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 May 31, 2009

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 (Do not check if a smaller reporting company)	Smaller reporting company o

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 June 30, 2009 there were 22,026,693 shares of the registrant’s common stock outstanding.

STANDARD MICROSYSTEMS CORPORATION
  
TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements		1
Condensed Consolidated Balance Sheets as of May 31, 2009 and February 28, 2009		1
Condensed Consolidated Statements of Operations for the Three-Month Periods Ended May 31, 2009 and 2008		2
Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended May 31, 2009 and 2008		3
Notes to Condensed Consolidated Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3. Quantitative and Qualitative Disclosures About Market Risk		27
Item 4. Controls and Procedures		28
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		29
Item 1A. Risk Factors		29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3. Defaults Upon Senior Securities		30
Item 4. Submission of Matters to a Vote of Security Holders		30
Item 5. Other Information		30
Item 6. Exhibits		30
Signature		31
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

i

PART I

Item 1. — Financial Statements

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

	May 31, 2009		February 28, 2009
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	108,681	$	97,156
Accounts receivable, net		37,058		26,799
Inventories		45,508		53,413
Deferred income taxes, net		18,092		14,155
Other current assets		9,374		13,658
Total current assets		218,713		205,181
Property, plant and equipment, net		65,107		65,635
Goodwill		44,321		44,321
Intangible assets, net		27,841		27,413
Long-term investments		62,474		69,223
Deferred income taxes		16,198		14,123
Other assets		3,741		3,790
Total assets	$	438,395	$	429,686
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	18,273	$	12,881
Deferred income on shipments to distributors		14,620		11,278
Accrued expenses, income taxes and other liabilities		36,217		35,136
Total current liabilities		69,110		59,295
Deferred income taxes		6,462		5,958
Other liabilities		15,891		15,625
Commitments and contingencies
Shareholders’ equity:
Preferred stock		—		—
Common stock		2,646		2,642
Additional paid-in capital		327,839		325,596
Retained earnings		115,446		124,642
Treasury stock, at cost		(101,199 )		(101,199 )
Accumulated other comprehensive income (loss)		2,200		(2,873 )
Total shareholders’ equity		346,932		348,808
Total liabilities and shareholders’ equity	$	438,395	$	429,686

 
 
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 May 31,
	2009		2008
	(Unaudited)
Product sales	$	62,472	$	89,762
Intellectual property revenues		7		3,028
Sales and revenues		62,479		92,790
Costs of goods sold		34,680		45,646
Gross profit		27,799		47,144
Operating expenses:
Research and development		18,466		18,335
Selling, general and administrative		21,659		24,092
Restructuring charges		221		—
Settlement charge		2,050		—
(Loss) income from operations		(14,597 )		4,717
Interest income		430		1,743
Interest expense		(20 )		(72 )
Other expense, net		(294 )		(155 )
(Loss) income before income taxes		(14,481 )		6,233
(Benefit) provision for income taxes		(5,285 )		1,755
Net (loss) income	$	(9,196 )	$	4,478
Basic net (loss) income per share:	$	(0.42 )	$	0.20
Diluted net (loss) income per share:	$	(0.42 )	$	0.20
Weighted average common shares outstanding:
Basic		21,901		22,456
Diluted		21,901		22,887

 
 
See Accompanying Notes to Condensed Consolidated Financial Statements

2

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	Three Months Ended May 31,
	2009			2008
	(Unaudited)
Cash flows from operating activities:
Net (loss) income	$	(9,196 )		$	4,478
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		5,301			5,192
Foreign exchange gains		(23 )			(98 )
Excess tax benefits from stock-based compensation		(1	)		(342 )
Stock-based compensation		5,890			5,575
Deferred income taxes		(5,892 )			(270 )
Loss on sale of property, plant, and equipment		13			—
Deferred income on shipments to distributors		3,342			(3,324 )
Non cash restructuring charges		221			—
Settlement charge		2,050			—
Provision for sales returns and allowances		79			—
Other adjustments, net		—			(95 )
Changes in operating assets and liabilities:
Accounts receivable		(9,874 )			6,310
Inventories		9,008			(2,777 )
Accounts payable, accrued expenses and other liabilities		1,694			(4,406 )
Accrued restructuring charges		(4,187 )			—
Income taxes payable		5,039			1,158
Other changes, net		(55 )			(1,909 )
Net cash provided by operating activities		3,409			9,492
Cash flows from investing activities:
Capital expenditures		(1,211 )			(2,808 )
Sales of investments		8,000			21,000
Net cash provided by investing activities		6,789			18,192
Cash flows from financing activities:
Excess tax benefits from stock-based compensation		1			342
Proceeds from issuance of common stock		541			809
Purchases of treasury stock		—			(10,734 )
Repayments of obligations under capital leases and notes payable		(506 )			(684 )
Net cash provided by (used in) financing activities		36			(10,267 )
Effect of foreign exchange rate changes on cash and cash equivalents		1,291			572
Net increase in cash and cash equivalents		11,525			17,989
Cash and cash equivalents at beginning of period		97,156			61,641
Cash and cash equivalents at end of period	$	108,681		$	79,630

 
 
See Accompanying Notes to Condensed Consolidated Financial Statements

3

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial information of Standard Microsystems Corporation and subsidiaries (“SMSC” or the “Company”) has 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”), and reflects all adjustments, consisting only of normal recurring adjustments, which in management’s opinion are necessary to state fairly the Company’s financial position as of May 31, 2009, results of operations for the three-month periods ended May 31, 2009 and 2008 and cash flows for the three-month periods ended May 31, 2009 and 2008. The February 28, 2009 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 financial statements.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended February 28, 2009 included in the Company’s Annual Report on Form 10-K, as filed on April 28, 2009 with the SEC (the “Fiscal 2009 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 2010 presentation. Specifically, the Company added the caption of gross profit to the consolidated statements of operations in the fourth quarter of fiscal 2009 and reclassified the amortization of intangibles previously shown separately to costs of goods sold for the amortization of technology intangible assets and selling, general and administrative expenses for the amortization of customer relationships and other intangible assets for all periods presented. In addition, the Company reclassified and revised certain components of the Consolidated Statement of Cash Flows for fiscal 2009 to conform to the current presentation.

2. Fair Value

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”) 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. When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider 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, such as 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.

