currency controls and fluctuations, devaluation of foreign currencies, hard currencies shortages and exchange rate fluctuations.

In addition, the laws of certain foreign countries may not protect Microsemi’s products, assets or intellectual property rights to the same extent as do U.S. laws. Therefore, the risk of piracy of Microsemi’s technology and products may be greater in those foreign countries. Microsemi may experience material adverse effects to its financial condition, operating results and cash flows in the future.

Microsemi depends on the ability of its personnel, raw materials, equipment and products to move reasonably unimpeded around the world.

Any political, military, world health (e.g., SARS or avian flu) or other issue that hinders the movement or restricts the import or export of materials or products could lead to significant business disruptions. Furthermore, any strike, economic failure or other material disruption on the part of major airlines or other transportation companies could also adversely affect Microsemi’s ability to conduct business. If such disruptions result in cancellations of customer orders or contribute to a general decrease in economic activity or corporate spending, or directly impact marketing, manufacturing, financial and logistics functions, Microsemi’s consolidated results of operations and financial condition could be materially adversely affected.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Inapplicable

Item 3.

DEFAULTS UPON SENIOR SECURITIES

Inapplicable

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)

We held our Annual Meeting of Stockholders on February 22, 2006.

(b)

Names and personal information about the nominees to the Board of Directors were included in the Definitive Proxy Statement as filed with the SEC on January 20, 2006.

(c)

On Proposal 1, the votes received by each of the nominees to the Board of Directors were as follows:


	For	Abstained
Dennis R. Leibel	57,096,885	3,136,453
James J. Peterson	60,231,065	2,273
Thomas R. Anderson	57,096,885	3,136,453
William E. Bendush	60,196,773	36,565
William L. Healey	57,271,350	2,961,988
Paul F. Folino	57,273,350	2,959,988
Matthew E. Massengill	60,230,938	2,400

On Proposal 2, the votes on ratifying the appointment of PricewaterhouseCoopers LLP as independent registered public accountants to audit our financial statements were as follows:


For	Against	Abstain
59,058,621	1,297,766	4,537

(d)

None

Item 5.

OTHER INFORMATION

None

Item 6.

EXHIBITS



2.6.1		Amendment No. 1 to Agreement and Plan of Merger dated April 25, 2006 previously filed as Exhibit 2.6.1 to the Registrant’s Post-Effective Amendment No. 1 to Form S-4 (Reg. No. 333-130655) as filed on April 27, 2006 and incorporated herein by reference.

10.104		Settlement Agreement dated July 8, 1998 by and between Microsemi Corp.—Colorado, FMC Corporation, Siemens Microelectronics, Inc. and Coors Porcelain Company, previously filed as Exhibit 10.104 to the Registrant’s Registration Pre-Effective Amendment No. 2 to Form S-4 (Reg. No. 333-130655) as filed on March 3, 2006 and incorporated herein by reference.

10.109		Form of Notice of Stock Option Grant and Employee Stock Option Agreement from and after February 22, 2006 previously filed as Exhibit 10.109 to the Registrant’s Current Report on Form 8-K as filed on February 28, 2006 and incorporated herein by reference.

10.110		Form of Notice of Stock Option Grant and Non-Employee Stock Option Agreement from and after February 22, 2006 previously filed as Exhibit 10.110 to the Registrant’s Current Report on Form 8-K as filed on February 28, 2006 and incorporated herein by reference.

31		Certifications pursuant to Exchange Act Rule 13a-14(a)

32		Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		MICROSEMI CORPORATION

DATED:	May 12, 2006	By:	/s/ David R. Sonksen
			David R. Sonksen Executive Vice President and Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer and duly authorized to sign on behalf of the Registrant)

EXHIBIT INDEX


Ex. No.		Exhibit Description

2.6.1		Amendment No. 1 to Agreement and Plan of Merger dated April 25, 2006 previously filed as Exhibit 2.6.1 to the Registrant’s Post-Effective Amendment No. 1 to Form S-4 (Reg. No. 333-130655) as filed on April 27, 2006 and incorporated herein by reference.

10.104		Settlement Agreement dated July 8, 1998 by and between Microsemi Corp.—Colorado, FMC Corporation, Siemens Microelectronics, Inc. and Coors Porcelain Company, previously filed as Exhibit 10.104 to the Registrant’s Registration Pre-Effective Amendment No. 2 to Form S-4 (Reg. No. 333-130655) as filed on March 3, 2006 and incorporated herein by reference.

10.109		Form of Notice of Stock Option Grant and Employee Stock Option Agreement from and after February 22, 2006 previously filed as Exhibit 10.109 to the Registrant’s Current Report on Form 8-K as filed on February 28, 2006 and incorporated herein by reference.

10.110		Form of Notice of Stock Option Grant and Non-Employee Stock Option Agreement from and after February 22, 2006 previously filed as Exhibit 10.110 to the Registrant’s Current Report on Form 8-K as filed on February 28, 2006 and incorporated herein by reference.

31		Certifications pursuant to Exchange Act Rule 13a-14(a)

32		Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350