10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 November 30, 2010

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-7422

STANDARD MICROSYSTEMS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware	11-2234952
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
80 Arkay Drive, Hauppauge, New York	11788-3728
(Address of Principal Executive Offices)	(Zip Code)

(631) 435-6000

(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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

As of December 31, 2010 there were 22,871,229 shares of the registrant’s common stock outstanding.

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of November 30, 2010 and February 28, 2010	1
	Condensed Consolidated Statements of Operations for the Three-Month and Nine-Month Periods Ended November 30, 2010 and 2009	2
	Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended November 30, 2010 and 2009	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Removed and Reserved	39
Item 5.	Other Information	39
Item 6.	Exhibits	40
Signature		41
Exhibit 31.1
Exhibit 31.2
Exhibit 32

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document

PART I

Item 1. — Financial Statements

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	November 30, 2010			February 28, 2010
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	158,009		$	109,141
Short-term investments		—			30,500
Accounts receivable, net		64,831			47,972
Inventories		49,582			44,374
Deferred income taxes		29,561			23,278
Other current assets		8,325			6,613
Total current assets		310,308			261,878
Property, plant and equipment, net		68,287			66,802
Goodwill		78,365			54,414
Intangible assets, net		36,768			30,495
Long-term investments, net		30,484			42,957
Investments in equity securities		2,042			7,238
Deferred income taxes		7,578			11,364
Other assets		3,768			4,188
Total assets	$	537,600		$	479,336
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	37,427		$	25,992
Deferred income from distribution		19,053			16,125
Accrued expenses, income taxes and other current liabilities		63,572			48,424
Total current liabilities		120,052			90,541
Deferred income taxes		4,078			3,963
Other liabilities		26,429			22,944
Commitments and contingencies (Note 15)
Shareholders’ equity:
Preferred stock		—			—
Common stock		2,727			2,688
Additional paid-in capital		353,695			340,959
Retained earnings		125,619			116,664
Treasury stock, at cost		(101,295	)		(101,199	)
Accumulated other comprehensive income		6,295			2,776
Total shareholders' equity		387,041			361,888
Total liabilities and shareholders’ equity	$	537,600		$	479,336

See Accompanying Notes to Condensed Consolidated Financial Statements

1

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Three Months Ended November 30,						Nine Months Ended November 30,
	2010			2009			2010			2009
	(Unaudited)						(Unaudited)
Sales and revenues	$	107,025		$	87,236		$	308,268		$	224,789
Costs of goods sold		51,270			42,220			142,061			116,572
Gross profit on sales and revenue		55,755			45,016			166,207			108,217
Operating expenses:
Research and development		28,893			17,983			72,475			56,546
Selling, general and administrative		33,026			17,232			74,425			63,602
Restructuring charges		146			393			1,014			1,264
Settlement charge, net		-			(31	)		-			2,019
Impairment loss on equity investment		3,208			-			3,208			-
Gain on equity investment		(249	)		-			(249	)		-
Revaluation of contingent acquisition expense		(1,083	)		-			(626	)		-
(Loss) income from operations		(8,186	)		9,439			15,960			(15,214	)
Interest income		241			159			559			854
Interest expense		(20	)		(73	)		(114	)		(132	)
Other expense, net		(139	)		(326	)		(475	)		(758	)
(Loss) income before provision for (benefit from) income taxes		(8,104	)		9,199			15,930			(15,250	)
(Benefit from) provision for income taxes		(3,530	)		2,393			6,975			(6,327	)
Net (loss) income	$	(4,574	)	$	6,806		$	8,955		$	(8,923	)
Net (loss) income per share:
Basic	$	(0.20	)	$	0.31		$	0.40		$	(0.40	)
Diluted	$	(0.20	)	$	0.30		$	0.39		$	(0.40	)
Weighted average common shares outstanding:
Basic		22,679			22,239			22,586			22,066
Diluted		22,679			22,442			22,969			22,066

See Accompanying Notes to Condensed Consolidated Financial Statements

2

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Nine Months Ended November 30,
	2010			2009
	(Unaudited)
Cash flows from operating activities:
Net income (loss)	$	8,955		$	(8,923	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		18,383			19,754
Stock-based compensation		22,285			13,852
Deferred income taxes		(3,469	)		(8,102	)
Deferred income on shipments to distributors		2,929			5,111
Foreign exchange (gain) loss		(305	)		48
Excess tax benefits from stock-based compensation		(91	)		(76	)
Loss on sale of property, plant and equipment		40			13
Non-cash restructuring charges		-			336
Impairment loss on equity investment		3,208			-
Provision for sales returns and allowances		91			25
Changes in operating assets and liabilities, net of effects of business acquisitions:
Accounts receivable		(13,373	)		(18,755	)
Inventories		(2,032	)		9,261
Accounts payable, accrued expenses and other current liabilities		52			9,709
Accrued restructuring charges		(711	)		(4,563	)
Income taxes payable		(997	)		5,321
Other changes, net		(1,203	)		721
Net cash provided by operating activities		33,762			23,732
Cash flows from investing activities:
Capital expenditures		(9,795	)		(5,234	)
Acquisition of business, net of cash acquired – Symwave		1,517			-
Acquisition of business, net of cash acquired – STS		(21,891	)		-
Acquisition of business, net of cash acquired – Tallika		-			(1,825	)
Acquisition of business, net of cash acquired – K2L		-			(5,277	)
Proceeds from sale of non-marketable equity investments – Canesta		2,248			-
Investment in non-marketable secured loans – Symwave		(3,125	)		-
Investment in non-marketable equity investments		(2,042	)		(7,238	)
Purchases of short-term and long-term investments		(14,900	)		(1,775	)
Sales of short-term and long-term investments		59,750			30,925
Purchases of technology licenses		-			(1,200	)
Net cash provided by investing activities		11,762			8,376
Cash flows from financing activities:
Excess tax benefits from stock-based compensation		91			76
Proceeds from issuance of common stock		6,454			3,625
Purchases of treasury stock		(96	)		-
Repayments of obligations under supplier financing arrangements		(3,267	)		(2,746	)
Net cash provided by financing activities		3,182			955
Effect of foreign exchange rate changes on cash and cash equivalents		162			2,415
Net increase in cash and cash equivalents		48,868			35,478
Cash and cash equivalents at beginning of period		109,141			97,156
Cash and cash equivalents at end of period	$	158,009		$	132,634

See Accompanying Notes to Condensed Consolidated Financial Statements

3

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and related disclosures of Standard Microsystems Corporation and subsidiaries (“SMSC” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”), reflecting all adjustments (consisting only of normal, recurring adjustments) which in management’s opinion are necessary to present fairly the Company’s financial position as of November 30, 2010, results of operations for the three and nine-month periods ended November 30, 2010 and 2009 and cash flows for the nine-month periods ended November 30, 2010 and 2009 (collectively, including accompanying no tes and disclosures, the “Interim Financial Statements”). The February 28, 2010 balance sheet information has been derived from audited financial statements, but does not include all information or disclosures required by U.S. GAAP.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of sales and revenues and expenses during the reporting period. Actual results may differ from those estimates, and such differences may be material to the Company’s financial statements.

These Interim Financial Statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended February 28, 2010 included in the Company’s Annual Report on Form 10-K, as filed on April 28, 2010 with the SEC (the “Fiscal 2010 Form 10-K”).

Results of operations for interim periods are not necessarily indicative of results to be expected for the full fiscal year or any future periods.

Certain items in the prior years’ consolidated financial statements have been reclassified to conform to the fiscal 2011 presentation reflected in these Interim Financial Statements. Specifically, in the three and nine-month periods ended November 30, 2009, the Company reclassified a negligible amount in amortization of technology intangibles previously included in selling, general and administrative costs to cost of goods sold on the consolidated statements of operations to conform to the current period presentation.

2. Recent Accounting Standards

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-13, “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”) and ASU 2009-14, “ Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements” (“ASU 2009-14”). ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all undelivered elements must have either: (i) vendor-spe cific objective evidence, or “VSOE”, or (ii) third-party evidence, or “TPE”, before an entity can recognize the portion of an overall arrangement consideration that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. Overall arrangement consideration will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. The residual method of allocating arrangement consideration has been eliminated. ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deli ver a product’s essential functionality. For SMSC, these new updates are required to be effective for revenue arrangements entered into or materially modified in the first quarter of fiscal year 2012, with early adoption available. The Company adopted these ASUs retroactively beginning in the first quarter of fiscal 2011. The adoption of these ASUs did not have a material effect on our consolidated financial statements.

In January 2010, the FASB issued new standards in the FASB Accounting Standards Codification 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which require new disclosures on the amount and reason for transfers in and out of Level 1 and 2 fair value measurements. The standards also require disclosure of activities, including purchases, sales, issuances, and settlements within the Level 3 fair value measurements. The standards also clarify existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques. The new disclosures regarding Level 1 and 2 fair value measurements and clarification of existing disclosures were adopted by SMSC beginning in the first quarter of fiscal 2011. The adoption of ASC 820 did not have a material effect on our consolidated financial statements.

4

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3. Fair Value

In September 2006, the FASB issued a new standard for fair value measurement now codified as ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In January 2010, the FASB issued new standards codified as part of ASC 820which require new disclosures on the amount and reason for transfers in and out of Level 1 and 2 fair value measurements. The standards also require disclosure of activities, including purchases, sales, issuances, and settlements within the Level 3 fair value measurements. The standards also clarify existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques. When determining fair value, management considers the principal or most advantageous market in which the Company would transact, and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.

The Company’s financial instruments are measured and recorded at fair value. The Company’s non-financial assets (including: goodwill; intangible assets; and, property, plant and equipment) are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.

This pronouncement requires disclosure regarding the manner in which fair value is determined for assets and liabilities and establishes a three-tiered value hierarchy into which these assets and liabilities are grouped, based upon significant levels of inputs as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.

The following table summarizes the composition of the Company’s investments at November 30, 2010 and February 28, 2010 (in thousands) :

	Cost		Gross Unrealized Losses			Aggregate Fair Value		Classification on Balance Sheet
November 30, 2010								Cash		Short-Term Investments		Investments in equity securities		Long-Term Investments
Marketable equity securities	$	143	$	(40	)	$	103	$	—	$	—	$	—	$	103
Non-marketable equity investments		2,042		—			2,042		—		—		2,042		—
Auction rate securities		32,150		(1,769	)		30,381		—		—		—		30,381
Money market funds		125,953		—			125,953		125,953		—		—		—
	$	160,288	$	(1,809	)	$	158,479	$	125,953	$	—	$	2,042	$	30,484

	Cost		Gross Unrealized Losses			Aggregate Fair Value		Classification on Balance Sheet
February 28, 2010								Cash		Short-Term Investments		Investments in equity securities		Long-Term Investments
Marketable equity securities	$	143	$	(44	)	$	99	$	—	$	—	$	—	$	99
Non-marketable equity investments		7,238		—			7,238		—		—		7,238		—
Auction rate securities		46,500		(3,642	)		42,858		—		—		—		42,858
Short-Term Investments		30,500		—			30,500		—		30,500		—		—
Money market funds		87,108		—			87,108		87,108		—		—		—
	$	171,489	$	(3,686	)	$	167,803	$	87,108	$	30,500	$	7,238	$	42,957

5

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3. Fair Value – (continued)

The Company classifies all marketable debt and equity securities with remaining contractual maturities of greater than one year as long-term investments. As of November 30, 2010 the Company held approximately $30.4 million of investments in auction rate securities (net of $1.8 million in unrealized losses) with maturities ranging from 11 years to 31 years, all classified as available-for-sale. Auction rate securities are long-term variable rate bonds tied to short-term interest rates that were, until February 2008, reset through a “Dutch auction” process. As of November 30, 2010, all of the Company’s auction rate securities were “AAA” rated by one or more of the major credit rating agencies.

The cost basis and estimated fair values of available-for-sale securities at November 30, 2010 by contractual maturity are shown below (in thousands):

	Cost		Estimated Fair Value
Due in ten through twenty years	$	12,100	$	11,490
Due in over twenty years		20,050		18,891
Total	$	32,150	$	30,381

Expected maturities of securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.

The following table details the fair value measurements within the three levels of fair value hierarchy of the Company’s financial assets and liabilities, including investments, equity securities, cash surrender value of life insurance policies, contingent consideration and cash equivalents at November 30, 2010 (in thousands):

	Total Fair Value at 11/30/2010		Fair Value Measurements at Report Date Using
			Level 1		Level 2		Level 3
Assets:
Marketable equity securities	$	103	$	103	$	—	$	—
Non-marketable equity investments		2,042		—		—		2,042
Auction rate securities		30,381		—		550		29,831
Money market funds		125,953		125,953		—		—
Other assets-cash surrender value		1,673		—		1,673		—
Total Assets	$	160,152	$	126,056	$	2,223	$	31,873
Liabilities:
Contingent consideration	$	6,270	$	—	$	—	$	6,270
Total Liabilities	$	6,270	$	—	$	—	$	6,270

6

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table details the fair value measurements within the three levels of fair value hierarchy of the Company’s financial assets, including investments, equity securities, cash surrender value of life insurance policies and cash equivalents at February 28, 2010 ( in thousands ):

	Total Fair Value at 02/28/2010		Fair Value Measurements at Report Date Using
			Level 1		Level 2		Level 3
Assets:
Marketable equity securities	$	99	$	99	$	—	$	—
Non-marketable equity investments		7,238		—		—		7,238
Auction rate securities		42,858		—		—		42,858
Short-term investments		30,500		30,500		—		—
Money market funds		87,108		87,108		—		—
Other assets-cash surrender value		1,662		—		1,662		—
Total Assets	$	169,465	$	117,707	$	1,662	$	50,096
Liabilities:
Contingent consideration	$	2,590	$	—	$	—	$	2,590
Total Liabilities	$	2,590	$	—	$	—	$	2,590

At February 28, 2010 and November 30, 2010, the Company grouped money market funds and equity securities using a Level 1 valuation because market prices were readily available. Level 2 financial assets and liabilities represent the fair value of cash surrender value of life insurance and auction rate securities that have been redeemed at par subsequent to the  reporting date.

The assets grouped for Level 3 valuation were auction rate securities consisting of AAA rated securities mainly collateralized by student loans guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program (“FFELP”), as well as auction rate preferred securities ($6.1 million at par) which are AAA rated and part of a closed end fund that must maintain an asset ratio of 2 to 1. Level 3 liabilities consist of contingent consideration on acquisitions. See Note 15 — Commitments and Contingencies, for further discussion on contingent consideration arrangements, including fair valuation.