SFAS 157 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 must be grouped, based upon significant levels of inputs as follows:

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

4

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Fair Value  – (continued)

• 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 May 31, 2009 and February 28, 2009 (in thousands):

May 31, 2009	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Aggregate Fair Value		Classification on Balance Sheet
									Short-Term Investments		Long-Term Investments
Equity Securities	$	143	$	—	$	(69 )	$	74	$	—	$	74
Auction Rate Securities		68,250		—		(5,850 )		62,400		—		62,400
Money Market Funds		100,005		—		—		100,005		—		—
	$	168,398	$	—	$	(5,919 )	$	162,479	$	—	$	62,474

February 28, 2009	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Aggregate Fair Value		Classification on Balance Sheet
									Short-Term Investments		Long-Term Investments
Equity Securities	$	143	$	—	$	(86 )	$	57	$	—	$	57
Auction Rate Securities		76,250		—		(7,084 )		69,166		—		69,166
Money Market Funds		74,397		—		—		74,397		—		—
	$	150,790	$	—	$	(7,170 )	$	143,620	$	—	$	69,233

The Company classifies all marketable debt and equity securities with remaining contractual maturities of greater than one year as long-term investments. As of May 31, 2009 the Company held approximately $62.4 million of investments in auction rate securities (net of $5.9 million in unrealized losses) with maturities ranging from 1 to 32 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 May 31, 2009, 100% 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 May 31, 2009 by contractual maturity are shown below (in thousands):

	Cost		Estimated Fair Value
Due in one year or less	$	—	$	—
Due in one year through five years		16,000		15,138
Due in five years through ten years		—		—
Due in ten through twenty years		17,400		15,776
Due in over twenty years		34,850		31,486
Total	$	68,250	$	62,400

5

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Fair Value  – (continued)

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, including investments, equity securities, cash surrender value of life insurance policies and cash equivalents at May 31, 2009 (in thousands):

	Total Fair Value at 5/31/2009		Fair Value Measurements at Report Date Using
			Level 1		Level 2		Level 3
Assets:
Equity Securities	$	74	$	74	$	—	$	—
Auction rate securities		62,400		—		850		61,550
Money market funds		100,005		100,005		—		—
Other assets-cash surrender value		1,665		—		1,665		—
Total Assets:	$	164,144	$	100,079	$	2,515	$	61,550
Net	$	164,144	$	100,079	$	2,515	$	61,550

At May 31, 2009, the Company grouped money market funds and equity securities using a Level 1 valuation because market prices are readily available. Level 2 financial assets and liabilities represent the fair value of cash surrender value of life insurance as well as auction rate securities that have been redeemed at par subsequent to the May 31, 2009 reporting date. At May 31, 2009, 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.

The table below includes a roll forward of the Company’s investments in auction rate securities from March 1, 2009 to May 31, 2009, and the reclassification of these investments in the hierarchy. 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 table reflects the activity for the Company’s major classes of assets measured at fair value using Level 3 inputs (in thousands):

	Three Months Ended May 31, 2009
Balance at beginning of period	$	61,166
Transfers out to level 2 (Auction Rate Securities with market inputs)		(850	)
Transfers into level 3
Sales of Level 3 investments		—
Total gains and losses:		—
Included in earnings (realized)		—
Unrealized gains included in accumulated other comprehensive income		1,234
Balance as of May 31, 2009	$	61,550

6

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Fair Value  – (continued)

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. Due to these liquidity issues, 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 probabilities 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 May 31, 2009, the Company recorded an estimated cumulative unrealized loss of $5.9 million ($5.8 million, net of tax) related to the temporary impairment of the auction rate securities, which was included in accumulated other comprehensive (loss) income 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. The Company continues to liquidate investments in auction rate securities as opportunities arise. In the three-months ended May 31, 2009, $8.0 million in auction rate securities were liquidated at par in connection with 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 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 consolidated statements of operations, and any such impairment adjustments may be material.

3. Recent Accounting Pronouncements

In April 2009, the FASB issued three related Staff Positions: (i) FSP 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”); (ii) SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and FSP 124-2”); and (iii) SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107 and APB 28-1”), which will be effective for interim and annual periods ending after June 15, 2009 (SMSC’s fiscal quarter ending August 31, 2009). FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If it were concluded that there has been a significant decrease in the

7

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. Recent Accounting Pronouncements  – (continued)

volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value. In such instances, changes in valuation techniques or the use of multiple valuation techniques may be appropriate. FSP 115-2 and FSP 124-2 modify the requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such securities, by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP 107 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS 157 for both interim and annual periods. We are currently evaluating the impact of the adoption of these Staff Positions on the Company’s consolidated financial statements.

4. Comprehensive Income

The Company’s other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, unrealized gains and losses on investments classified as available-for-sale, and changes in minimum pension liability adjustments.

The components of the Company’s comprehensive (loss) income for the three-month periods ended May 31, 2009 and 2008 were as follows (in thousands):

	Three Months Ended May 31,
	2009			2008
Net (loss) income	$	(9,196	)	$	4,478
Other comprehensive income:
Change in foreign currency translation adjustments		3,828			3,760
Change in unrealized gain (loss) on investments, net of taxes		1,244			(1,955 )
Change in minimum pension liability adjustment, net of taxes		—			112
Total comprehensive (loss) income	$	(4,124 )		$	6,395

The components of the Company’s accumulated other comprehensive (loss) income as of May 31, 2009 and February 28, 2009, net of taxes, were as follows (in thousands):

	May 31, 2009		February 28, 2009
Unrealized losses on investments	$	(5,790 )	$	(7,035 )
Foreign currency items		7,795		3,967
Minimum pension liability adjustment		195		195
Total accumulated other comprehensive income (loss)	$	2,200	$	(2,873 )

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.

8

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. Net Income (Loss) Per Share  – (continued)

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 May 31,
	2009		2008
Average shares outstanding for basic net income per share		21,901		22,456
Dilutive effect of stock options and unvested restricted stock awards		—		431
Average shares outstanding for diluted net income per share		21,901		22,887

Options covering 3.7 million and 0.7 million shares for the three month periods ended May 31, 2009 and 2008, respectively, were excluded from the computation of average shares outstanding for diluted net income (loss) per share because their effect was antidilutive.

6. Investments

Long-term investments consist of AAA rated auction rate securities (most of which are backed by U.S. Federal or state and municipal government guarantees — see Note 2) 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 underlying terms of these securities, in most cases where auctions fail, the investor is entitled to higher interest rates to compensate for the lack of liquidity.