3. Fair Value – (continued)

When a determination is made to classify a financial instrument within Level 3, the determination is based upon the lack of significance of the observable parameters to the overall fair value measurement. However, the fair value determination for Level 3 financial instruments may consider some observable market inputs. The following tables reflect the activity for the Company’s major classes of assets and liabilities measured at fair value using Level 3 inputs (in thousands):

Assets:	Three Months Ended November 30, 2010			Nine Months Ended November 30, 2010
Balance at beginning of period	$	37,241		$	50,096
Transfers out to Level 2 (Auction Rate Securities with market inputs)		(550	)		(4,700	)
Purchases of Level 3 investments		2,042			2,042
Sales of Level 3 investments		(4,604	)		(14,479	)
Total (gains) and losses:
Included in earnings (realized)		(2,959)			(2,959)
Unrealized gains included in accumulated other comprehensive income		703			1,873
Balance as of November 30, 2010	$	31,873		$	31,873

Liabilities:	Three Months Ended November 30, 2010			Nine Months Ended November 30, 2010
Balance at beginning of period	$	4,050		$	2,590
Level 3 liabilities acquired		3,094			4,244
Total (gains) and losses:
Included in earnings (realized)		(1,083	)		(626	)
Unrealized losses included in accumulated other comprehensive income		209			62
Balance as of  November 30, 2010	$	6,270		$	6,270

7

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Historically, the carrying value (par value) of the auction rate securities approximated fair market value due to the frequent resetting of variable interest rates. Beginning in February 2008, however, the auctions for auction rate securities began to fail and were largely unsuccessful. As a result, the interest rates on the investments reset to the maximum rate per the applicable investment offering statements. The types of auction rate securities generally held by the Company have historically traded at par and are callable at par at the option of the issuer.

The par (invested principal) value of the auction rate securities associated with these failed auctions will not be accessible to the Company until a successful auction occurs, a buyer is found outside of the auction process, the securities are called or the underlying securities have matured. In light of these liquidity constraints, the Company performed a valuation analysis to determine the estimated fair value of these investments. The fair value of these investments was based on a trinomial discount model. This model considers the probability of three potential occurrences for each auction event through the maturity date of the security. The three potential outcomes for each auction are (i) successful auction/early redemption, (ii) failed auction and (iii) issuer default. Inputs in determining the probabilities of the potential outco mes include, but are not limited to, the security’s collateral, credit rating, insurance, issuer’s financial standing, contractual restrictions on disposition and the liquidity in the market. The fair value of each security was then determined by summing the present value of the probability weighted future principal and interest payments determined by the model. The discount rate was determined using a proxy based upon the current market rates for successful auctions within the AAA rated auction rate securities market. The expected term was based on management’s estimate of future liquidity. The illiquidity discount was based on the levels of federal insurance or FFELP backing for each security as well as considering similar preferred stock securities ratings and asset backed ratio requirements for each security.

As a result, as of November 30, 2010, the Company recorded an estimated cumulative unrealized loss of $1.7 million (net of tax)  related to the temporary impairment of the auction rate securities, which was included in accumulated other comprehensive income (loss) within shareholders’ equity. The Company deemed the loss to be temporary because the Company does not plan to sell any of the auction rate securities prior to maturity at an amount below the original purchase value and, at this time, does not deem it probable that it will receive less than 100% of the principal and accrued interest from the issuer. Further, the auction rate securities held by the Company are AAA rated, and the Company considers the credit risk to be negligible. The Company continues to liquidate investments in auction rate securities as opportun ities arise. In the three and nine-month periods ended November 30, 2010, $3.8 million and $14.4 million, respectively, in auction rate securities were liquidated at par in connection with issuer calls. Subsequent to November 30, 2010, an additional $0.6 million in auction rate securities were also liquidated at par, also as a consequence of issuer calls.

The Company does not believe it will be necessary to access these investments to support current working capital requirements. However, the Company may be required to record additional unrealized losses in accumulated other comprehensive income in future periods based on then current facts and circumstances. Specifically, if the credit rating of the security issuers deteriorates, or if active markets for such securities are not reestablished, the Company may be required to adjust the carrying value of these investments through impairment charges recorded in the consolidated statements of operations, and any such impairment adjustments may be material.

4. Comprehensive Income (Loss)

The Company’s other comprehensive income (loss) consists of foreign currency translation adjustments from those subsidiaries whose functional currency is other than the U.S. dollar (“USD”) and unrealized gains and losses on investments classified as available-for-sale.

The components of the Company’s comprehensive income (loss) for the three-month and nine-month periods ended November 30, 2010 and 2009 were as follows (in thousands):

	Three Months Ended November 30,					Nine Months Ended November 30,
	2010			2009		2010		2009
Net (loss) income	$	(4,574	)	$	6,806	$	8,955	$	(8,923	)
Other comprehensive income:
Change in foreign currency translation adjustments		2,438			1,888		1,647		6,583
Change in unrealized gain on marketable equity securities		712			517		1,872		3,544
Total comprehensive (loss) income	$	(1,424	)	$	9,211	$	12,474	$	1,204

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The components of the Company’s accumulated other comprehensive income as of November 30, 2010 and February 28, 2010, net of taxes, were as follows (in thousands):

	November 30, 2010			February 28, 2010
Unrealized losses on investments (net of tax of $86 thousand)	$	(1,704	)	$	(3,576	)
Foreign currency translation		8,041			6,394
Changes in defined benefit plans (net of tax of $20 thousand)		(42	)		(42	)
Total accumulated other comprehensive income	$	6,295		$	2,776

5. Net Income (Loss) Per Share

Basic net income (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated using the sum of weighted-average number of common shares outstanding during the period, plus the dilutive effect of shares issuable through stock options.

The shares used in calculating basic and diluted net income (loss) per share for the condensed consolidated statements of operations included within this report are reconciled as follows (in thousands) :

	Three Months Ended November 30,				Nine Months Ended November 30,
	2010		2009		2010		2009
Weighted average shares outstanding for basic net income per share		22,679		22,239		22,586		22,066
Dilutive effect of stock options		—		203		383		—
Weighted average shares outstanding for diluted net income per share		22,679		22,442		22,969		22,066

Options covering approximately 3.4 million and 2.0 million shares for the three month periods ended November 30, 2010 and 2009, and approximately 1.6 million and 3.6 million shares for the nine month periods ended November 30, 2010 and 2009 respectively, were excluded from the computation of average shares outstanding for diluted net income (loss) per share because their effects were antidilutive.

6. Business Combinations

Symwave

On November 12, 2010 SMSC completed the acquisition of Symwave, Inc. (“Symwave”), a global fabless semiconductor company supplying high-performance analog/mixed-signal connectivity solutions utilizing proprietary technology, IP and silicon design capabilities. Symwave’s suite of SuperSpeed USB 3.0 compliant products and core technology can deliver up to 10 times the speed of USB 2.0 devices and target external storage, cellular phones, media players, camcorders, digital cameras and other applications requiring high-speed data transfer capabilities. End products based on Symwave’s storage controller were the industry’s first to achieve the USB-IF’s USB 3.0 certification in December 2009. Headquartered in Laguna Niguel, California, with design centers in San Diego, California and Shenzhen, China, Symwave has approximately 90 employees, of which over 60 are in Asia.

SMSC made an initial $5.2 million equity investment in Symwave in fiscal 2010, resulting in an equity stake of approximately 14 percent, and in fiscal 2011 provided $3.1 million in bridge financing to Symwave. At acquisition, the initial equity investment was revalued to $2.0 million and an impairment loss of $3.2 million was recorded within income from operations. The terms of the purchase agreement provide for quarterly cash payments to former Symwave shareholders upon achievement of certain revenue and gross profit margin goals. As a result, no cash was paid at acquisition and SMSC recorded a $3.1 million liability for contingent consideration. The fair value of the initial equity investment of $2.0 million was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, w hich is a Level 3 input. Key assumptions include a discount rate of 15 percent and probability-adjusted level of quarterly revenues and gross profit margins.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes the components of the purchase price (in millions):

Total Consideration at Fair Value
Fair value of initial investment in Symwave	$	2.0
Assumption of liability for overdue accounts payable		4.1
Assumption of liability for notes payable		3.2
Liability for contingent consideration		3.1
	$	12.4

The following table summarizes the allocation of the purchase price (in millions):

Cash and cash equivalents	$	1.5
Inventories		3.2
Accounts receivable		3.3
Other current assets		0.3
Fixed assets		2.0
Customer relationships		0.3
Trade name		0.2
Technology		3.6
Goodwill (all non-deductible for tax purposes)		3.6
Accounts payable and accrued liabilities		(5.3	)
Deferred tax liabilities		(0.3	)
	$	12.4

The majority of Symwave’s net assets are located in Laguna Niguel, California. The functional currency of Symwave’s operations in the United States is the U.S. dollar (“USD”) and in China is the Chinese Yuan Renminbi (“CNY”). Goodwill represents the excess of the purchase price over the fair values of the net tangible and intangible assets acquired.  The Symwave acquisition is expected to contribute to SMSC’s USB revenue stream and accelerate SMSC’s entry into the USB 3.0 market. These factors contributed to the recognition of goodwill as a component of the purchase price. In accordance with ASC Topic 350, “Intangibles — Goodwill and Other”, goodwill is not amortized but is tested for impairment at least an nually.

As of the end of each fiscal quarter at which a liability for contingent consideration is recorded, the Company will revalue the contingent consideration obligation to fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as a reduction of contingent consideration expense. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in discount periods and rates, changes in the timing and amount of revenue and gross profit margin estimates and changes in probability adjustments.

The results of Symwave’s operations subsequent to November 12, 2010 have been included in the Company’s consolidated results of operations. In the three and nine month period ended November 30, 2010, Symwave contributed $2.7 million in revenue and $1.0 million in net losses.

The following unaudited pro forma financial information presents the combined operating results of SMSC and Symwave as if the acquisition had occurred as of the beginning of each period presented.  Pro forma data is subject to various assumptions and estimates, and is presented for informational purposes only.  This pro forma data does not purport to represent or be indicative of the consolidated operating results that would have been reported had the transaction been completed as described herein, and the data should not be taken as indicative of future consolidated operating results.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Pro forma financial information for the three and nine month periods ended November 30, 2010 and 2009 is presented in the following table (in millions, except per share data):

	Three Months Ended November 30,					Nine Months Ended November 30,
	2010			2009		2010		2009
Sales and revenues	$	112.4		$	87.7	$	316.4	$	225.6
Net income (loss)	$	(7.5	)	$	3.6	$	0.04	$	(17.7	)
Basic net income (loss) per share	$	(0.33	)	$	0.16	$	0.02	$	(0.80	)
Diluted net income (loss) per share	$	(0.33	)	$	0.16	$	0.02	$	(0.80	)

STS

On June 14, 2010 SMSC acquired Wireless Audio IP B.V. ("STS"), a fabless designer of plug-and-play wireless solutions for consumer audio streaming applications, including home theater, headphones, LED TVs, PCs, gaming and automotive entertainment. Customers include many of the industry's leading consumer and PC brands. SMSC paid $22.0 million in cash and an additional cash payment of $3.0 million may occur upon achievement of certain revenue performance goals as set forth in the agreement between SMSC and STS. The results of STS’ operations subsequent to June 14, 2010 have been included in the Company’s consolidated results of operations.

The following table summarizes the components of the purchase price (in millions):

Total Consideration at Fair Value
Cash	$	22.0
Liability for contingent consideration		1.2
	$	23.2

The following table summarizes the allocation of the purchase price (in millions) :

Cash and cash equivalents	$	0.1
Inventories		0.2
Other current assets		0.1
Fixed assets		0.3
Customer relationships		3.9
Trade name		0.3
Technology		4.2
Goodwill (all non-deductible for tax purposes)		19.4
Other long-term assets		0.1
Accounts payable and accrued liabilities		(2.5	)
Other long-term liabilities		(1.1	)
Deferred tax liabilities		(1.8	)
	$	23.2

The majority of STS’ net assets are located in the Netherlands and Singapore, and the functional currency of STS’operations in the Netherlands is the euro (“EUR”) and in Singapore is the Singapore dollar (“SGD”). Goodwill represents the excess of the purchase price over the fair values of the net tangible and intangible assets acquired. STS' robust, low latency digital audio baseband processor and integrated module solutions are highly complementary to SMSC's Kleer wireless audio products. Together, the STS and Kleer teams intend to collaborate on developing best-in-class baseband processor and audio networking solutions that allow end users to enjoy state-of-the-art entertainment in the home, in the car or on the go. These factors contributed to the recognition of goodwill as a component of the purcha se price. In accordance with ASC Topic 350, “Intangibles — Goodwill and Other”, goodwill is not amortized but is tested for impairment at least annually.

The acquisition of STS was not significant to the Company’s consolidated results of operations for the three and nine-month periods ended November 30, 2010.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of the end of each fiscal quarter at which a liability for contingent consideration is recorded, the Company will revalue the contingent consideration obligation to fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as a reduction of contingent consideration expense. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability adjustments.

Kleer

On February 16, 2010 SMSC acquired substantially all the assets and certain liabilities of Kleer Corporation and Kleer Semiconductor Corporation (collectively “Kleer”), a designer of high quality, interoperable wireless audio technology addressing headphones and earphones, home audio/theater systems and speakers, portable audio/media players and automotive sound systems. This transaction brings a robust, high-quality audio and low-power radio frequency (“RF”) capability that will allow consumer and automotive OEMs to integrate wireless audio technology into portable audio devices and sound systems without compromising high-grade audio quality or battery life. Under terms of the asset purchase agreement, SMSC paid approximately $5.5 million in cash and additional cash payments of up to $2.0 million may occur upon a chievement of certain revenue performance goals as set forth in the agreement between SMSC and Kleer. The tangible assets of Kleer at February 16, 2010 included approximately $0.3 million of cash and cash equivalents, resulting in an initial net cash outlay of approximately $5.2 million. The results of Kleer’s operations subsequent to February 16, 2010 have been included in the Company’s consolidated results of operations.

The following table summarizes the components of the purchase price (in millions) :

Total Consideration at Fair Value
Cash	$	5.5
Liability for contingent consideration		0.8
	$	6.3

The following table summarizes the allocation of the purchase price (in millions) :

Cash and cash equivalents	$	0.3
Accounts receivable		0.2
Inventories		0.6
Customer relationships		0.5
Trade name		0.7
Technology		1.8
Goodwill (of which $3.2M is tax-deductible)		2.7
Accounts payable and accrued liabilities		(0.3	)
Deferred tax liabilities		(0.2	)
	$	6.3

The majority of Kleer’s net assets are located in Luxembourg, and the functional currency of Kleer’s operations in Luxembourg is the USD. Goodwill represents the excess of the purchase price over the fair values of the net tangible and intangible assets acquired. Kleer technology provides a natural extension to SMSC’s consumer and automotive connectivity portfolio. This technology extends our ability to service our OEM customers with a broad portfolio of solutions. These factors contributed to the recognition of goodwill as a component of the purchase price. In accordance with ASC Topic 350, “Intangibles — Goodwill and Other”, goodwill is not amortized but is tested for impairment at least annually.

The acquisition of Kleer was not significant to the Company’s consolidated results of operations for the three and nine-month periods ended November 30, 2010.