7. Goodwill and Intangible Assets

The Company’s March 2005 acquisition of OASIS Silicon Systems 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 of these intangible assets, or portions thereof, are denominated in currencies other than the U.S. dollar, and these March 2005 values reflect foreign exchange rates in effect on the date of the transaction. 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.

In accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), goodwill is not amortized, but is tested for impairment in value at least annually, or when events or circumstances indicate possible impairment in value. The Company performs an annual goodwill impairment assessment during the fourth quarter of each fiscal year, and completed its most recent annual review during the fourth quarter of fiscal 2009. Based on this assessment, the Company recorded a charge of $52.3 million as of February 28, 2009, as previously outlined in its Fiscal 2009 Form 10-K.

The primary factors contributing to this impairment charge were: the recent significant economic downturn, which caused a decline in the automotive market; an increase in implied discount rate due to higher risk premiums; and, the decline in the Company’s market capitalization. Management adjusted the assumptions used to assess the estimated fair value of the reporting unit to account for these macroeconomic changes.

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 eight years, with a weighted-average useful life of approximately eight years. Customer relationships and contracts have been assigned useful lives of between one and ten years, with a weighted-average useful life of approximately eight years.

9

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. Goodwill and Intangible Assets  – (continued)

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. As of May 31 and February 28, 2009, the Company’s identifiable intangible assets consisted of the following (in thousands):

	5/31/2009				2/28/2009
	Cost		Accumulated Amortization		Cost		Accumulated Amortization
Purchased technologies	$	39,934	$	23,760	$	38,309	$	21,909
Customer relationships and contracts		11,646		6,124		10,663		5,281
Other		809		526		734		458
Total – finite-lived intangible assets		52,389		30,410		49,706		27,648
Trademarks		5,862		—		5,355		—
	$	58,251	$	30,410	$	55,061	$	27,648

Total amortization expense recorded for finite-lived intangible assets was $1.5 million for the three month period ended May 31, 2009 and $1.8 million for the three month period ended May 31, 2008.

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

Period	Amount
Remainder of Fiscal 2010	$	4,310
Fiscal 2011	$	5,723
Fiscal 2012	$	5,701
Fiscal 2013	$	5,669
Fiscal 2014	$	496
Fiscal 2015 and thereafter	$	80

8. Other Balance Sheet Data

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

	May 31, 2009		February 28, 2009
Raw materials	$	1,430	$	1,476
Work-in-process		16,910		16,926
Finished goods		27,168		35,011
	$	45,508	$	53,413

Property, plant and equipment (in thousands):

	May 31, 2009			February 28, 2009
Land	$	578		$	578
Buildings and improvements		37,628			38,038
Machinery and equipment		116,039			112,397
		154,245			151,013
Less: accumulated depreciation		(89,138	)		(85,378	)
	$	65,107		$	65,635

10

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8. Other Balance Sheet Data  – (continued)

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

	May 31, 2009		February 28, 2009
Compensation, incentives and benefits	$	7,924	$	10,108
Stock appreciation rights		10,601		6,574
Supplier financing – current portion		3,131		2,583
Restructuring Charges		1,198		5,385
Accrued rent obligations		3,133		2,876
Income taxes		910		415
Other		9,320		7,195
	$	36,217	$	35,136

Other liabilities (in thousands):

	May 31, 2009		February 28, 2009
Retirement benefits	$	7,973	$	8,253
Income taxes		5,445		5,311
Supplier financing – long-term portion		2,285		1,884
Other		188		177
	$	15,891	$	15,625

9. Deferred Income on Shipments to Distributors

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 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 consolidated Statements of Operations will typically 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):

	May 31, 2009			February 28, 2009
Deferred Sales Revenue	$	20,444		$	16,782
Deferred COGS		(4,060	)		(3,394	)
Provisions for Sales Returns		886			650
Distributor Advances on Price Allowances		(2,650	)		(2,760	)
	$	14,620		$	11,278

11

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10. Common Stock Repurchase Program

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 May 31, 2009, 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 2007.

The Company did not repurchase any shares in the first quarter of fiscal 2010.

11. Other Income (Expense), Net

The components of the Company’s other income (expense) for the three-month periods ended May 31, 2009 and 2008, respectively, consisted of the following (in thousands):

	Three Months Ended May 31,
	2009			2008
Realized and unrealized foreign currency transaction losses	$	(283	)	$	(249	)
Losses on disposal of property		(13	)		(1	)
Other miscellaneous income		2			95
	$	(294	)	$	(155	)

12. Income Taxes

The Company increased its reserves for liabilities for uncertain tax positions for the three month period ended May 31, 2009 by $0.1 million in connection with deductions expected to be taken in its fiscal 2010 U.S. federal income tax return. 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 May 31, 2010, and 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 three month period ended May 31, 2009, the Company provided $0.1 million for interest and penalties.

The Company files U.S. federal, U.S. state, and foreign tax returns, and is generally no longer subject to tax examinations for fiscal years prior to 2006 (in the case of certain foreign tax returns, calendar year 2004).

13. Restructuring

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 SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (“SFAS 88”) relating

12

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

13. Restructuring  – (continued)

to the voluntary retirement program. An additional $0.2 million was recorded during the first quarter of fiscal 2010 for two full-time employees who elected to accept these benefits subsequent to February 28, 2009 and for other related expenses.

A reserve for restructuring charges in the amount of $1.2 million is included on the Company’s balance sheet as of May 31, 2009, which includes the restructuring charge and other previously accrued amounts to be settled in connection with these employee separations.

The following table summarizes the activity related to the accrual for restructuring charges for the quarter ended May 31, 2009 (in thousands):

	March 1, 2009 Accrual		Charges		Payments		Reclasses		Non-Cash Items		May 31, 2009 Accrual
Q4 Fiscal 2009 Restructuring Plan		$5,385		$221		($4,145)		($277)		$14		$1,198

The company expects to complete payment of the remaining fiscal 2009 restructuring charges by the end of the second quarter of fiscal 2011.

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 are granted to employees and directors. Stock Options, restricted stock awards and stock appreciation rights are granted with exercise prices not less than the fair value of the underlying shares on the date of grant.