As of the end of each fiscal quarter at which a liability for contingent consideration is recorded, the Company will revalue the contingent consideration obligation to fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as a reduction of contingent consideration expense. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability adjustments.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

K2L

On November 5, 2009, the Company (through its wholly-owned subsidiary, SMSC Europe GmbH) completed the acquisition of 100 percent of the outstanding shares of K2L GmbH (“K2L”), a privately held company located in Pforzheim, Germany that specializes in software development and systems integration support services for automotive networking applications, including MOST®-based systems. The transaction was accounted for as a purchase under ASC 805, whereby the purchase price for K2L has been allocated to the net tangible and identifiable intangible assets acquired, based upon their estimated fair values as of November 5, 2009. The results of K2L’s operations subsequent to November 5, 2009 have been included in the Company’s consolidated results of operations.

SMSC acquired all of K2L’s outstanding capital stock in exchange for initial consideration of $6.9 million, consisting of 53,236 shares of SMSC common stock valued for accounting purposes at $1.0 million and $5.9 million of cash. The tangible assets of K2L at November 5, 2009 included approximately $0.6 million of cash and cash equivalents, resulting in an initial net cash outlay of approximately $5.3 million. SMSC's existing cash balances were the source of the cash used in the transaction. For accounting purposes, the value of the SMSC common stock was determined using the stock’s closing market value as of November 5, 2009. In addition, the Company recorded a liability for contingent consideration at the estimated fair value of $2.0 million as of November 5, 2009.

The following table summarizes the components of the purchase price (in millions):

Total Consideration at Fair Value
Cash	$	5.9
SMSC common stock (53,236 shares)		1.0
Liability for contingent consideration		2.0
	$	8.9

The following table summarizes the allocation of the purchase price (in millions):

Cash and cash equivalents	$	0.6
Accounts receivable		0.8
Inventories		0.1
Other current assets		0.2
Property and equipment		0.3
Customer relationships		1.9
Trade name		0.2
Technology		1.7
Goodwill (all non-deductible for tax purposes)		4.8
Accounts payable and accrued liabilities		(0.4	)
Deferred income		(0.1	)
Deferred tax liabilities		(1.1	)
Other long-term liabilities		(0.1	)
	$	8.9

The majority of K2L’s net assets are located in Germany, and the functional currency of K2L’s operations in Germany is the EUR. Accordingly, these EUR-denominated net assets are translated into U.S. dollars at period-end exchange rates and gains or losses arising from translation are included as a component of accumulated other comprehensive income within shareholders’ equity.

Goodwill represents the excess of the purchase price over the fair values of the net tangible and intangible assets acquired. This acquisition significantly expands SMSC’s automotive engineering capabilities by adding an assembled workforce of approximately 30 highly skilled engineers and other professionals, in close proximity to SMSC’s current automotive product design center in Karlsruhe, Germany. These factors contributed to the recognition of goodwill as a component of the purchase price. In accordance with ASC Topic 350, “Intangibles — Goodwill and Other” , goodwill is not amortized but is tested for impairment at least annually.

The acquisition of K2L was not significant to the Company’s consolidated results of operations for the three and nine-month periods ended November 30, 2010.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of the end of each fiscal quarter at which a liability for contingent consideration is recorded, the Company will revalue the contingent consideration obligation to fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as a reduction of contingent consideration expense. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability adjustments. The maximum amount of contingent consideration that can be earned by the sellers is €2.1 million. Fifty percent of the contingent consideration will be available to be earned in each of calendar years 2010 and 2011 based on the level of achievement of revenue as set fort h in the related stock purchase agreement.

Tallika

On September 8, 2009, the Company completed its acquisition of certain assets of Tallika Corporation and 100 percent of the outstanding shares of Tallika Technologies Private Limited (collectively, “Tallika”), a business with a team of approximately 50 highly skilled engineers operating from design centers in Phoenix, Arizona and Chennai, India, respectively. The Company expects this acquisition will add to SMSC’s research and development know-how, notably with respect to its software development capabilities. The Tallika and SMSC teams have previously collaborated on various projects including transceiver development, chip design and pre-silicon verification.

The transaction was accounted for as a purchase under ASC Topic 805, “Business Combinations” (“ASC 805”), whereby the purchase price for Tallika has been allocated to the net tangible and intangible assets acquired, based upon their fair values as of September 8, 2009. The results of Tallika’s operations subsequent to September 8, 2009 have been included in the Company’s consolidated results of operations.

SMSC acquired the Tallika business for $3.4 million, consisting of 57,201 shares of SMSC common stock valued for accounting purposes at $1.3 million and $2.1 million of cash. The tangible assets of Tallika at September 8, 2009 included approximately $0.2 million of cash and cash equivalents, resulting in an initial net cash outlay of approximately $1.9 million. SMSC's existing cash balances were the source of the cash used in the transaction. For accounting purposes, the value of the SMSC common stock was determined using the closing market price as of the date such shares were tendered to the selling parties.

The following table summarizes the components of the purchase price (in millions) :

Total Consideration at Fair Value
Cash	$	2.1
SMSC common stock (57,201 shares)		1.3
	$	3.4

The following table summarizes the allocation of the purchase price (in millions) :

Cash and cash equivalents	$	0.2
Accounts receivable		0.3
Property and equipment		0.1
Customer relationships		0.4
Goodwill (of which $1.0 million is tax-deductible)		2.4
	$	3.4

A significant portion of Tallika’s net assets are located in India, and the functional currency of Tallika’s Chennai, India based operations is the Rupee (“INR”). Accordingly, these INR-denominated net assets are translated into the USD dollars at period-end exchange rates and unrealized gains or losses arising from translation are included as a component of accumulated other comprehensive income within the shareholders’ equity.

Goodwill represents the excess of the purchase price over the fair values of the net tangible and identifiable intangible assets acquired. This acquisition significantly expands SMSC’s engineering, design and software development capabilities by adding an assembled workforce of approximately 50 highly skilled engineers into SMSC’s operations. These factors contributed to the recognition of goodwill as a component of the purchase price. In accordance with ASC Topic 350, “Intangibles — Goodwill and Other”, goodwill is not amortized but is tested for impairment at least annually.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The acquisition of Tallika was not significant to the Company’s consolidated results of operations for the three and nine-month periods ended November 30, 2010.

7. Investments

Long-term investments consist of highly rated auction rate securities (most of which are backed by the U.S. Federal or state and municipal government guarantees) and other marketable debt and equity securities held as available-for-sale investments. As of November 30, 2007 and prior period-end dates, investments in auction rate securities were classified as short-term in nature. In the fourth quarter of fiscal 2008, such investments became subject to adverse market conditions, and the liquidity typically associated with the financial markets for such instruments became restricted as auctions began to fail. Given the circumstances, these securities were subsequently classified as long-term (or short-term if stated maturity dates were within one year of the reported balance sheet date), reflecting the restrictions on liquidity and the Comp any’s intent to hold until maturity (or until such time as the principal investment could be recovered through other means, such as issuer calls and redemptions). See Note 3 — Fair Value for further discussion on related issues and matters, including fair valuation.

On November 23, 2010, the Company invested $2.0 million in EqcoLogic, N.V. (“EqcoLogic”), a Belgian corporation based in Brussels, Belgium. SMSC holds approximately 18.0 percent of the total outstanding equity of EqcoLogic on a fully diluted basis. The purchase of the equity shares has been accounted for as a cost-basis investment and is included in the Investments in equity securities caption on the Company’s condensed consolidated balance sheet.

During fiscal 2010, SMSC invested $2.0 million in Canesta, a privately held developer of three-dimensional motion sensing systems and devices (previously accounted for as a cost-basis investment and included in the Investments in equity securities caption of the consolidated balance sheet). Canesta has entered into an Asset Purchase Agreement with Microsoft, pursuant to which Microsoft  acquired substantially all of the assets of Canesta. On November 30, 2010, SMSC received $2.2 million in cash from Canesta pursuant to its Asset Purchase Agreement with Microsoft (approximately $0.8 million in additional distributions will be held in escrow for 12 months until all of the obligations of Canesta have been satisfied). As a result, the Company recorded a gain of $0.2 million.

On November 12, 2010 SMSC completed the acquisition of Symwave, Inc. (“Symwave”), a global fabless semiconductor company supplying high-performance analog/mixed-signal connectivity solutions utilizing proprietary technology, IP and silicon design capabilities. SMSC had previously invested $5.2 million in Symwave in fiscal 2010, resulting in a total equity stake of approximately 14 percent. At acquisition, this equity investment was revalued at $2.0 million and an impairment loss of $3.2 million was recorded within income from operations. The remaining $2.0 million investment in Symwave is no longer classified as part of the Investments in equity securities caption of the consolidated balance sheet and is currently included as part of the consideration paid for the Symwave acquisition.

8. Goodwill and Intangible Assets

The Company’s November 2010 acquisition of Symwave included the purchase of $4.2 million of finite-lived intangible assets and goodwill of $3.6 million. The Company’s June 2010 acquisition of STS included the purchase of $8.4 million of finite-lived intangible assets and goodwill of $19.4 million. The Company’s February 2010 acquisition of Kleer included the purchase of $3.0 million of finite-lived intangible assets and goodwill of $2.7 million. The Company’s November 2009 acquisition of K2L included the purchase of $3.8 million of finite-lived intangible assets and goodwill of $4.8 million. The Company’s November 2009 acquisition of Tallika included the purchase of $0.4 million of finite-lived intangible assets and goodwill of $2.4 million. The Company’s March 2005 acquisition of OASIS SiliconSystems Holding AG (“OASIS”) included the purchase of $42.9 million of finite-lived intangible assets, an indefinite-lived trademark of $5.4 million, and goodwill of $67.8 million. Some or portions of these intangible assets are denominated in currencies other than the USD, and these values reflect foreign exchange rates in effect on the dates of the transactions. The Company’s June 2002 acquisition of Tucson, Arizona-based Gain Technology Corporation included the acquisition of $7.1 million of finite-lived intangible assets and $29.4 million of goodwill, after adjustments.

Goodwill is tested for impairment in value annually, as well as when events or circumstances indicate possible impairment in value. The Company performs an annual goodwill impairment review during the fourth quarter of each fiscal year. The Company completed its most recent annual goodwill impairment review during the fourth quarter of fiscal 2010. In accordance with ASC Topic 350, “Intangibles — Goodwill and Other” (“ASC 350”), we compared the carrying value of each of our reporting units that existed at those times to their estimated fair value. For purposes of ASC 350 testing, the Company has two reporting units: the automotive reporting unit and the analog/mixed signal reporting unit. The automotive unit consists of those portions of the business t hat were acquired in the March 30, 2005 acquisition of OASIS including the infotainment networking technology known as Media Oriented Systems Transport (“MOST”), and the business that was acquired in the Company’s November, 2010 acquisition of K2L. The analog/mixed signal reporting unit is comprised of most other portions of the business.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company considered both the market and income approaches in determining the estimated fair value of the reporting units, specifically the market multiple methodology and discounted cash flow methodology. The market multiple methodology involved the utilization of various revenue and cash flow measures at appropriate risk-adjusted multiples. Multiples were determined through an analysis of certain publicly traded companies that were selected on the basis of operational and economic similarity with the business operations. Provided these companies meet these criteria, they can be considered comparable from an investment standpoint even if the exact business operations and/or characteristics of the entities are not the same. Revenue and EBITDA multiples were calculated for the comparable companies based on market data and published fina ncial reports. A comparative analysis between the Company and the public companies deemed to be comparable formed the basis for the selection of appropriate risk-adjusted multiples for the Company. The comparative analysis incorporates both quantitative and qualitative risk factors which relate to, among other things, the nature of the industry in which the Company and other comparable companies are engaged. In the discounted cash flow methodology, long-term projections prepared by the Company were utilized. The cash flows projected were analyzed on a “debt-free” basis (before cash payments to equity and interest bearing debt investors) in order to develop an enterprise value. A provision, based on these projections, for the value of the Company at the end of the forecast period, or terminal value, was also made. The present value of the cash flows and the terminal value were determined using a risk-adjusted rate of return, or “discount rate.”

Upon completion of the fiscal 2010 assessment, it was determined that the estimated fair values of all reporting units exceeded their respective carrying value, therefore no impairment in value was identified.

Changes in the carrying amount of goodwill, net, on a consolidated basis, for the nine months ended November 30, 2010 and the twelve months ended February 28, 2010, consist of the following (in thousands):

Nine Months Ended November 30, 2010	Symwave		STS		Kleer			K2L			Tallika		Oasis			Gain Technologies		TOTAL
Balance, beginning of year	$	—	$	—	$	3,278		$	4,411		$	2,404	$	67,186		$	29,435	$	106,714
Accumulated impairment		—		—		—			—			—		(52,300	)		—		(52,300	)
		—		—		3,278			4,411			2,404		14,886			29,435		54,414
Goodwill acquired		3,615		19,400		(633	)		—			—		—			—		22,382
Foreign exchange rate impact		—		1,809		(145	)		(112	)		17		—			—		1,569
		—															—
Balance, November 30, 2010		3,615		21,209		2,500			4,299			2,421		67,186			29,435		130,665
Accumulated impairment		—		—		—			—			—		(52,300	)		—		(52,300	)
	$	3,615	$	21,209	$	2,500		$	4,299		$	2,421	$	14,886		$	29,435	$	78,365

Year Ended February 28, 2010	Kleer		K2L			Tallika		OASIS			Gain Technologies		TOTAL
Balance, beginning of year	$	—	$	—		$	—	$	67,186		$	29,435	$	96,621
Accumulated impairment		—		—			—		(52,300	)		—		(52,300	)
		—		—			—		14,886			29,435		44,321
Goodwill acquired		3,278		4,778			2,404		—			—		10,460
Foreign exchange rate impact		—		(367	)		—		—			—		(367	)
Balance, end of year		3,278		4,411			2,404		67,186			29,435		106,714
Accumulated impairment		—		—			—		(52,300	)		—		(52,300	)
	$	3,278	$	4,411		$	2,404	$	14,886		$	29,435	$	54,414

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Intangible assets that are denominated in a functional currency other than the U.S. dollar have been translated into U.S. dollars using the exchange rate in effect on the reporting date. The Company’s identifiable intangible assets consisted of the following:

	11/30/2010				2/28/2010
	Cost		Accumulated Amortization		Cost		Accumulated Amortization
	(in thousands)
Purchased technologies	$	50,474	$	30,311	$	42,767	$	26,675
Customer relationships and contracts		17,972		9,215		13,900		7,368
Other		2,087		512		2,132		670
Total – finite-lived intangible assets		70,533		40,038		58,799		34,713
Trademarks and trade names		6,273		—		6,409		—
	$	76,806	$	40,038	$	65,208	$	34,713

All finite-lived intangible assets are being amortized on a straight-line basis, which approximates the pattern in which the estimated economic benefits of the assets are realized, over their estimated useful lives. Existing technologies have been assigned estimated useful lives of between six and nine years, with a weighted-average useful life of approximately eight years. Customer relationships and contracts have been assigned useful lives of between one and fifteen years, with a weighted-average useful life of approximately seven years.

Total amortization expense recorded for finite-lived intangible assets was $2.2 million and $1.4 million for the three month periods ended November 30, 2010 and 2009, respectively, and total amortization expense recorded for finite-lived intangible assets was $6.1 million and $4.5 million for the nine month periods ended November 30, 2010 and 2009, respectively.