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 SFAS No. 123R (revised 2004), Share-Based Payments (“SFAS 123R”) included in our condensed consolidated statements of operations (in thousands):

	Three Months Ended May 31,
	2009		2008
Costs of goods sold	$	625	$	530
Research and development		1,560		1,778
Selling, general and administrative		3,651		3,785
Stock-based compensation expense under SFAS 123R, before income tax (provision) benefit		5,836		6,093
Tax benefit		2,101		2,193
Stock-based compensation expense under SFAS 123R, after income tax (provision) benefit	$	3,735	$	3,900

Employee and Director Stock Option Plans

Under the Company’s various stock option plans, the Compensation Committee of the Board of Directors is authorized to grant options to purchase shares of common stock. The purpose of these plans 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. Options under inducement plans may only be offered to new employees. Options are granted at prices not less than the fair market value on the date of grant. As of May 31, 2009, 490,576 shares of common stock were available for future grants of stock options (as adjusted for the most recent plan amendment, effective April 30, 2008), of which 355,974 shares

13

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14. Benefit and Incentive Plans (Including Share-Based Payments)  – (continued)

can also be issued as restricted stock awards. 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.

Stock option plan activity for the three-months ended May 31, 2009 is summarized below (shares and intrinsic value in thousands):

	Fiscal 2010 Shares			Weighted Average Exercise Prices Per Share		Weighted Average Contractual Term		Aggregate Intrinsic Value
Options outstanding, March 1, 2009		3,700		$	22.40
Granted		112		$	15.39
Exercised		(16	)	$	14.98
Canceled, forfeited or expired		(116	)	$	24.89
Options outstanding, May 31, 2009		3,680		$	22.14		6.2	$	3,279
Options exercisable, May 31, 2009		2,127		$	21.09		4.7	$	2,311

The total remaining unrecognized compensation cost related to SMSC’s employee and director stock option plans is $15.4 million as of May 31, 2009. The weighted-average period over which the cost is expected to be recognized is 1.96 years.

The Company recognizes compensation expense for 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.

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

	Three Months Ended May 31,
	2009			2008
Dividend yield		—			—
Expected volatility		50	%		49	%
Risk-free interest rates		2.13	%		3.07	%
Expected lives (in years)		5.01			4.88

Restricted Stock Awards

The Company provides restricted stock awards to certain officers and key employees. The Company grants these awards, at its discretion, 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%, 25% and 50% increments on the first, second and third anniversaries of the grant date of the award, respectively, and are distributed provided the employee has remained employed by the Company through such anniversary dates; otherwise the unearned shares are forfeited. The grant date fair value of these shares at the date of award is recorded as compensation expense over the service period, as adjusted for forfeitures of unvested awards.

14

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14. Benefit and Incentive Plans (Including Share-Based Payments)  – (continued)

Restricted stock activity for the three-months ended May 31, 2009 is set forth below (shares in thousands):

	Number of Shares			Average Grant-Date Fair Value
Restricted stock shares outstanding, March 1, 2009		143		$	28.25
Granted		15		$	16.23
Canceled or expired		(3	)	$	29.33
Vested		(25	)	$	28.09
Restricted stock shares outstanding, May 31, 2009		130		$	26.83

The total unrecognized compensation cost related to SMSC’s restricted stock plans is $2.4 million as of May 31, 2009. The weighted-average period over which the cost is expected to be recognized is 1.89 years.

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, upon 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 Director stock appreciation rights 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.

Activity under the Stock Appreciation Rights Plans for the three-months ended May 31, 2009 is set forth below (shares and intrinsic value in thousands):

	Fiscal 2010 Shares			Weighted Average Exercise Prices Per Share		Weighted Average Contractual Term		Aggregate Intrinsic Value
Stock appreciation rights outstanding, March 1, 2009		3,852		$	27.22
Granted		1,154		$	17.02
Exercised		(4	)	$	17.10
Canceled or expired		(80	)	$	27.55
Stock appreciation rights outstanding, May 31, 2009		4,922		$	24.83		8.12	$	3,280
Stock appreciation rights exercisable, May 31, 2009		1,586		$	26.39		6.81	$	746

15

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14. Benefit and Incentive Plans (Including Share-Based Payments)  – (continued)

The total unrecognized compensation cost related to SMSC’s Stock Appreciation Rights Plans is $21.6 million as of May 31, 2009. The weighted-average period over which the cost is expected to be recognized is 1.90 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 May 31,
	2009		2008
Dividend yield		—		—
Expected volatility		45 – 60%		49%
Risk-free interest rates		0.49 – 2.20%		2.09 – 3.07%
Expected lives (in years)		0.87 – 6.22		1.21 – 4.84

Retirement Plans

The Company maintains an unfunded Supplemental Executive Retirement Plan to provide 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 periods ended May 31, 2009 and 2008, respectively (in thousands):

	Three Months Ended May 31,
	2009		2008
Components of net periodic benefit costs:
Service cost – benefits earned during the period	$	108	$	118
Service cost – benefits forfeited during the period		—		(140	)
Interest cost on projected benefit obligations		116		105
Amortization of net obligation		—		61
Net periodic pension expense	$	224	$	144

	May 31, 2009			February 28, 2009
Amounts recognized in accumulated other comprehensive income:
Transition obligation	$	1		$	1
Net income		(302	)		(302	)
Prior service cost		—			—
Total amount recognized in accumulated other comprehensive income	$	(301	)	$	(301	)

Annual benefit payments under these plans are expected to be approximately $0.6 million in fiscal 2010.

Additionally, the Company is the beneficiary of life insurance policies that have been purchased as a method of partially financing benefits under the Supplemental Executive Retirement Plan.

16

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

15. Commitments and Contingencies

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 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.

United States Customs Liability Payment

On July 6, 2006 SMSC made a prior disclosure to the United States Commissioner of Customs (“Customs”) pursuant to 19 C.F.R. §162.74 related to SMSC’s learning that in certain cases it has not declared the full value or costs of assets provided by SMSC to its foreign suppliers. SMSC conducted a comprehensive review of its customs entries over the past five years and determined the amount of the additional fees. SMSC filed with Customs on October 4, 2006 an updated disclosure, and tendered to Customs approximately $0.4 million for these prior periods.

OPTi, Inc. Patent Infringement Lawsuit

On July 3, 2007, OPTi, Inc. (“OPTi”) filed a lawsuit in the United States District Court for the Eastern District of Texas against the Company, Advanced Micro Devices, Inc., Atmel Corporation, Broadcom Corporation, Renesas Technology America, Inc., Silicon Storage Technology, Inc., STMicroelectronics, Inc., and Via Technology, Inc. OPTi’s Complaint alleges that the Company’s Low Pin Count products infringe two patents and seeks unspecified damages (including treble damages for willful infringement), attorneys’ fees and injunctive relief. On September 5, 2007, the Company answered the Complaint, denying OPTi’s allegations and asserting counterclaims for declaratory judgments of invalidity, unenforceability and noninfringement of the two patents-in-suit. The Company has taken a charge of $2.1 million in the first quarter of fiscal 2010 which is the amount it anticipates will be sufficient to settle this matter.