Estimated future finite-lived intangible asset amortization expense is as follows (in thousands) :

Period	Amount
Remainder of Fiscal 2011	$	2,368
Fiscal 2012	$	9,155
Fiscal 2013	$	8,455
Fiscal 2014	$	3,348
Fiscal 2015	$	2,840
Fiscal 2016 and thereafter	$	4,329

9. Other Balance Sheet Data

Inventories, net are valued at cost (which approximates the lower of first-in, first-out cost) or market and consist of the following (in thousands):

	November 30, 2010		February 28, 2010
Raw materials	$	1,866	$	1,442
Work-in-process		16,833		15,924
Finished goods		30,863		27,008
	$	49,582	$	44,374

Property, plant and equipment (in thousands):

	November 30, 2010			February 28, 2010
Land	$	578		$	578
Buildings and improvements		37,779			38,606
Machinery and equipment		131,721			119,241
		170,078			158,425
Less: accumulated depreciation		(101,791	)		(91,623	)
	$	68,287		$	66,802

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Accrued expenses, income taxes and other current liabilities (in thousands):

	November 30, 2010		February 28, 2010
Compensation, incentives and benefits	$	15,066	$	15,086
Stock appreciation rights		29,410		14,579
Supplier financing – current portion		4,786		4,274
Accrued restructuring charges		317		1,091
Accrued rent obligations		2,908		2,959
Income taxes payable		2,433		2,261
Accrued contingent consideration		1,267		770
Other		7,385		7,404
	$	63,572	$	48,424

Other liabilities (in thousands):

	November 30, 2010		February 28, 2010
Retirement benefits	$	8,411	$	8,349
Income taxes		6,478		5,230
Supplier financing – long-term portion		5,625		7,153
Accrued contingent consideration		5,003		1,820
Other		912		392
	$	26,429	$	22,944

10. Deferred Income from Distribution

Certain of the Company’s products are sold to electronic component distributors under agreements providing for price protection and rights to return unsold merchandise. Accordingly, recognition of revenue and associated gross profit on shipments to a majority of the Company’s distributors are deferred until the distributors resell the products. At the time of shipment to distributors, the Company records a trade receivable for the selling price, relieves inventory for the carrying value of goods shipped, and records this gross margin as deferred income on shipments to distributors on the condensed consolidated balance sheet. This deferred income represents the gross margin on the initial sale to the distributor; however, the amount of gross margin recognized in future condensed consolidated statements of operations will typic ally be less than the originally recorded deferred income as a result of price allowances. Price allowances offered to distributors are recognized as reductions in product sales when incurred, which is generally at the time the distributor resells the product.

Deferred income on shipments to distributors consists of the following (in thousands):

	November 30, 2010			February 28, 2010
Deferred sales revenue	$	34,453		$	24,897
Deferred COGS		(6,761	)		(4,909	)
Provisions for sales returns		806			1,625
Distributor advances for price allowances		(9,445	)		(5,488	)
	$	19,053		$	16,125

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

11. Other Expense, Net

The components of the Company’s other expense, net for the three and nine-month periods ended November 30, 2010 and 2009, respectively, consisted of the following (in thousands):

	Three Months Ended November 30,						Nine Months Ended November 30,
	2010			2009			2010			2009
Realized and unrealized foreign currency transaction losses	$	(131	)	$	(312	)	$	(502	)	$	(739	)
Losses on disposal of property		(22	)		-			(40	)		(13	)
Other miscellaneous income, net		14			(14	)		67			(6	)
	$	(139	)	$	(326	)	$	(475	)	$	(758	)

12. Income Taxes

The Company had a decrease of its reserves for liabilities for uncertain tax positions for the three month period ending November 30, 2010 by $1.5 million and by approximately $0.8 for the nine month period ended November 30, 2010.  For the three month period ending November 30, 2010, amounts consist of reductions of $1.6 million of reserves and $0.3 million of interest and penalties as a result of a lapse of the applicable statute of limitations and a $0.4 million increase in reserves primarily attributable to acquisition related matters.  The nine month period ending November 30, 2010 amounts consist of reductions of $1.6 million of reserves and $0.3 million of interest and penalties as a result of a lapse of the applicable statute of limitations, and a $1.2 million increase in reserves primarily attributable to acq uisition related matters.  Substantially all such unrecognized tax benefits would be recorded as part of the provision for income taxes if realized in future periods. At this time, the Company does not currently anticipate that liabilities for uncertain tax positions will significantly increase or decrease on or prior to November 30, 2011. All liabilities for uncertain tax positions are classified as long term and included in Other Liabilities in the condensed consolidated balance sheet.

The Company will continue its policy of including interest and penalties related to unrecognized tax benefits within the provision for income taxes in the condensed consolidated statements of operations. For the nine month period ended November 30, 2010, the Company provided $0.2 million for interest and penalties.

The effective tax rates for the three month periods ended November 30, 2010 and November 30, 2009 were 43.6% and 26.0%, respectively. The effective tax rates for the nine month periods ended November 30, 2010 and November 30, 2009 were 43.8% and 41.5%, respectively. The difference in the effective rate for both the three month and nine month periods is primarily attributable to certain losses incurred in fiscal 2011 which cannot be benefited and the expiration of the research and development credit on December 31, 2009.

The Company files U.S. federal, state, and foreign tax returns, and is generally no longer subject to tax examinations for fiscal years prior to 2008 (in the case of certain foreign tax returns, calendar year 2005).

13. Restructuring

In the second quarter of fiscal 2011, the Company initiated a restructuring plan that resulted in a charge of $0.1 million for severance and termination benefits for 9 full-time employees. An additional $0.1 million was incurred in the third quarter of fiscal 2011 for severance and termination relating to this restructuring plan. A reserve for restructuring charges in the amount of $0.2 million is included on the Company’s condensed consolidated balance sheet as of November 30, 2010, which includes the restructuring charges to be settled in connection with these separations. The Company expects the payments on these obligations to be completed in the third quarter of fiscal year 2012.

In the fourth quarter of fiscal 2010, the Company initiated a restructuring plan that resulted in a charge of $0.6 million for severance and termination benefits for 5 full-time employees, which is included in the caption “Restructuring charges” in the Company’s fiscal 2010 consolidated statements of operations. An additional $0.8 million was incurred in the first quarter of fiscal 2011 for severance and termination benefits for 12 full-time employees relating to this restructuring plan. A reserve for restructuring charges for a negligible amount is included on the Company’s condensed consolidated balance sheet as of November 30, 2010, which includes the restructuring charges to be settled in connection with these separations. The Company expects the payments on these obligations to be completed in the first quart er of fiscal year 2012.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In the second quarter of fiscal 2010, the Company announced a plan to reduce its workforce by approximately sixty-four employees in connection with the relocation of certain of its test floor activities from Hauppauge, New York to third party offshore facilities (Sigurd Microelectronics Corporation) in Taiwan. During fiscal 2010 the Company recorded $1.3 million in asset impairment charges and accrued severance and retention bonus obligations relating to this plan. A reserve for restructuring charges for a negligible amount is included on the Company’s condensed consolidated balance sheet as of November 30, 2010, which includes the restructuring charges to be settled in connection with these separations. The Company expects the payments on these obligations to be completed in the fourth quarter of fiscal year 2011.

In the fourth quarter of fiscal 2009, the Company announced a restructuring plan that included a supplemental voluntary retirement program and involuntary separations that would result in approximately a ten percent reduction in employee headcount and expenses worldwide. This action resulted in a charge of $5.2 million for severance and termination benefits for 88 full-time employees, which is included in the caption “Restructuring charges” in the Company’s fiscal 2009 consolidated statements of operations. This amount includes a charge of $2.4 million recorded pursuant to ASC 715,“Compensation – Retirement Benefits” (“ASC 715”) relating to the voluntary retirement program. An additional $0.2 million was incurred in the first quarter of fiscal 2010 relating to this restructuring plan. A res erve for restructuring charges in the amount of $0.1 million is included on the Company’s condensed consolidated balance sheet as of November 30, 2010, which includes the restructuring charges and other previously accrued amounts to be settled in connection with these separations. The Company expects the payments on these obligations to be completed during the fourth quarter of fiscal year 2011.

The following table summarizes the activity related to the accrual for restructuring charges for the nine-month period ended November 30, 2010 (in thousands):

	Balance as of March 1, 2010		Charges		Payments			Non-Cash Items			Balance as of November 30, 2010
Q4 Fiscal 2009 Restructuring Plan	$	210	$	—	$	(150	)	$	2		$	62
Q2 Fiscal 2010 Restructuring Plan		101		—		(77	)		—			24
Q4 Fiscal 2010 Restructuring Plan		780		815		(1,447	)		(116	)		32
Q2 Fiscal 2011 Restructuring Plan		—		199		—			—			199
	$	1,091	$	1,014	$	(1,674	)	$	(114	)	$	317

The following table summarizes the activity related to the accrual for restructuring charges for the fiscal year ended February 28, 2010 (in thousands) :

	Balance as of March 1, 2009		Charges		Payments			Non-Cash Items			Balance as of February 28, 2010
Q4 Fiscal 2009 Restructuring Plan	$	5,385	$	221	$	(5,293	)	$	(103	)	$	210
Q2 Fiscal 2010 Restructuring Plan
Employee severance and benefits		—		852		(751	)					101
Asset impairment charges		—		408		(72	)		(336	)		—
Q4 Fiscal 2010 Restructuring Plan		—		642		—			138			780
	$	5,385	$	2,123	$	(6,116	)	$	(301	)	$	1,091

14. Benefit and Incentive Plans (including Share-Based Payments)

The Company has several stock-based compensation plans in effect under which incentive stock options and non-qualified stock options (collectively “stock options”), restricted stock awards and stock appreciation rights have been granted to employees and directors. In July 2009, the stockholders approved the 2009 Long Term Incentive Plan (the “LTIP”). The Company has ceased issuing stock options and restricted stock awards under previously established stock option and restricted stock plans, and has ceased issuing SARs, and instead is using the LTIP to issue stock options and restricted stock units to employees and stock options to directors. The Compensation Committee and management continue to evaluate means to effectively promote share ownership by employees and directors while offering industry-competitive comp ensation packages, including appropriate use of stock-based compensation awards.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Long Term Incentive Plan

Under the LTIP, the Compensation Committee of the Board of Directors is authorized to grant awards of stock options, restricted stock or restricted stock units, or other stock-based awards. The Committee is authorized under the LTIP to delegate its authority in certain circumstances. The purpose of this plan is to promote the interests of the Company and its shareholders by providing officers, directors and key employees with additional incentives and the opportunity, through stock ownership, to better align their interests with the Company’s and enhance their personal interest in its continued success. The maximum number of shares that may be delivered pursuant to awards granted under the LTIP is 1,000,000 plus: (i) any shares that have been authorized but not issued pursuant to previously established plans of the Company as of Ju ne 30, 2009, up to a maximum of an additional 500,000 shares; (ii) any shares subject to any outstanding options or restricted stock grants under any plan of the Company that were outstanding as of June 30, 2009 and that subsequently expire unexercised, or are otherwise forfeited, up to a maximum of an additional 3,844,576 shares. The maximum number of incentive stock options that may be granted under the LTIP is 1,500,000. No participant may receive awards under the LTIP in any calendar year for more than 1,000,000 shares equivalents. Based on the above, as of November 30, 2010, awards amounting to 794,753 share equivalents may be granted under the LTIP, net of awards issued to date. For disclosure purposes, awards issued under the LTIP are through and including November 30, 2010 reflected in the statistics below by type of award.

Employee and Director Stock Option Plans

Under the Company’s various stock option plans, the Compensation Committee of the Board of Directors had been authorized to grant options to purchase shares of common stock. Stock options under inducement plans were offered only to new employees, and all options were granted at prices not less than the fair market value on the date of grant. The grant date fair values of stock options are recorded as compensation expense ratably over the vesting period of each award, as adjusted for forfeitures of unvested awards. Stock options generally vest over four or five-year periods, and expire no later than ten years from the date of grant. Following shareholder approval of the LTIP, the Company ceased issuing awards under previously established stock option plans.

Stock option plan activity for the nine-months ended November 30, 2010 is summarized below (shares and intrinsic value in thousands) :

	Shares			Weighted Average Exercise Prices Per Share		Weighted Average Contractual Term (in yrs.)		Aggregate Intrinsic Value
Options outstanding, March 1, 2010		3,480		$	22.31
Granted		378			25.29
Exercised		(337	)		19.45
Canceled, forfeited or expired		(243	)		28.07
Options outstanding, November 30, 2010		3,278		$	22.52		5.8	$	18,730
Options exercisable, November 30, 2010		2,054		$	22.00		4.3	$	12,889

The total remaining unrecognized compensation cost related to SMSC’s employee and director stock option plans is $10.6 million as of November 30, 2010. The weighted-average period over which the cost is expected to be recognized is 1.61 years.

The Company estimates the grant date fair value of stock options by using the Black-Scholes option pricing model. The Black-Scholes model requires certain assumptions, judgments and estimates by the Company to determine fair value, including expected stock price volatility, risk-free interest rate, and expected life. The Company based the expected volatility on historical volatility. Additionally, the Company based the expected life of stock options granted on an actuarial model. There are no dividends expected to be paid on the Company’s common stock over the expected lives estimated.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The weighted-average fair values per share of stock options granted in connection with the Company’s stock option plans have been estimated utilizing the following assumptions:

	Three Months Ended November 30,						Nine Months Ended November 30,
	2010			2009			2010			2009
Dividend yield	—			—				—			—
Expected volatility		46	%		50	%		46-47	%		50	%
Risk-free interest rates		1.4	%		2.33	%		1.4-2.58	%		2.33-2.46	%
Expected lives (in years)		5.02			5.01			5.02			5.01

Restricted Stock Awards

The Company provides common stock awards to certain officers and key employees. The Company previously granted restricted stock awards, at its discretion, and as part of the Company’s management incentive plan, from the shares available under its 2001 and 2003 Stock Option and Restricted Stock Plans and its 2005 Inducement Stock Option and Restricted Stock Plan. The shares awarded are typically earned in 25 percent, 25 percent and 50 percent increments on the first, second and third anniversaries of the award, respectively, and are distributed provided the employee has remained employed by the Company through such anniversary dates; otherwise the unvested shares are forfeited. The grant date fair value of these shares at the date of award is recorded as compensation expense ratably on a straight-line basis over the related vesting periods, as adjusted for estimated forfeitures of unvested awards. Restricted stock shares are no longer being granted from previously established restricted stock award plans. Instead, restricted stock units are currently being granted from the LTIP. Restricted stock units are typically earned in 33 percent increments on the first, second and third anniversaries of the award, respectively, and are distributed provided the employee remains employed by the Company through such anniversary dates; otherwise the unvested shares are forfeited. The grant date fair value of these shares at the date of award is recorded as compensation expense ratably on a straight-line basis over the related vesting periods, as adjusted for estimated forfeitures of unvested awards.