16. Supplemental Cash Flow Disclosures

The Company acquired software and other tools used in product design through long-term financing provided by suppliers. The Company had $5.4 million and $6.0 million of outstanding balances due under such arrangements as of May 31, 2009 and 2008, respectively. During fiscal 2010 the Company acquired $1.5 million of software through supplier provided financing. None was acquired in the three-month period ended May 31, 2008. The Company made cash payments in respect of obligations under supplier financing arrangements of $0.5 million and $0.7 million for the three-month periods ended May 31, 2009 and 2008, respectively. The Company received federal, state and foreign tax refunds of $4.7 million for the three-month period ending May 31, 2009, and the Company made cash payments for federal, state and foreign income taxes payable of $1.0 million for the three month period, ending May 31, 2008.

17. Operating Segment Information

As a consequence of the Company’s focus on developing products that can address multiple end markets and market demand for products that contain more than one element of SMSC’s technology solutions, and the impact that these trends have had on the management of the Company’s business and internal reporting, since the quarter ending November 30, 2005 the Company has concluded that it operates and reports as a single business segment — the design, development, and marketing of semiconductor integrated circuits. This change

17

STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

17. Operating Segment Information  – (continued)

had no impact on the Company’s disclosure because it previously aggregated the results of operating segments into one reportable segment under the aggregation criteria set forth in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”.

18. Subsequent Event

The Company announced on June 25, 2009 that as a result of global economic conditions and to improve its cost competitiveness and strategic flexibility, the Company’s Board of Directors approved management’s plan to reduce its workforce by approximately sixty-four employees over the next two to nine months 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 Asia. The Company estimates that these measures will result in accounting charges totaling approximately $6.0 million to $7.0 million over the remaining three quarters of fiscal year 2010. These charges are expected to consist primarily of severance, implementation costs, accelerated depreciation of test equipment and potential adjustments to certain deferred tax assets. The Company estimates that cash payments associated with these programs will approximate $2.5 million and will most likely be made in the third and fourth quarters of fiscal year 2010 and expects these activities to be completed no later than the fourth quarter of fiscal year 2010.

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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended May 31, 2009

Item 2. — Management’s Discussion and Analysis of Financial Conditions 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”) 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. These risks and uncertainties may cause the Company’s actual future results to be materially different from those discussed in forward-looking statements. 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 industry, 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 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 “SEC”). 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 signal processing attributes that are incorporated by its globally diverse customers into numerous end products in the Consumer Electronics, Automotive, Mobile PC, Desktop PC and Industrial markets. These products generally provide connectivity, networking, or input/output control solutions 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

19

increasingly used in various combinations and in alternative applications SMSC is headquartered in Hauppauge, New York with operations in North America, Taiwan, Japan, Korea, Singapore, China and Europe. Engineering design centers are located in Arizona, New York, Texas and Karlsruhe, Germany. Additional information is available at www.smsc.com.

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.

The preparation of financial statements in conformity with U.S. GAAP and SEC 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

• Valuation of Long-Lived Assets

• 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, 2009, as filed with the SEC on April 28, 2009. During the three-month period ended May 31, 2009, there were no significant changes to any critical accounting policies or to the related estimates and judgments involved in applying those policies.

Results of Operations

Overview

Net revenue, gross profit, operating (loss) income, and net (loss) income for the three months ended May 31, 2009, February 28, 2009 and May 31, 2008 were as follows (in thousands):

	Three Months Ended May 31, 2009			Three Months Ended February 28, 2009			Three Months Ended May 31, 2008
Sales and revenues	$	62,479		$	51,241		$	92,790
Gross profit	$	27,799		$	21,753		$	47,144
Operating (loss) income	$	(14,597	)	$	(78,752	)	$	4,717
Net (loss) income	$	(9,196	)	$	(71,643	)	$	4,478

Sales and revenues the first quarter of fiscal 2010 were $62.5 million, an increase of $11.2 million or 22% sequentially over the prior quarter ended February 28, 2009. The primary growth driver was PC product sales, which were up over 60% sequentially. This growth occurred mainly in both North America and Asia. The Company expects sales and revenues to increase further sequentially in the second quarter of 2010.

20

Sales and revenue decreased $30.3 million or 32.7% from sales and revenues of $92.8 million in the first quarter of the prior fiscal year, primarily due to the continuing global economic downturn in the PC and automotive markets, as well as the reduction in intellectual property revenues from Intel Corporation of $3.0 million per quarter as payments pursuant to this agreement ceased with receipt of the final payment in the third quarter of fiscal 2009. While demand for our PC products has increased significantly over the prior quarter, the Company is still expecting continuing weakness in demand as compared to prior year levels, particularly in the automotive and industrial markets, in the current quarter.

The Company reported a gross profit of $27.8 million or 44.5% of sales and revenues for the first quarter of fiscal 2010, an increase $6.0 million or 200 basis points, compared to gross profit of $21.8 million or 42.5% of sales and revenues in the prior quarter ended February 28, 2009. While product mix was unfavorable due to shipping more of our analog products, which have gross margins slightly below the corporate average, we gained the benefit of more activity and the cost reductions we have completed. Gross profit in the first quarter of fiscal 2010 of $27.8 million decreased $19.3 million compared to gross profit of $47.1 million, or 50.8% of sales and revenues in the first quarter of the prior fiscal year, primarily due to the decrease in production levels in response to lower demand and our inventory reduction initiatives which led to significant unabsorbed manufacturing overhead costs, as well as the reduction in intellectual property revenues of $3.0 million as noted above.

An operating loss of $14.6 million was generated in the first quarter of fiscal 2010 compared to an operating loss of $78.8 million in the prior quarter ended February 28, 2009, and operating income of $4.7 million in the first quarter of the prior year. The significant decline in operating loss compared to the prior quarter ended February 28, 2009 was due to the increase in revenue sequentially over the prior quarter as well as the benefit of cost reductions we have completed. The prior quarter also included a goodwill impairment charge of $52.3 million and restructuring charges of $5.2 million. The significant decline in operating income compared to the first quarter of the prior fiscal year ended May 31, 2008 was primarily attributable to the year over year decrease in product sales volume in the first quarter of fiscal 2010, a charge of $2.1 million in anticipation of the settlement of the OPTi, Inc. patent infringement lawsuit against the Company, as well as the reduction in intellectual property revenues of $3.0 million as noted above.