Restricted stock activity for the nine-months ended November 30, 2010 is set forth below (shares in thousands) :

	Number of Shares			Weighted Average Grant-Date Fair Value
Restricted stock shares/units outstanding, March 1, 2010		90		$	25.42
Granted		305			25.67
Canceled or expired		(3	)		26.09
Vested		(35	)		28.83
Restricted stock shares/units outstanding, November 30, 2010		357		$	25.27

The total unrecognized compensation cost related to SMSC’s restricted stock plans is $6.9 million as of November 30, 2010. The weighted-average period over which the remaining cost is expected to be recognized is 1.8 years.  Of the 357,000 restricted stock awards outstanding at November 30, 2010, 303,000 are restricted stock units that are very similar to restricted stock shares except there are no voting rights attached to restricted stock units. Such units were granted for the first time during the quarter ended May 31, 2010.

Stock Appreciation Rights Plans

In September 2004 and September 2006, the Company’s Board of Directors approved Stock Appreciation Rights Plans (the “2004 Stock Appreciation Rights Plan” and the “2006 Stock Appreciation Rights Plan”, collectively the “Stock Appreciation Rights Plans”), the purpose of which are to attract, retain, reward and motivate employees and consultants to promote the Company’s best interests and to share in its future success. The Stock Appreciation Rights Plans authorize the Board’s Compensation Committee to grant up to six million stock appreciation rights awards to eligible officers, employees and consultants (after amendment to the 2006 Stock Appreciation Rights Plan, effective April 30, 2008). Each award, when granted, provides the participant with the right to receive payment in cash, up on exercise, for the appreciation in market value of a share of SMSC common stock over the award’s exercise price. On July 11, 2006, the Company’s Board of Directors approved the 2006 Director Stock Appreciation Rights Plan. The Company can grant up to 200,000 stock appreciation rights to directors under this plan. On April 9, 2008, the Board of Directors authorized an increase in the number of stock appreciation rights issuable pursuant to this plan from 200,000 to 400,000. The exercise price of a stock appreciation right is equal to the closing market price of SMSC stock on the date of grant. Stock appreciation rights awards generally vest over four or five-year periods, and expire no later than ten years from the date of grant. The Company ceased issuing SARs in the second half of calendar year 2009.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Activity under the Stock Appreciation Rights Plans for the nine months ended November 30, 2010 is set forth below (shares and intrinsic value in thousands):

	Fiscal 2011 Shares			Weighted Average Exercise Prices Per Share		Weighted Average Contractual Term		Aggregate Intrinsic Value
Stock appreciation rights outstanding, March 1, 2010		4,766		$	24.69
Granted		—			—
Exercised		(132	)		17.22
Canceled or expired		(199	)		27.13
Stock appreciation rights outstanding, November 30, 2010		4,435		$	24.81		6.79	$	19,970
Stock appreciation rights exercisable, November 30, 2010		2,666		$	26.29		6.11	$	9,396

The total unrecognized compensation cost related to SMSC’s Stock Appreciation Rights Plans is $17.1 million as of November 30, 2010. The weighted-average period over which the unrecognized cost is expected to be recognized is 3.32 years.

The weighted-average fair values per share of stock appreciation rights granted in connection with the Company’s Stock Appreciation Rights Plans have been estimated utilizing the following assumptions:

	Three Months Ended November 30,						Nine Months Ended November 30,
	2010			2009			2010			2009
Dividend yield		—			—			—			—
Expected volatility		27 – 48	%		44 – 53	%		37 – 53	%		44 – 60	%
Risk-free interest rates		0.07 –1.22	%		0.21 – 2.65	%		0.04 –2.76	%		0.21 –2.83	%
Expected lives (in years)		0.04 – 5.13			0.62 – 6.12			0.02 –5.62			0.62 – 6.2

Employee Stock Purchase Plan

The Company’s 2010 Employee Stock Purchase Plan (the “Purchase Plan”), effective November 1, 2010, provides for the issuance of up to 1,100,000 shares of common stock to eligible employees. The Purchase Plan provides for eligible employees to purchase whole shares of common stock at a price of 85% of the lesser of: (a) the fair market value of a share of common stock on the first date of the purchase period or (b) the fair market value of a share of common stock on the last date of the purchase period. Stock-based compensation expense for the Purchase Plan is recognized over the vesting period of six months on a straight-line basis. As of November 30, 2010, the Company had 1,100,000 shares available for future grants and issuances under the Purchase Plan. The Company recognized an expense of $49 thousand in the three an d nine-month periods ended November 30, 2010.

Stock-Based Compensation Expense

The following table summarizes the compensation expense for stock options, restricted stock awards and stock appreciation rights at fair value as measured per the provisions of ASC Topic 718, “ Compensation — Stock Compensation ” (“ASC 718”) included in our condensed consolidated statements of operations (in thousands) :

	Three Months Ended November 30,					Nine Months Ended November 30,
	2010		2009			2010		2009
Costs of goods sold	$	2,004	$	(286	)	$	2,375	$	1,305
Research and development		5,410		(486	)		6,190		3,537
Selling, general and administrative		11,650		(1,674	)		13,206		7,906
Stock-based compensation expense, before income taxes		19,064		(2,446	)		21,771		12,748
Tax benefit (provision)		6,863		(881	)		7,838		4,589
Stock-based compensation expense, after income taxes	$	12,201	$	(1,566	)	$	13,933	$	8,159

23

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Retirement Plans

The Company maintains an unfunded Supplemental Executive Retirement Plan to provide certain members of senior management with retirement, disability and death benefits. The Company’s subsidiary, SMSC Japan, also maintains an unfunded retirement plan, which provides its employees and directors with separation benefits, consistent with customary practices in Japan. Benefits under these defined benefit plans are based upon various service and compensation factors.

The following table sets forth the components of the consolidated net periodic pension expense for the three-month and nine-month period ended November 30, 2010 and 2009, respectively (in thousands) :

	Nine Months Ended November 30,				Three Months Ended November 30,
	2010		2009		2010			2009
Components of net periodic benefit costs:
Service cost – benefits earned during the period	$	265	$	324		$	93		$	108
Interest cost on projected benefit obligations		287		348			95			116
Net periodic pension expense	$	552	$	672		$	188		$	224

	November 30, 2010		February 28, 2010
Amounts recognized in accumulated other comprehensive loss:
Transition obligation	$	1	$	1
Net income		71		71
Total amount recognized in accumulated other comprehensive loss	$	72	$	72

Annual benefit payments under these plans are expected to be approximately $0.7 million in fiscal 2011, to be funded as general corporate obligations with available cash and cash equivalents. Additionally, the Company is the beneficiary of life insurance policies that have been purchased as a method of partially financing longer-term benefits payable under the Supplemental Executive Retirement Plan. In November 2009, the Compensation Committee of SMSC’s Board of Directors froze benefits under the Supplemental Executive Retirement Plan for existing participants, and there will be no further eligibility for participation in this plan. The effect of this action is expected to be immaterial to SMSC’s future results of operations.

15. Commitments and Contingencies

Contingent Consideration — Symwave Acquisition

The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of Symwave at the estimated fair value of $3.1 million as of November 30, 2010. The contingent consideration arrangement requires the Company to pay the former owners of Symwave an earnout amount equal to one times revenue (less certain agreed upon adjustments), depending on the achievement of certain revenue and gross profit margin performance goals, for each of the four quarterly periods from January 1, 2011 until December 31, 2011. No earnout payments shall be payable for any period after December 31,2011.

The fair value of the contingent consideration arrangement of $3.1 million was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, which is a Level 3 input. Key assumptions include a discount rate of 15 percent and probability-adjusted level of quarterly revenues and gross profit margins. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income.

Contingent Consideration — STS Acquisition

The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of STS at the estimated fair value of $0.6 million as of November 30, 2010. The contingent consideration arrangement requires the Company to pay the former owners of STS an earnout amount of $3.0 million for the period from January 1, 2011 until December 31, 2011 provided that revenue exceeds performance goals set forth in the purchase agreement. No earnout payments shall be payable for any period after December 31,2011.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The fair value of the contingent consideration arrangement of $0.6 million was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, which is a Level 3 input. Key assumptions include a discount rate of 16 percent and a probability-adjusted level of annual revenues. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income.

Contingent Consideration — Kleer Acquisition

The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of Kleer at the estimated fair value of $0.2 million as of November 30, 2010. The contingent consideration arrangement requires the Company to pay the former owners of Kleer an earnout amount of $1.0 million each for the fiscal years ended February 28, 2011 and 2012 provided that revenue exceeds performance goals set forth in the purchase agreement. No earnout payments shall be payable for any period after February 28, 2012.

The fair value of the contingent consideration arrangement of $0.2 million was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, which is a Level 3 input. Key assumptions include a discount rate of 30 percent and a probability-adjusted level of annual revenues. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income.

Contingent Consideration — K2L Acquisition

The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of K2L at the estimated fair value of $2.4 million (€1.8 million) as of November 30, 2010. The contingent consideration arrangement requires the Company to pay the former owners of K2L a maximum earnout amount of €2.1 million. Fifty percent of the earnout will be available to be earned in each of calendar years 2010 and 2011 provided that revenue exceeds performance goals as set forth in the purchase agreement. No earnout payments shall be payable for any period after December 31, 2011.

The fair value of the contingent consideration arrangement of $2.4 million (€1.8 million) was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, which is a Level 3 input. Key assumptions include a discount rate of 17 percent and a probability-adjusted level of annual revenues. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income.

Litigation

From time to time as a normal incidence of doing business, various claims and litigation may be asserted or commenced against the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages and/or invalidate its proprietary rights. Any lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management’s time and attention, and an adverse outcome of any significant matter could have a material adverse effect on the Company’s consolidated results of operations or cash flows in the quarter or annual period in which one or more of these matters are resolved.

On October 18, 2010, AFTG-TG, L.L.C. and Phillip M. Adams & Associates, L.L.C. (collectively, "Adams") filed a lawsuit in the United States District Court for the District of Wyoming against the Company and other semiconductor companies. Adams' Complaint alleges that the Company's products infringe twelve patents related to floppy disk controllers and that the Company misappropriated trade secrets related to detecting computer-related defects. The Complaint seeks unspecified damages (including treble damages for willful infringement and disgorgement of profits), attorneys’ fees and injunctive relief. On December 3, 2010, the Company filed a Motion to Dismiss for failure to state a claim upon which relief may be granted or, in the alternative, for improper joinder. The Company intends to vigorously defend against Adams' allegati ons.

16. Supplemental Cash Flow Disclosures

The Company financed the acquisition of certain software and other design automation tools used in product development activities using long-term financing provided directly by suppliers. The Company had $10.4 million and $12.5 million of outstanding balances due under such arrangements as of November 30, 2010 and 2009, respectively. During the nine-month periods ended November 30, 2010 and 2009, the Company acquired $2.3 million and $12.6 million, respectively, of software with supplier provided financing. The Company made cash payments in respect of these obligations of $3.3 million and $2.7 million for the nine month periods ended November 30, 2010 and 2009, respectively.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company did not receive any federal, state and foreign tax refunds for the nine-month period ending November 30, 2010 and the Company received $4.7 million for the nine-month period ended November 30, 2009. The Company made cash payments for federal, state and foreign income taxes payable of $14.1 million for the nine month period ended November 30, 2010 and $1.2 million for the nine month period ended November 30, 2009.

17. Subsequent Event – Acquisition of Conexant Systems, Inc.

The Company has evaluated subsequent events and has determined that except as set forth below, there are no subsequent events that require disclosure.

On January 9, 2011, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Conexant Systems, Inc. (“Conexant”), a leading designer of solutions for imaging, audio, embedded modem, and video surveillance applications. Subject to the terms of the Merger Agreement, which has been approved by the boards of directors of SMSC and Conexant, at the effective time of the Merger (the “Effective Time”), each share of Conexant common stock issued and outstanding immediately prior to the Effective Time will be converted into the right to receive $1.125 in cash (the “Cash Consideration”) and a fraction of a share of SMSC common stock equal to $1.125 divided by the volume weighted average price of SMSC common stock for the 20 trading days ending on the second trading day prior to closing, but in no event more than 0.04264 nor less than 0.03489 shares of SMSC common stock (the “Stock Consideration” and, together with the Cash Consideration, the “Merger Consideration”). The total Cash Consideration to be paid in the Merger is approximately $98 million and the total number of shares of SMSC common stock to be issued in the Merger is approximately 2.9 to 3.6 million.

The affirmative vote of the holders of a majority of the outstanding shares of Company common stock at a meeting of Conexant’s stockholders is required to approve the Merger. No vote of the holders of SMSC common stock is needed to approve the Merger.

On January 10, 2011, the Company filed Form 8-K with the SEC disclosing the Merger Agreement.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2010

Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes included in Part I Item 1. — Financial Statements, of this Quarterly Report on Form 10-Q (“Quarterly Report” or “10-Q”) of Standard Microsystems Corporation (the “Company” or “SMSC”).

Forward-Looking Statements

Portions of this Quarterly Report may contain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on management’s beliefs and assumptions, current expectations, estimates and projections. Such statements, including statements relating to the Company’s expectations for future financial performance, are not considered historical facts and are considered forward-looking statements under federal securities laws. Words such as “believe,” “expect,” “anticipate” and similar expressions identify forward-looking statements. Risks and uncertainties may cause the Company’s actual future results to be materially different from those discussed in forward-looking s tatements. The Company’s risks and uncertainties include (but are not limited to): the timely development and market acceptance of new products; the impact of competitive products and pricing; the Company’s ability to procure capacity from suppliers and the timely performance of their obligations; commodity prices; potential investment losses as a result of liquidity conditions; the effects of changing economic and political conditions in the market domestically and internationally and on its customers; relationships with and dependence on customers and growth rates in the personal computer, consumer electronics and embedded and automotive markets and within the Company’s sales channel; changes in customer order patterns, including order cancellations or reduced bookings; the effects of tariff, import and currency regulation; potential or actual litigation; and excess or obsolete inventory and variations in inventory valuation, among others. In addition, SMSC competes in the semiconductor i ndustry, which has historically been characterized by intense competition, rapid technological change, cyclical market patterns, price erosion and periods of mismatched supply and demand.

The Company’s forward looking statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations and may not reflect the potential impact of any future acquisitions, mergers, equity investments or divestitures. All forward-looking statements speak only as of the date hereof and are based upon the information available to SMSC at this time. Such statements are subject to change, and the Company does not undertake to update such statements, except to the extent required under applicable law and regulation. These and other risks and uncertainties, including potential liability resulting from pending or future litigation, are detailed from time to time in the Company’s periodic and current reports as filed with the United States Securities and Exchange Commission (the “SECR 21;). Readers are advised to review the Company’s most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q as filed subsequently with the SEC, particularly those sections entitled “ Risk Factors ,” for a more complete discussion of these and other risks and uncertainties. Other cautionary statements concerning risks and uncertainties may also appear elsewhere in this Quarterly Report.