Net loss in the first quarter of fiscal 2010 was $9.2 million, compared to a net loss of $71.6 million in the prior quarter ended February 28, 2009, and net income of $4.5 million in the first quarter of the prior fiscal year, primarily due to the factors mentioned above, as well as the significant decrease in interest income, from $1.7 million in the first quarter of fiscal 2009 to $0.4 million in the first quarter of fiscal 2010. This 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, as well as lower market interest rates as compared to the first quarter of the prior fiscal year.

Sales and Revenues

The Company’s sales and revenues for the first quarter of fiscal 2010 were $62.5 million, compared to sales and revenues of $92.8 million in the first quarter of the prior year, which consisted of $89.8 million of product sales and $3.0 million of intellectual property revenues. This 32.7% decrease for the Company as a whole derives from substantial decreases in shipping volumes, particularly in the PC, automotive and industrial product lines, and is a reflection of the continuing recent economic downturn. However, end customer demand has strengthened sequentially over the prior quarter in the PC market, particularly in commercial and low-end notebook sales, as well as in new analog products designed for PCs. The overall revenue decrease compared to the prior year is also due, in part, to the reduction in intellectual property revenues of $3.0 million as noted above.

Costs of Goods Sold

Costs of goods sold 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.

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The Company reported a gross profit of $27.8 million or 44.5% of sales and revenues for the first quarter of fiscal 2010, a decrease of $19.3 million, compared to gross profit of $47.1 million, or 50.8% of sales and revenues in the first quarter of fiscal 2009. The decrease in gross profit as a percentage of sales and revenues in the first quarter of the current fiscal year compared to the first quarter of the prior fiscal year was primarily due to the decrease in production levels in response to lower demand and our inventory reduction initiatives which led to significant unabsorbed manufacturing overhead costs. Additionally, gross profit was impacted by the decrease in intellectual property revenues of $3.0 million in the first quarter of fiscal 2010, as Intel payments ceased with receipt of the final payment in the third quarter of fiscal 2009.

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 blocks of logic; and investment in new product offerings based on converging 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.

R&D expenses were $18.5 million and $18.3 million in the first quarter of fiscal 2010 and fiscal 2009, respectively, growing from approximately 19.8% to 29.6% of sales and revenues. Expense increases of $0.4 million over the first quarter of fiscal 2009 were partially offset by a reduction in stock-based compensation pursuant to SFAS 123R, which decreased from $1.8 million in the first quarter of fiscal 2009 to $1.6 million in the first quarter of fiscal 2010.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses consist primarily of sales, marketing, finance (including compliance costs), information technology, legal, human resources management and other executive and administrative costs. SG&A expenses were $21.7 million, or approximately 34.7% of sales and revenues, for the first quarter of fiscal 2010, compared to $24.1 million, or approximately 26.0% of sales and revenues, for the first quarter of fiscal 2009. SG&A expenses decreased $2.4 million, as a result of corporate cost saving initiatives, including the restructuring plan initiated in the fourth quarter on fiscal 2009. Net charges of $3.7 million relating to stock-based compensation pursuant to SFAS 123R are included in the first quarter of fiscal 2010, compared to $3.8 million in charges related to stock-based compensation in the first quarter of the prior year.

Restructuring Charges

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 in the fourth quarter of fiscal 2009. An additional $0.2 million was incurred in the first quarter of fiscal 2010 for two full-time employees who elected to accept these benefits subsequent to February 28, 2009 and for other related expenses. This represents the final charge relating to this restructuring plan.

Settlement Charge

A charge of $2.1 million in anticipation of the settlement of the OPTi, Inc. patent infringement lawsuit against the Company was recognized in the first quarter of fiscal 2010.

Interest and Other (Expense) Income

The decrease in interest income, from $1.7 million in the first quarter of fiscal 2009 to $0.4 million in the first quarter of fiscal 2010, 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

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conditions. Funds from liquidated auction rate securities investments as well as funds generated through operating activities are earning lower average rates of return. The Company is currently investing in money market funds, and certain high quality fixed income securities with a double AA rating or better and ample market liquidity.

Interest expense remained relatively flat in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. The increase in other expense in the first quarter of fiscal 2010 consisted primarily of foreign exchange rate losses on U.S. dollar transactions of SMSC Europe, due to the significant strengthening of the euro vs. the U.S. dollar in the first quarter of fiscal 2010. The Company has taken action in the fourth quarter of fiscal 2009 to minimize the impact of such fluctuations going forward, primarily limiting the amount of U.S. dollar monetary assets held by SMSC Europe.

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 income tax credits.

The benefit from income taxes for the three-month period ended May 31, 2009, was $5.3 million, or an effective income tax rate of 36.5% against $14.5 million of losses before income taxes. This tax provision included the impact of $0.1 million from tax-exempt income and a $0.1 million increase in reserves for uncertain tax positions. Legislation was passed in October, 2008 extending income tax credits related to qualified research and development expenditures in the U.S. incurred through December 31, 2009. Consequently, the effective tax rate for fiscal year 2010 includes ten months of qualified R&D expenditures.

The provision for income taxes for the three-month period ended May 31, 2008 was $1.8 million or an effective income tax rate of 28.2% against $6.2 million of income before income taxes. This provision for the three month period ended May 31, 2008 included the impact of $0.4 million from tax exempt income and the reversal of approximately $0.2 million of interest and penalties accrued in respect of tax exposures attributable to prior periods.

Business Outlook

The Company believes that current macroeconomic conditions and corresponding weakness in semiconductor demand remains challenged, however there has been some improvement since the end of the year. The Company currently anticipates that revenues for the second fiscal quarter ending August 31, 2009 will show further improvement compared to the first quarter of fiscal 2010, but will be significantly lower than revenues reported for the second fiscal quarter of the prior fiscal year.

Liquidity & Capital Resources

The Company currently finances its operations through a combination of existing cash and cash generated by operations. The Company had no bank debt during the first quarters of fiscal 2010 or 2009.

The Company’s cash, cash equivalents and long-term investments (including investments in auction rate securities with maturities in excess of one year) were $171.2 million at May 31, 2009, compared to $166.4 million at February 28, 2009. Positive cash flows from operations, partially offset by significant stock repurchases and capital expenditures in fiscal 2009 contributed to this increase. There were no investments classified as short-term as of May 31, 2009 and February 28, 2009. Operating activities generated $3.4 million of cash in the first quarter of fiscal 2010, compared to $9.5 million of cash generated in the first quarter of fiscal 2009. The decrease in operating cash flows reflect the impact of a significant decrease in revenues and operating profits in the first quarter of fiscal 2010. Accounts receivable increased significantly, commensurate with the increase in first quarter sales volume over the previous quarter, offset by a significant decrease in inventories, related to the Company’s ongoing efforts at reducing inventory levels across most product lines.

Investing activities contributed $6.8 million of cash during the first quarter of fiscal 2010, resulting from the redemption of auction rate securities totaling $8.0 million, partially offset by $1.2 million in capital expenditures. Capital expenditures decreased in the first quarter of fiscal 2010 as compared to the first quarter of the prior fiscal year due primarily to the impact of corporate cost saving initiatives, as well as the completion of

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expenditures related to test equipment for our Hauppauge test facility in fiscal 2009, which accounted for the majority of the capital expenditures in the first quarter of the prior fiscal year.

Net cash provided by financing activities was a negligible amount in the first quarter of fiscal 2010, consisting primarily of $0.5 million of payments under supplier financing arrangements, offset by $0.5 million of proceeds from exercises of stock options. Financing activities consumed $10.3 million of cash during the first quarter of fiscal 2009, including $10.7 million of stock repurchases and $0.7 million of payments under supplier financing arrangements, partially offset by $0.8 million in proceeds from exercises of stock options.

Working capital increased $3.7 million, or 2.5%, to $149.6 million in the first quarter of fiscal 2010 from the prior quarter ended February 28, 2009, primarily due to the liquidation of $8.0 million in auction rate securities in connection with issuer calls, partially offset by capital expenditures of $1.2 million, $0.5 million of payments under supplier financing arrangements and the cash payout of $4.1 million in accrued restructuring charges.

In addition, the Company also made non-cash capital investments of $1.5 million in the first quarter of fiscal 2010 for advanced design tools acquired under long-term supplier financing arrangements (typically 3 years). No advanced design tools were acquired in the first quarter of fiscal 2009. Payments under these agreements are reported within cash flows from financing activities on the consolidated statements of cash flows.

The Company received federal, state and foreign tax refunds of $4.7 million for the three-month period ending May 31, 2009. Also, the Company made cash payments for federal, state and foreign income taxes payable of $1.0 million for the three-month period ending May 31, 2008.

In April 2008, the Company’s Board of Directors authorized the repurchase of up to an additional one million shares, for a total of up to five million shares authorized under the common stock repurchase program first initiated in October 1998. Shares may be repurchased by the Company on the open market or in private transactions. During fiscal 2009 the Company repurchased 1,084,089 shares of treasury stock at an aggregate cost of $28.5 million. Through May 31, 2009 (inclusive), the Company has repurchased a total of 4,495,084 shares at an aggregate cost of $101.2 million.

The Company has considered in the past, and will continue to consider, various possible transactions to secure necessary foundry manufacturing capacity, including equity investments in, prepayments to, or deposits with foundries, in exchange for guaranteed capacity or other arrangements which address the Company’s manufacturing requirements. The Company may also 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 2010 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 Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”) 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. SFAS No. 157 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 determined 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 SFAS No. 157 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.

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As of May 31, 2009, the Company held approximately $164.1 million in financial instruments measured at fair value within the three levels of the SFAS No. 157 fair value hierarchy, including investments, equity securities, cash surrender value of life insurance policies and cash equivalents. The Company classified $61.6 million of investments in auction rate securities (net of $5.9 million in gross unrealized losses) as Level 3 under the SFAS 157 hierarchy (37% 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 May 31, 2009, 100% of the Company’s auction rate securities were “AAA” rated by one or more of the major credit rating agencies, 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.

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. Due to these liquidity issues, 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 probabilities 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 May 31, 2009, the Company recorded an estimated cumulative unrealized loss of $5.9 million ($5.8 million, net of tax) related to the temporary impairment of the auction rate securities, which was included in accumulated other comprehensive (loss) income 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. The Company continues to liquidate investments in auction rate securities as opportunities arise. In the three-months ended May 31, 2009, $8.0 million in auction rate securities were liquidated at par in connection with issuer calls. Subsequent to May 31, 2009, an additional $0.9 million in auction rate securities were redeemed at par in connection with 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. 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 consolidated statements of operations, and any such impairment adjustments may be material.

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Commitments and Contingencies

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 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.

United States Customs Liability Payment

On July 6, 2006 SMSC made a prior disclosure to the United States Commissioner of Customs (“Customs”) pursuant to 19 C.F.R. §162.74 related to SMSC’s learning that in certain cases it has not declared the full value or costs of assets provided by SMSC to its foreign suppliers. SMSC conducted a comprehensive review of its customs entries over the past five years and determined the amount of the additional fees. SMSC filed with Customs on October 4, 2006 an updated disclosure, and tendered to Customs approximately $0.4 million for these prior periods.

OPTi, Inc. Patent Infringement Lawsuit

On July 3, 2007, OPTi, Inc. (“OPTi”) filed a lawsuit in the United States District Court for the Eastern District of Texas against the Company, Advanced Micro Devices, Inc., Atmel Corporation, Broadcom Corporation, Renesas Technology America, Inc., Silicon Storage Technology, Inc., STMicroelectronics, Inc., and Via Technology, Inc. OPTi’s Complaint alleges that the Company’s Low Pin Count products infringe two patents and seeks unspecified damages (including treble damages for willful infringement), attorneys’ fees and injunctive relief. On September 5, 2007, the Company answered the Complaint, denying OPTi’s allegations and asserting counterclaims for declaratory judgments of invalidity, unenforceability and noninfringement of the two patents-in-suit. The Company has taken a charge of $2.1 million in the first quarter of fiscal 2010 which is the amount it anticipates will be sufficient to settle this matter.