Description of Business

SMSC designs and sells a wide range of silicon-based integrated circuits that utilize analog and mixed-signal technologies. The Company’s integrated circuits and systems provide a wide variety of connectivity products that are incorporated by its globally diverse customers into numerous end products in the Personal Computing (“PC”), Consumer Electronics, Industrial and Automotive markets. These products generally provide connectivity, networking, or input/output control solutions including hardware, software, and firmware, for a variety of high-speed communication, computer and related peripheral, consumer electronics, industrial control systems or automotive information applications. The market for these solutions is increasingly diverse, and the Company’s technologies are increasingly used in various combination s and in alternative applications. SMSC has operations in the United States, Canada, Germany, Bulgaria, Sweden, India, Japan, China, Korea, Singapore and Taiwan. Major engineering design centers are located in North America, Asia, Europe and India.

Business Combinations and Other Non-Controlling Equity Investments

On November 23, 2010, SMSC invested $2.0 million in EqcoLogic, N.V. (“EqcoLogic”), a Belgian corporation based in Brussels, Belgium. SMSC holds approximately 18.0 percent of the total outstanding equity of EqcoLogic on a fully diluted basis. The purchase of the equity shares has been accounted for as a cost-basis investment and is included in the Investments in equity securities caption on the Company’s condensed consolidated balance sheet.

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During fiscal 2010, SMSC invested $2.0 in Canesta, a privately held developer of three-dimensional motion sensing systems and devices (previously accounted for as a cost-basis investment and included in the Investments in equity securities caption of the condensed consolidated balance sheet). Canesta has entered into an Asset Purchase Agreement with Microsoft, pursuant to which Microsoft acquired substantially all of the assets of Canesta. On November 30, 2010, SMSC received $2.2 million in cash from Canesta pursuant to its Asset Purchase Agreement with Microsoft (approximately $0.8 million in additional distributions will be held in escrow for 12 months until all of the obligations of Canesta have been satisfied). As a result, the Company recorded a gain of $0.2 million.

On November 12, 2010, the Company completed its acquisition of Symwave, a global fabless semiconductor company supplying high-performance analog/mixed-signal connectivity solutions utilizing proprietary technology, IP and silicon design capabilities. Symwave’s suite of SuperSpeed USB 3.0 compliant products and core technology can deliver up to 10 times the speed of USB 2.0 devices and target external storage, cellular phones, media players, camcorders, digital cameras and other applications requiring high-speed data transfer capabilities. End products based on Symwave’s storage controller were the industry’s first to achieve the USB-IF’s USB 3.0 certification in December 2009. Headquartered in Laguna Niguel, CA, with design centers in San Diego, CA and Shenzhen, China, Symwave has approximately 90 employees, of wh ich over 60 are in Asia.

SMSC made an initial $5.2 million equity investment in Symwave in fiscal 2010, resulting in an equity stake of 14 percent, and in fiscal 2011 provided $3.1 million in bridge financing to Symwave. At acquisition, the initial equity investment was revalued to $2.0 million and an impairment loss of $3.2 million was recorded within income from operations. The terms of the purchase agreement provide for quarterly cash payments to former Symwave shareholders upon achievement of certain revenue and gross profit margin goals. As a result, no cash was paid at acquisition and SMSC recorded a $3.1 million liability for contingent consideration.

On June 14, 2010, the Company completed its acquisition of Wireless Audio IP B.V., more commonly known in the industry as STS, a fabless designer of plug-and-play wireless solutions for consumer audio streaming and video applications with a team of approximately 40 highly skilled engineers headquartered in the Netherlands and Singapore. This team will bring to SMSC a strong source of engineering capabilities in wireless audio and video development. SMSC paid approximately $22.0 million in cash and an additional cash payment of $3.0 million may occur upon achievement of certain revenue performance goals as set forth in the agreement between SMSC and STS. The results of STS’ operations subsequent to June 14, 2010 have been included in the Company’s consolidated results of operations.

On February 16, 2010 SMSC acquired substantially all the assets and certain liabilities of Kleer, a designer of high quality, interoperable wireless audio technology addressing headphones and earphones, home audio/theater systems and speakers, portable audio/media players and automotive sound systems. This transaction brings a robust, high-quality audio and low-power radio frequency (RF) capability that will allow consumer and automotive OEMs to integrate wireless audio technology into portable audio devices and sound systems without compromising high-grade audio quality or battery life. Under terms of the asset purchase agreement, SMSC paid approximately $5.5 million in cash and additional cash payments of up to $2.0 million may occur upon achievement of certain performance goals. The results of Kleer’s operations subsequent to Fe bruary 16, 2010 have been included in the Company’s consolidated results of operations.

On November 5, 2009, the Company completed the acquisition of 100 percent of the outstanding shares of K2L, a privately held company located in Pforzheim, Germany that specializes in software development and systems integration support services for automotive networking applications, including MOST®-based systems. This acquisition significantly expands SMSC’s automotive engineering capabilities by adding an assembled workforce of approximately 30 highly skilled engineers as well as other professionals, in close proximity to SMSC’s current automotive product design center in Karlsruhe, Germany. SMSC paid approximately $8.9 million to purchase K2L. Additional cash payments of up to €2.1million may occur upon achievement of certain performance goals. The results of K2L’s operations subsequent to November 5, 2009 have been included in the Company’s consolidated results of operations.

On September 8, 2009, the Company completed its acquisition of certain assets and 100 percent of the outstanding shares of Tallika, a business with a team of approximately 50 highly skilled engineers located in design centers in Phoenix, Arizona and Chennai, India. This team brings to SMSC a broad set of technical engineering capabilities, including software development experience and expertise, largely in a low-cost geography. The Tallika and SMSC teams have previously collaborated on various projects including transceiver development, chip design and pre-silicon verification. SMSC paid approximately $3.4 million to purchase Tallika. The results of Tallika’s operations subsequent to September 8, 2009 have been included in the Company’s consolidated results of operations.

Critical Accounting Policies & Estimates

This discussion and analysis of the Company’s financial condition and results of operations is based upon the unaudited condensed consolidated financial statements included in this Quarterly Report, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable SEC regulations for preparation of interim financial statements.

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The preparation of financial statements in conformity with U.S. GAAP and SEC rules and regulations requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Although management believes that its judgments and estimates are appropriate and reasonable, actual future results may differ from these estimates, and to the extent that such differences are material, future reported operating results may be affected.

The Company believes that the critical accounting policies and estimates listed below are important to the portrayal of the Company’s financial condition, results of operations and cash flows, and require critical management judgments and estimates about matters that are inherently uncertain.

• Revenue Recognition

• Inventory Valuation

• Allowance for Doubtful Accounts

• Valuation of Long-Lived Assets

• Accounting for Business Combinations

• Accounting for and Valuation of Share-Based Payments

• Accounting for Income Taxes and Uncertain Tax Positions

• Legal Contingencies

• Valuation of Long-Term Investments

Further information regarding these policies appears within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2010, as filed with the SEC on April 28, 2010. During the nine-month period ended November 30, 2010, there were no significant changes to any critical accounting policies or to the related estimates and judgments involved in applying those policies.

Recent Accounting Standards

In October 2009 the Financial Accounting Standards Board (“FASB”)  the FASB issued Accounting Standards Update (“ASU”) 2009-13, “ Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”) and ASU 2009-14, “ Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements” (“ASU 2009-14”). ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all undelivered elements must have ei ther: (i) vendor-specific objective evidence, or “VSOE”, or (ii) third-party evidence, or “TPE”, before an entity can recognize the portion of an overall arrangement consideration that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. Overall arrangement consideration will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. The residual method of allocating arrangement consideration has been eliminated. ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that funct ion together to deliver a product’s essential functionality. For SMSC, these new updates are required to be effective for revenue arrangements entered into or materially modified in the first quarter of fiscal year 2012, with early adoption available. The Company adopted these ASUs retroactively beginning in the first quarter of fiscal 2011. The adoption of these ASUs did not have a material effect on our consolidated financial statements.

In January 2010, the FASB issued new standards in the FASB Accounting Standards Codification 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which require new disclosures on the amount and reason for transfers in and out of Level 1 and 2 fair value measurements. The standards also require disclosure of activities, including purchases, sales, issuances, and settlements within the Level 3 fair value measurements. The standards also clarify existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques. The new disclosures regarding Level 1 and 2 fair value measurements and clarification of existing disclosures were adopted by SMSC beginning in the first quarter of fiscal 2011. The adoption of ASC 820 did not have a material effect on our consolidated financial statements.

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Results of Operations

Overview

Sales and revenues, gross profit on sales and revenue, (loss) income from operations, and net (loss) income for the three months ended November 30, 2010 and November 30, 2009 were as follows (in thousands) :

	Three Months Ended November 30, 2010			Three Months Ended November 30, 2009
Sales and revenues	$	107,025		$	87,236
Gross profit on sales and revenue	$	55,755		$	45,016
(Loss) income from operations	$	(8,186	)	$	9,439
Net (loss) income	$	(4,574	)	$	6,806

Sales and revenues increased primarily due to improvements in global demand for goods that incorporate the Company’s products, in each of our end markets (PC, Automotive, Consumer and Industrial). In addition, wireless product sales increased due to the acquisitions of Kleer and STS. The acquisition of Symwave on November 12, 2010 also contributed to the year over year improvement.

Gross profit on sales and revenue increased mainly due to the rise in sales and revenues as well as improved manufacturing overhead absorption due to volume increases. An increase in stock compensation expenses associated with the Company’s Stock Appreciation Rights (“SARs”) partially offset gross profit increases. The increase in stock compensation expense is attributable to the relative increase in the Company’s common stock market price during the three months ended November 30, 2010 as compared to the decrease in the Company’s common stock market price in the three months ended November 30, 2009.

The loss from operations and net loss are primarily attributable to an increase in stock compensation expense related to the Company’s SARs. The Company recorded $21.5 million of additional stock compensation expense compared to the prior year period. An impairment charge associated with the Company’s initial investment in Symwave also contributed to the losses.

Sales and revenues, gross profit on sales and revenue, (loss) income from operations, and net (loss) income for the three months ended November 30, 2010 and August 31, 2010 were as follows (in thousands) :

	Three Months Ended November 30, 2010			Three Months Ended August 31, 2010
Sales and revenues	$	107,025		$	104,084
Gross profit on sales and revenue	$	55,755		$	58,658
(Loss) income from operations	$	(8,186	)	$	22,346
Net (loss) income	$	(4,574	)	$	12,902

Sales and revenue growth on a sequential quarter basis was primarily driven by Automotive revenue and revenue from the Symwave acquisition, partially offset by some decline in PC peripherals revenues.

Gross profit on sales and revenue, loss from operations and net loss were impacted by an increase in stock compensation expense associated with the Company’s SARs. The Company recognized $24.3 million of additional stock compensation expense compared to the prior three month period. The increase in stock compensation expense is attributable to the relative increase in the Company’s common stock market price during the three months ended November 30, 2010 as compared to the decrease in the Company’s common stock market price during the three months ended August 31, 2010. The loss from operations and net loss were also impacted by an impairment charge associated with the Company’s initial investment in Symwave.

Sales and Revenues

The Company’s sales and revenues for the three months ended November 30, 2010 were $107.0 million, compared to sales and revenues of $87.2 million in the three months ended November 30, 2009. The increase of $19.8 million or 23% overall was primarily due to improved demand across all our end markets. In addition, wireless product sales increased due to the acquisitions of Kleer in the fourth quarter of fiscal 2010 and STS in the second quarter of fiscal 2011. Also the acquisition of Symwave in the third quarter of fiscal 2011 contributed to the increased revenues.

The Company’s sales and revenues for the nine months ended November 30, 2010 were $308.3 million, compared to sales and revenues of $224.8 million in the nine months ended November 30, 2009. The increase of $83.5 million or 37% overall was primarily due to significant improvement in the economy and demand across all markets over the prior year, as well as the impact of the acquisitions of Kleer, STS and Symwave in the nine months of fiscal 2011.

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Costs of Goods Sold

Costs of goods sold on product sales include: the purchase cost of finished silicon wafers manufactured by independent foundries (including mask and tooling costs); costs of assembly, packaging and mechanical and electrical testing; manufacturing overhead; quality assurance and other support overhead (including costs of personnel and equipment associated with manufacturing support); royalties paid to developers of intellectual property incorporated into the Company’s products; amortization of intangible assets relating to acquired technologies; and adjustments for excess, slow-moving or obsolete inventories. Costs of goods sold associated with other revenues are immaterial, and there are no costs of sales associated with intellectual property revenues.

The Company reported a gross profit of $55.8 million or 52.1% of sales and revenues in the third quarter of fiscal 2011, an increase of $10.7 million, compared to gross profit of $45.0 million, or 51.6% of sales and revenues in the third quarter of fiscal 2010. The increase in gross profit as a percentage of sales and revenues in the third quarter of the current fiscal year compared to the third quarter of the prior fiscal year was primarily due to higher production levels in the third quarter of fiscal 2011, which eliminated the excess capacity and the significant unabsorbed manufacturing overhead costs experienced in the comparable prior year period. The impact of the decrease in unabsorbed overhead  was partially offset by the increase of $2.3 million in stock compensation charges associated with the Stock Appreciation Right s (“SARs”) in the third quarter of fiscal 2011 over the third quarter of the prior fiscal year, as mentioned previously.

The Company’s gross profit for the nine month period ended November 30, 2010 totaled $166.2 million or 53.9% of sales and revenues, an increase of $58.0 million, compared to gross profit of $108.2 million, or 48.1% of sales and revenues in the prior comparable nine-month period. The increase in gross profit as a percentage of sales and revenues in the first nine months of the current fiscal year compared to the first nine months of the prior fiscal year was primarily due to increased production and sales levels, which eliminated the significant unabsorbed manufacturing overhead costs incurred in the comparable prior year period, significant reductions in supply chain costs and structural changes in the Company’s supply and logistics chain, most notably the outsourcing of a significant portion of product test activities beginn ing in the first quarter of fiscal 2010. The impact of these reduced costs in the first nine months of the current fiscal year was partially offset by the increase of $1.1 million in stock compensation charges associated with the Stock Appreciation Rights (“SARs”) in the nine month period ended November 30, 2011 over the comparable prior fiscal year period, as mentioned previously.

Research and Development Expenses

Research and development (“R&D”) expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, costs related to engineering design tools and computer hardware, subcontractor costs and device prototyping costs. The Company’s R&D activities are performed by highly-skilled and experienced engineers and technicians, and are primarily directed towards the design of new integrated circuits; the development of new software drivers, firmware and design tools; and investment in new product offerings based on technology trends, as well as ongoing cost reductions and performance improvements in existing products.

The Company intends to continue its efforts to develop innovative new products and technologies, and believes that an ongoing commitment to R&D is essential in order to maintain product leadership and compete effectively. Therefore, the Company expects to continue to make significant R&D investments in the future. Recent acquisitions (Tallika,K2L, Kleer, STS and Symwave, as previously described) have added additional engineering talent and capabilities.

Research and Development expenses were $28.9 million, or 27.0% of sales and revenues, for the three months ended November 30, 2010 compared to $18.0 million, or approximately 20.6% of sales and revenues, for the three months ended November 30, 2009. The increase was primarily due to a $5.9 million increase in stock based compensation associated with Stock Appreciation Rights (“SARs”), as mentioned previously, as well as an increase in engineering headcount and compensation charges and other engineering costs associated with the acquisitions of Tallika, K2L and Kleer in the prior fiscal year and STS and Symwave in the current fiscal year.

Research and Development expenses were $72.5 million, or 23.5% of sales and revenues, for the nine months ended November 30, 2010 compared to $56.5 million, or approximately 25.2% of sales and revenues, for the nine months ended November 30, 2009. The increase was primarily due to the increase in engineering headcount and compensation charges of $8.0 million and other engineering costs associated with the acquisitions of Tallika, K2L and Kleer in the prior fiscal year and STS and Symwave in the current fiscal year. Other increases include depreciation expense, which increased $1.6 million primarily due to the purchase of  a significant amount of system design tools over the preceding twelve months. In addition, there was an increase of $2.7 million relating to stock based compensation charges associated with Stock Appreciation Rights (“SARs”), as mentioned previously.

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Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses, which consist primarily of sales, marketing, finance (including compliance costs), information technology, legal, human resources management and other executive and administrative costs, were $33.0 million, or approximately 30.9% of sales and revenues, for the quarter ended November 30, 2010, compared to $17.2 million, or approximately 19.8% of revenues, for the quarter ended November 30, 2009. The increase of $15.8 of million was primarily the result of an increase of $13.6 million in stock based compensation charges associated with Stock Appreciation Rights (“SARs”), as mentioned previously.

SG&A expenses were $74.4 million, or approximately 24.1% of sales and revenues, for the nine months ended November 30, 2010, compared to $63.6 million, or approximately 28.3% of revenues, for the nine months ended November 30, 2009. The increase of $10.8 million was primarily the result of the increase of $6.0 million in stock based compensation charges associated with Stock Appreciation Rights (“SARs”), as mentioned previously. Other SG&A expense increases include increases in incentives and bonuses of $0.7 million due to the fact that bonuses were not earned in the first quarter of the prior fiscal year, as well as increases in accounting and consulting fees of $1.2 million related to due diligence and integration associated with recent acquisitions, and an increase of $1.0 million in amortization of intangibles acq uired with recent acquisitions.

Restructuring Charges

Restructuring charges of $0.1 million and $1.0 million were incurred in the three and nine month periods ended November 30, 2010, relating to restructuring plans initiated in the fourth quarter of fiscal 2010 and second quarter of fiscal 2010 in connection with the integration and reorganization of engineering and corporate overhead resources, primarily for severance obligations and termination benefits for certain employees.

Restructuring charges of $0.4 million and $1.3 million were incurred in the three and nine month periods ended November 30, 2009 primarily relating to a restructuring plan initiated in the second quarter of fiscal 2010 to reduce its workforce by approximately sixty-four employees in connection with the relocation of certain test floor activities from Hauppauge, New York to third party offshore facilities (Sigurd Microelectronics Corporation) in Taiwan.

In the fourth quarter of fiscal 2009 the Company initiated a restructuring plan that included a supplemental voluntary retirement program and involuntary separations that resulted in approximately a ten percent reduction in employee headcount and related expenses worldwide. This action resulted in a charge of $5.2 million for severance and termination benefits for 88 full-time employees in the fourth quarter of fiscal 2009. An additional $0.2 million was incurred in the first three months of fiscal 2010 relating to this restructuring plan.

Settlement Charge

There were no settlement charges incurred in the three and nine month periods ended November 30, 2010. A charge of $2.0 million in settlement of the OPTi, Inc. patent infringement lawsuit against the Company was recognized in the nine month period ended November 30, 2009. Income of $31 thousand was recognized in the three-month period ended November 30, 2009 relating to a true-up of this expense upon payment of the final settlement.

Impairment Loss on Equity Investment in Symwave

On November 12, 2010 SMSC completed the acquisition of Symwave, Inc. (“Symwave”), a global fabless semiconductor company supplying high-performance analog/mixed-signal connectivity solutions utilizing proprietary technology, IP and silicon design capabilities.  SMSC had invested $5.2 million in Symwave in fiscal 2010. At acquisition, this equity investment was reduced to its fair value of $2.0 million and an impairment loss of $3.2 million was recorded within income from operations in the three month period ended November 30, 2010 in accordance with U.S. GAAP. There were no impairment losses incurred in the three or nine month periods ended November 30, 2009.

Gain on Equity Investment in Canesta

During fiscal 2010, SMSC invested $2.0 in Canesta, a privately held developer of three-dimensional motion sensing systems and devices (previously accounted for as a cost-basis investment and included in the Investments in equity securities caption of the condensed consolidated balance sheet). Canesta has entered into an Asset Purchase Agreement with Microsoft, pursuant to which Microsoft acquired substantially all of the assets of Canesta. On November 30, 2010, SMSC received $2.2 million in cash from Canesta pursuant to its Asset Purchase Agreement with Microsoft (approximately $0.8 million in additional distributions will be held in escrow for 12 months until all of the obligations of Canesta have been satisfied). As a result, the Company recorded a gain of $0.2 million in the three month period ended November 30, 2010.

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Revaluation of Contingent Consideration

The Company recorded a liability for contingent consideration as part of the purchase price for the acquisitions of Symwave, STS, Kleer and K2L. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income. As a result, revaluation gains of $1.1 million and $0.6 million were incurred in the three and nine month periods ended November 30, 2010. There were no revaluation gains or losses incurred in the three and nine month periods ended November 30, 2009.

Interest and Other (Expense) Income, Net

Interest income was $0.2 million and $0.6 million for the three-month and nine-month periods ended November 30, 2010, compared to $0.2 million and $0.9 million for the three-month and nine-month periods ended November 30, 2009. The decrease in interest income year-over-year is primarily the result of a decrease in the Company’s overall investment in auction rate securities, as the Company continues to liquidate its positions as opportunities arise in response to market conditions. Funds from liquidated auction rate securities investments as well as funds generated through operating activities are currently being invested in high grade money market accounts, at lower average rates of return.

Other expenses, net were $0.1 and $0.5 million for the three-month and nine-month periods ended November 30, 2010, compared to other expense, net of $0.3 million and $0.8 million for the three-month and nine-month periods ended November 30, 2009. Other expenses, net primarily consist of unrealized foreign exchange gains and losses on net U.S. dollar monetary assets held by the Company’s foreign affiliates.

Provision for Income Taxes

The Company’s effective income tax rate reflects statutory federal, state and foreign tax rates, the impact of certain permanent differences between the book and tax treatment of certain expenses, and the impact of tax-exempt income and various income tax credits.

The provision for income taxes for the three and nine month periods ended November 30, 2010 was a ($3.5) million benefit, and $7.0 million provision or an effective income tax rate of 43.6 % on $8.1 million of loss and an effective tax rate of 43.8% on $16.0 million of income before income taxes respectively. The tax provision for the nine month period ended November 30, 2010 includes the impact of a $1.6 million decrease in reserves for uncertain tax positions in connection with a lapse of applicable statutes of limitations, and the reversal of $0.3 million in related accrued interest and penalties. The provision excludes the impact of certain losses in various jurisdictions that could not be benefited. In addition, as the research and development tax credit expired on December 31, 2009 there is no such tax credit included in the tax pr ovision for the three and nine month periods ended November 30, 2010.

The provision for income taxes for the three-month period and the benefit from income taxes for the nine-month period ended November 30, 2009, was $2.4 million and $6.3 million, or an effective income tax rate of 26.0% against $9.2 million of income and an effective income tax rate of 41.5% on $15.3 million of losses before income taxes, respectively. The tax benefit for the nine month period ended November 30, 2009 included the impact of a $0.8 million decrease in reserves for uncertain tax positions in connection with a lapse of applicable statutes of limitations. As of the November 30, 2010, legislation had not been passed to extend U.S. income tax credits relating to qualified research and development expenditures beyond December 31, 2009. For the three months and nine months ended November 30, 2009, $0.5 million and $1.3 million of qualified research and development tax credit have been included in the net provision/benefit for income taxes.

Subsequent to November 30, 2010, the U.S. income tax credit relating to qualified research and development expenditures was extended. In accordance with U.S. GAAP, the impact of this tax credit will be recognized in the fourth quarter or fiscal 2011.

Business Outlook

Our future results of operations and other matters comprising the subject of forward-looking statements contained in this Form 10-Q, included within this MD&A, involve a number of risks and uncertainties — in particular, current economic uncertainty, including tight credit markets, as well as future economic conditions, our goals and strategies, new product introductions, plans to cultivate new businesses, divestitures or investments, revenue, pricing, gross margin and costs, capital spending, depreciation, R&D expense levels, selling, general and administrative expense levels, potential impairment of investments, our effective tax rate, pending legal proceedings, ability to realize the benefits of recent acquisitions, and other operating parameters. In addition to the various important factors discussed above, a number of other important factors could cause actual results to differ materially from our expectations. See the risks described in Part II — Item 1.A. — Risk Factors.

The Company achieved record revenue levels in the third quarter of fiscal 2011 and saw strength in the Automotive end market. As we enter the seasonally slower period in our annual cycle, we expect revenue to decline sequentially in line with our historic sequential seasonal pattern, which is consistent with the rest of the industry.

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Liquidity & Capital Resources

The Company currently finances its operations through a combination of existing cash and cash generated by operations. Although the Company takes advantage of supplier financing arrangements for certain long-term agreements, the Company had no secured or unsecured debt during the first three quarters of fiscal 2011 or 2010.

The Company’s cash, cash equivalents, short-term and long-term investments (including investments in auction rate securities with maturities in excess of one year) were $188.5 million at November 30, 2010, compared to $176.3 million at November 30, 2009. Positive cash flows from operations, partially offset by net cash used for the acquisition of STS, investment in non-marketable secured loans and capital expenditures accounted for most of this increase.

Operating activities generated $33.8 million of cash in the first nine months of fiscal 2011, compared to $23.7 million of cash generated in the first nine months of fiscal 2010. The increase in operating cash flows reflects the impact of a significant increase in revenues and operating profits in the first nine months of fiscal 2011 partially offset by increases in accounts receivable of $13.4 million and inventory of $2.0 million as revenues increased over the prior year.

Investing activities contributed $11.8 million of cash during the first nine months of fiscal 2011, resulting from the sale of $30.5 million in short-term investments in commercial paper, the redemption of $14.4 million in auction rate securities and cash acquired in the acquisition of Symwave of $1.5 million, partially offset by the $21.9 million used in the acquisition of STS, $3.1 million invested in non-marketable secured loans from Symwave and $9.8 million used in capital expenditures. Capital expenditures increased $4.6 million in the first nine months of fiscal 2011 as compared to the first nine months of the prior fiscal year, during which capital expenditures were drastically reduced as a result of corporate cost saving initiatives in fiscal 2010.

Net cash provided by financing activities was $3.2 million in the first nine months of fiscal 2011, consisting of $6.5 million of proceeds from issuance of common stock on stock option exercises, partially offset by $3.3 million of payments for supplier financed design automation tools used in product development activities. Net cash provided by financing activities was $1.0 million in the first nine months of fiscal 2010. The increase of $2.2 million over the comparable prior year period was primarily due to the increase in proceeds from stock option exercises, partially offset by a $0.6 million increase in payments for supplier financed design automation tools.

Working capital increased by $18.9 million, or 11.0%, to $190.3 million in the first nine months of fiscal 2011, primarily due to cash from operations of $33.8 million, the liquidation of $14.4 million in auction rate securities in connection with issuer redemptions and $3.2 million in proceeds from financing activities, partially offset by $21.9 million used in the acquisition of STS, $3.1 million invested in non-marketable secured loans from Symwave and $9.8 million used in capital expenditures.

The Company may consider utilizing cash to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, the Company may evaluate potential acquisitions of or investments in such businesses, products or technologies owned by third parties.

The Company expects that its cash, cash equivalents and cash flows from operations will be sufficient to finance the Company’s operating and capital requirements through the end of fiscal 2011 and for the foreseeable future.

Fair Value of Financial Instruments

The assessment of fair value for our financial instruments is based on the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. When values are dete rmined using inputs that are both unobservable and significant to the values of the instruments being measured, the Company classifies those instruments as Level 3 under the ASC 820 hierarchy. A financial instrument’s categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

As of November 30, 2010, the Company held approximately $160.2 million in financial instruments measured at fair value within the three levels of the ASC 820 fair value hierarchy, including investments, equity securities, non-marketable equity investments, cash surrender value of life insurance policies and cash equivalents. The Company classified $31.9 million of investments in auction rate securities and non-marketable equity investments (net of $1.8 million in gross unrealized losses) as Level 3 under the ASC 820 hierarchy (24 percent of financial instruments measured at fair value). Auction rate securities are long-term variable rate bonds tied to short-term interest rates that were, until February 2008, reset through a “Dutch auction” process. As of November 30, 2010, 100 percent of the Company’s auction rate secur ities were “AAA” rated by one or more of the major credit rating agencies, mainly

34

collateralized by student loans guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program (“FFELP”), as well as auction rate preferred securities ($6.1 million at par) which are AAA rated and part of a closed end fund that must maintain an asset ratio of 2 to 1. Non-marketable equity investments consist of the recent investment in EqcoLogic, a development-stage enterprise accounted for as a cost-basis investment and included in the investments in equity securities caption of the consolidated balance sheet.

Historically, the carrying value (par value) of the auction rate securities approximated fair market value due to the frequent resetting of variable interest rates. Beginning in February 2008, however, the auctions for auction rate securities began to fail and were largely unsuccessful. As a result, the interest rates on the investments reset to the maximum rate per the applicable investment offering statements. The types of auction rate securities generally held by the Company had historically traded at par and are callable at par at the option of the issuer.

The par (invested principal) value of the auction rate securities associated with these failed auctions will not be accessible to the Company until a successful auction occurs, a buyer is found outside of the auction process, the securities are called or the underlying securities have matured. In light of these liquidity constraints and the lack of market-based data, the Company performed a valuation analysis to determine the estimated fair value of these investments. The fair value of these investments is based on a trinomial discount model. This model considers the probability of three potential occurrences for each auction event through the maturity date of the security. The three potential outcomes for each auction are (i) successful auction/early redemption, (ii) failed auction and (iii) issuer default. Inputs in determining the pro babilities of the potential outcomes include, but are not limited to, the security’s collateral, credit rating, insurance, issuer’s financial standing, contractual restrictions on disposition and the liquidity in the market. The fair value of each security is determined by summing the present value of the probability weighted future principal and interest payments determined by the model. The discount rate was determined using a proxy based upon the current market rates for successful auctions within the AAA rated auction rate securities market. The expected term was based on management’s estimate of future liquidity. The illiquidity discount was based on the levels of federal insurance or FFELP backing for each security as well as considering similar preferred stock securities ratings and asset backed ratio requirements for each security.

As a result, as of November 30, 2010, the Company recorded an estimated cumulative unrealized loss of $1.7 million (net of tax) related to the temporary impairment of the auction rate securities, which was included in accumulated other comprehensive income (loss) within shareholders’ equity. The Company deemed the loss to be temporary because the Company does not plan to sell any of the auction rate securities prior to maturity at an amount below the original purchase value and, at this time, does not deem it probable that it will receive less than 100 percent of the principal and accrued interest from the issuer. Further, the auction rate securities held by the Company are AAA rated. The Company continues to liquidate investments in auction rate securities as opportunities arise. In the three and nine-month periods ended November 30, 2010, $3.8 million and $14.4 million, respectively, in auction rate securities were liquidated at par in connection with issuer calls. Subsequent to November 30, 2010, an additional $0.6 million in auction rate securities were also liquidated at par, also as a consequence of issuer calls.

Given its sufficient cash reserves and positive cash flow from operations, the Company does not believe it will be necessary to access these investments to support current working capital requirements. However, the Company may be required to record additional unrealized losses in accumulated other comprehensive income in future periods based on then current facts and circumstances. Further, if the credit rating of the security issuers deteriorates, or if active markets for such securities are not reestablished, the Company may be required to adjust the carrying value of these investments through impairment charges recorded in the condensed consolidated statements of operations, and any such impairment adjustments may be material.

Commitments and Contingencies

Contingent Consideration — Symwave Acquisition

The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of Symwave at the estimated fair value of $3.1 million as of November 30, 2010. The contingent consideration arrangement requires the Company to pay the former owners of Symwave an earnout amount equal to one times revenue (less certain agreed upon adjustments), depending on the achievement of certain revenue and gross profit margin performance goals, for each of the four quarterly periods from January 1, 2011 until December 31, 2011. No earnout payments shall be payable for any period after December 31, 2011.

The fair value of the contingent consideration arrangement of $3.1 million was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, which is a Level 3 input. Key assumptions include a discount rate of 15 percent and probability-adjusted level of quarterly revenues and gross profit margins. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income.

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Contingent Consideration — STS Acquisition

The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of STS at the estimated fair value of $0.6 million as of November 30, 2010. The contingent consideration arrangement requires the Company to pay the former owners of STS an earnout amount of $3.0 million for the period from January 1, 2011 until December 31, 2011 provided that revenue exceeds performance goals set forth in the purchase agreement. No earnout payments shall be payable for any period after December 31,2011.

The fair value of the contingent consideration arrangement of $0.6 million was estimated by applying the income approach. That measure is based on significant inputs that are observable in the market, which is a Level 2 input. Key assumptions include a discount rate of 16 percent and a probability-adjusted level of annual revenues. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income.

Contingent Consideration — Kleer Acquisition

The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of Kleer at the estimated fair value of $0.2 million as of November 30, 2010. The contingent consideration arrangement requires the Company to pay the former owners of Kleer an earnout amount of $1.0 million each for the fiscal years ended February 28, 2011 and 2012 provided that revenue exceeds performance goals set forth in the purchase agreement. No earnout payments shall be payable for any period after February 28, 2012.

The fair value of the contingent consideration arrangement of $0.2 million was estimated by applying the income approach. That measure is based on significant inputs that are observable in the market, which is a Level 2 input. Key assumptions include a discount rate of 30 percent and a probability-adjusted level of annual revenues. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income.

Contingent Consideration — K2L Acquisition

The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of K2L at the estimated fair value of $2.4 million (€1.8 million) as of November 30, 2010. The contingent consideration arrangement requires the Company to pay the former owners of K2L a maximum earnout amount of €2.1 million. Fifty percent of the earnout will be available to be earned in each of calendar years 2010 and 2011 provided that revenue exceeds performance goals as set forth in the purchase agreement. No earnout payments shall be payable for any period after December 31, 2011.

The fair value of the contingent consideration arrangement of $2.4 million (€1.8 million) was estimated by applying the income approach. That measure is based on significant inputs that are observable in the market, which is a Level 2 input. Key assumptions include a discount rate of 17 percent and a probability-adjusted level of annual revenues. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income.

Litigation

From time to time as a normal incidence of doing business, various claims and litigation may be asserted or commenced against the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages and/or invalidate its proprietary rights. Any lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management’s time and attention, and an adverse outcome of any significant matter could have a material adverse effect on the Company’s consolidated results of operations or cash flows in the quarter or annual period in which one or more of these matters are resolved.

On October 18, 2010, AFTG-TG, L.L.C. and Phillip M. Adams & Associates, L.L.C. (collectively, "Adams") filed a lawsuit in the United States District Court for the District of Wyoming against the Company and other semiconductor companies. Adams' Complaint alleges that the Company's products infringe twelve patents related to floppy disk controllers and that the Company misappropriated trade secrets related to detecting computer-related defects. The Complaint seeks unspecified damages (including treble damages for willful infringement and disgorgement of profits), attorneys’ fees and injunctive relief. On December 3, 2010, the Company filed a Motion to Dismiss for failure to state a claim upon which relief may be granted or, in the alternative, for improper joinder. The Company intends to vigorously defend against Adams' allegati ons.

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Item 3. — Quantitative and Qualitative Disclosures About Market Risk

Interest Rate and Investment Liquidity Risk — The Company’s exposure to interest rate risk relates primarily to its investment portfolio (i.e. with respect to interest income). The primary objective of SMSC’s investment portfolio management is to invest available cash while preserving principal and meeting liquidity needs. In accordance with the Company’s investment policy, investments are placed with high credit-quality issuers and the amount of credit exposure to any one issuer is limited.

As of November 30, 2010, the Company’s $30.0 million of long-term investments consisted primarily of investments in U.S. government agency backed AAA rated auction rate securities. From time to time, the Company has also held investments in corporate, government and municipal obligations with maturities of between three and twelve months at acquisition. Auction rate securities have long-term underlying maturities, but have interest rates that until recently had been reset every 90 days or less at auction, at which time the securities could also typically be repurchased or sold.

In February 2008, the Company began to experience failed auctions on some of its auction rate securities Based on the failure rate of these auctions, the frequency and extent of the failures, and due to the lack of liquidity in the current market for the auction rate securities, the Company determined that the estimated fair value of the auction rate securities no longer approximates par value. The Company used a discounted cash flow model to determine the estimated fair value of these investments as of November 30, 2010, and recorded an unrealized loss of $1.7 million, (net of tax) related to the temporary impairment of the auction rate securities, which is included in accumulated other comprehensive income within shareholders’ equity on the consolidated balance sheet.

Assuming all other assumptions disclosed in Part I — Item 1 — Financial Statements — Note 3 of this Report, being equal, an increase or decrease in the liquidity risk premium (i.e. the discount rate) of 100 basis points as used in the model would decrease or increase, respectively, the fair value of the auction rate securities by approximately $0.8 million. In addition, an increase or decrease in interest rates of 100 basis points would increase interest income in the nine months ended November 30, 2010 by $1.6 million or decrease interest income to a negligible amount.

Equity Price Risk — The Company is not exposed to any significant equity price risks at November 30, 2010.

Foreign Currency Risk — The Company has international operations and is therefore subject to certain foreign currency rate exposures, principally the euro and Japanese Yen. The Company also conducts a significant amount of its business in Asia. In order to reduce the risk from fluctuation in foreign exchange rates, most of the Company’s product sales and all of its arrangements with its foundry, test and assembly vendors are denominated in U.S. dollars.

The Company’s most significant foreign subsidiaries, SMSC Japan and SMSC Europe, purchase a significant amount of their products for resale in U.S. dollars, and from time to time have entered into forward exchange contracts to hedge against currency fluctuations associated with these product purchases. Gains or losses on these contracts are intended to offset the gains or losses recorded for statutory and U.S. GAAP purposes from the remeasurement of certain assets and liabilities from U.S. dollars into local currencies. No such contracts were executed during fiscal 2010, and there are no obligations under any such contracts as of November 30, 2010. However, the Company has purchased currencies from time to time throughout the current fiscal year in anticipation of more significant foreign currency transactions, in order to optimize effective rates associated with those settlements.

Operating activities in Europe include transactions conducted in both euros and U.S. dollars. The euro is the functional currency for the Company’s European subsidiaries. Losses recorded from the remeasurement of U.S. dollar denominated assets and liabilities into euros were $0.1 million and $0.3 million for the three-months and nine-months period ending November 30, 2010, compared with losses of $0.1 million and $0.2 million for the three-months and nine-months period ending November 30, 2009. Losses recorded from the remeasurement of U.S. dollar denominated assets and liabilities into Yen for the three-months and nine-months period ending November 30, 2010 were $0.1 million and $0.4 million dollars compared with losses of $0.3 and $0.5 million for the three-months and nine-months period ending November 30, 2009.

Commodity Price Risk — The Company routinely uses precious metals in the manufacturing of its products. Supplies for such commodities may from time-to-time become restricted, or general market factors and conditions may affect pricing of such commodities. In the latter part of fiscal 2008, particularly in the fourth quarter, and in fiscal 2010, the price of gold increased precipitously, and certain of our supply chain partners began and continue to assess surcharges to compensate for the resultant increase in manufacturing costs. The Company is engaged in a project to replace gold with copper in certain of its parts to reduce this exposure. While the Company continues to attempt to mitigate the risk of similar increases in commodities-related costs, there can be no assurance that the Company will be able to successfully safeguard against potential short-term and long-term commodities price fluctuations.

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Item 4. — Controls and Procedures

The Company has carried out an evaluation under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon the Company’s evaluation, the Principal Executive Officer and Principal Financial Officer have concluded that, as of November 30, 2010, the disclosure controls and proce dures are effective to provide reasonable assurance that information required to be disclosed in the reports the Company files under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to the Company’s management, including the Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosure.

There have been no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

Item 1. — Legal Proceedings

From time to time as a normal consequence of doing business, various claims and litigation may be asserted or commenced against the Company. In particular, the Company in the ordinary course of business may receive claims that its products infringe the intellectual property of third parties, or that customers have suffered damage as a result of defective products allegedly supplied by the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages and/or invalidate its proprietary rights. Any lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management’s time and attention, and an adverse outcome of any significant ma tter could have a material adverse effect on the Company’s consolidated results of operations or cash flows in the quarter or annual period in which one or more of these matters are resolved.

On October 18, 2010, AFTG-TG, L.L.C. and Phillip M. Adams & Associates, L.L.C. (collectively, "Adams") filed a lawsuit in the United States District Court for the District of Wyoming against the Company and other semiconductor companies. Adams' Complaint alleges that the Company's products infringe twelve patents related to floppy disk controllers and that the Company misappropriated trade secrets related to detecting computer-related defects. The Complaint seeks unspecified damages (including treble damages for willful infringement and disgorgement of profits), attorneys’ fees and injunctive relief. On December 3, 2010, the Company filed a Motion to Dismiss for failure to state a claim upon which relief may be granted or, in the alternative, for improper joinder. The Company intends to vigorously defend against Adams' allegati ons.

Item 1.A. — Risk Factors

Readers of this Quarterly Report on Form 10-Q should carefully consider the risks described in the Company’s other reports filed or furnished with the SEC, including the Company’s prior and subsequent reports on Forms 10-K, 10-Q and 8-K, in connection with any evaluation of the Company’s financial position, results of operations and cash flows.

The risks and uncertainties described in the Company’s most recent Annual Report on Form 10-K, filed with the SEC as of April 28, 2010, are not the only risks facing the Company. Additional risks and uncertainties not presently known, currently deemed immaterial, or those otherwise discussed in this Quarterly Report on Form 10-Q may also affect the Company’s operations. Any of these risks, uncertainties, events or circumstances could cause the Company’s future financial condition, results of operations or cash flows to be adversely affected.

Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds

(a) None.

(b) None.

(c) Issuer Purchases of Equity Securities.

In October 1998, the Company’s Board of Directors approved a common stock repurchase program, allowing the Company to repurchase up to one million shares of its common stock on the open market or in private transactions. The Board of Directors authorized the repurchase of additional shares in one million share increments in July 2000, July 2002, November 2007 and April 2008, bringing the total authorized repurchases to five million shares as of February 28, 2009. As of November 30, 2010, the Company has repurchased approximately 4.5 million shares of its common stock at a cost of $101.2 million under this program, including 1,084,089 shares repurchased at a cost of $28.5 million in fiscal 2009, 1,165,911 shares repurchased at a cost of $40.6 million in fiscal 2008 and 253,300 shares repurchased at a cost of $6.1 million in fiscal 2 007.

The Company withheld 3,001 and 4,167 shares at a cost of $70 thousand and $95 thousand in the three and nine month periods ending November 30, 2010, respectively, as part of an ongoing program in which the Company will withhold shares from employees to fund tax withholdings required on restricted shares vesting each period.

Item 3. — Defaults Upon Senior Securities

None.

Item 4. — Removed and Reserved

Item 5. — Other Information

None.

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Item 6. — Exhibits

2.1	—	Agreement and Plan of Merger, by and between Standard Microsystems Corporation, Merger Sub and Comet Systems, Inc. dated as of January 9, 2011 incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K filed on January 10, 2011.
31.1	—	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	—	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	—	Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	—	XBRL Instance Document
101.SCH	—	XBRL Taxonomy Schema Document
101.CAL	—	XBRL Taxonomy Calculation Linkbase Document
101.LAB	—	XBRL Taxonomy Label Linkbase Document
101.PRE	—	XBRL Taxonomy Presentation Linkbase Document

40

SIGNATURE

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

STANDARD MICROSYSTEMS CORPORATION
By:	/s/ Kris Sennesael
	(Signature)
	Kris Sennesael
	Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

Date: January 10, 2011

EXHIBIT INDEX

Exhibit No.		Description
2.1	—	Agreement and Plan of Merger, by and between Standard Microsystems Corporation, Merger Sub and Comet Systems, Inc. dated as of January 9, 2011 incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K filed on January 10, 2011.
31.1	—	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	—	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	—	Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	—	XBRL Instance Document
101.SCH	—	XBRL Taxonomy Schema Document
101.CAL	—	XBRL Taxonomy Calculation Linkbase Document
101.LAB	—	XBRL Taxonomy Label Linkbase Document
101.PRE	—	XBRL Taxonomy Presentation Linkbase Document

41

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Christine King, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Standard Microsystems Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a — 15 (f) and 15d — 15 (f) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ CHRISTINE KING
	(signature)
	Christine King President and Chief Executive Officer (Principal Executive Officer)

Date: January 10, 2011

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Kris Sennesael, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Standard Microsystems Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a — 15 (f) and 15d — 15 (f) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ KRIS SENNESAEL
	(signature)
	Kris Sennesael Vice President and Chief Financial Officer (Principal Financial Officer)

Date: January 10, 2011

EX-32.1

Exhibit 32.1

CERTIFICATIONS

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Standard Microsystems Corporation (the Company), does hereby certify, to such officer’s knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended November 30, 2010 of the Company fully complies, in all material respects, with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/ CHRISTINE KING
	(signature)
	Christine King President and Chief Executive Officer (Principal Executive Officer)

By:	/s/ KRIS SENNESAEL
	(signature)
	Kris Sennesael Vice President and Chief Financial Officer (Principal Financial Officer)

Dated: January 10, 2011