Recent Accounting Pronouncements

In April 2009, the FASB issued three related Staff Positions: (i) FSP 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”); (ii) SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and FSP 124-2”); and (iii) SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107 and APB 28-1”), which will be effective for interim and annual periods ending after June 15, 2009 (SMSC’s fiscal quarter ending August 31, 2009). FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If it were concluded that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value. In such instances, changes in valuation techniques or the use of multiple valuation techniques may be appropriate. FSP 115-2 and FSP 124-2 modify the requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such securities, by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP 107 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS 157 for both interim and annual periods. We are currently evaluating the impact of the adoption of these Staff Positions on the Company’s consolidated financial statements.

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Item 3. — Quantitative and Qualitative Disclosures About Market Risk

Interest Rate 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 May 31, 2009, the Company’s $62.5 million of long-term investments (net of $5.9 million in gross unrealized losses) 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 have been reset every 90 days or less at auction, at which time the securities could also typically be repurchased or sold.

As with all fixed-income instruments and securitized investments, these investments are subject to interest rate risk and would likely decline in market value if market interest rates increase. However, if market interest rates were to increase immediately and uniformly by 10% from levels at May 31, 2009, the Company estimates that the fair values of these investments would decline by an immaterial amount. Declines in market interest rates would, over time, reduce the Company’s interest income.

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 May 31, 2009, and recorded an unrealized loss of $5.8 million, (net of tax) related to the temporary impairment of the auction rate securities, which was included in accumulated other comprehensive income within shareholders’ equity on the condensed consolidated balance sheet.

Assuming all other assumptions disclosed in Part I — Item 1. — Financial Statements in Note 2 of this quarterly 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 $1.8 million.

Equity Price Risk

The Company has no material investments in equity securities of other companies on its Consolidated Balance Sheet as of May 31, 2009.

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 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 the first three-months of fiscal 2010, and there are no obligations under any such contracts as of May 31, 2009.

Operating activities in Europe include transactions conducted in both euros and U.S. dollars. The euro has been designated as SMSC Europe’s functional currency for its European operations. Losses recorded from the remeasurement of U.S. dollar denominated assets and liabilities into euros were $0.1 million for the

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three-month period ended May 31, 2009 compared with losses of $0.2 million in the three-month period ended May 31, 2008. Losses recorded from the remeasurement of U.S. dollar denominated assets and liabilities into yen for the three-month period ended May 31, 2009 were $0.1 million, compared with gains of a negligible amount in the three-month period ended May 31, 2008.

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, the price of gold increased precipitously, and certain of our supply chain partners assessed surcharges to compensate for the resultant increase in manufacturing costs. While the Company is currently evaluating opportunities to control 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.

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 May 31, 2009, the disclosure controls and procedures 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 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 July 3, 2007, OPTi, Inc. (“OPTi”) filed a lawsuit in the United States District Court for the Eastern District of Texas against the Company, Advanced Micro Devices, Inc., Atmel Corporation, Broadcom Corporation, Renesas Technology America, Inc., Silicon Storage Technology, Inc., STMicroelectronics, Inc., and Via Technology, Inc. OPTi’s Complaint alleges that the Company’s Low Pin Count products infringe two patents and seeks unspecified damages (including treble damages for willful infringement), attorneys’ fees and injunctive relief. On September 5, 2007, the Company answered the Complaint, denying OPTi’s allegations and asserting counterclaims for declaratory judgments of invalidity, unenforceability and noninfringement of the two patents-in-suit. The Company has taken a charge of $2.1 million in the first quarter of fiscal 2010 which is the amount it anticipates will be sufficient to settle this matter.

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, 2009, are not the only ones 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.

Reliance on Third Party Production Test Facility Risk

On June 25, 2009 the Company announced that over the next eight months it will outsource to an Asian test house certain test production processes previously conducted at its Hauppauge, New York headquarters. The Company anticipates that this third party test house (Sigurd Microelectronics Corporation) will be responsible for testing the majority of the Company's parts once the transition is fully complete. The Company expects to realize certain gross margin increases and other benefits as a result of this decision. If the Company and the third party test house fail to execute this transition smoothly, or if the third party Asian test house fails to or cannot perform its services satisfactorily for any reason, the supply of parts may be delayed or interrupted. Additionally, failure of this third party to properly perform its services could result in the Company releasing parts that are defective. If the foregoing events occur, the Company's revenues and profitably could be materially adversely affected, and the Company's relationships with its customers could be damaged. The Company may also fail to realize its anticipated cost savings from this project in such cases.

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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 May 31, 2009, 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 2007.

The Company did not repurchase any shares in the first quarter of fiscal 2010.

Item 3. — Defaults Upon Senior Securities

None.

Item 4. — Submission of Matters to a Vote of Security Holders

None.

Item 5. — Other Information

None.

Item 6. — Exhibits

10.1*	—	Standard Microsystems Corporation 2006 Directors Stock Appreciation Rights Plan (As amended and restated on June 1, 2009)
10.2*	—	Standard Microsystems Corporation Plan for Deferred Compensation in Common Stock for Outside Directors (As amended and restated, effective May 22, 2009)
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.

* indicates a management or compensatory plan or arrangement.

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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/ Joseph S. Durko (Signature) Joseph S. Durko Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer)

Date: July 7, 2009

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EXHIBIT INDEX

Exhibit No.		Description
10.1*	—	Standard Microsystems Corporation 2006 Directors Stock Appreciation Rights Plan (As amended and restated on June 1, 2009)
10.2*	—	Standard Microsystems Corporation Plan for Deferred Compensation in Common Stock for Outside Directors (As amended and restated, effective May 22, 2009)
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.

* indicates a management or compensatory plan or arrangement.

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EX-10.1

Exhibit 10.1

STANDARD MICROSYSTEMS CORPORATION

2006 DIRECTORS STOCK APPRECIATION RIGHTS PLAN

(As Amended and Restated on June 1, 2009)

1. Purpose.  The purpose of this 2006 Directors Stock Appreciation Rights Plan (the “Plan” or the “SAR Plan”) of Standard Microsystems Corporation (the “Company” or “SMSC”), is to link the compensation of outside directors of the Company, whose services are considered essential to the Company’s continued progress, to the performance of SMSC stock, and to also provide them with a further incentive to continue to serve as directors of the Company.  The Plan is also intended to assist the Company through utilization of the incentives provided by the Plan to attract and retain experienced and qualified candidates to fill vacancies in the Board that may occur in the future.

2.           Administration

a. The Plan will be administered by the Board of Directors (the “Board”) of the Company.  The Board may delegate all or a portion of the administrative responsibilities for the SAR Plan to the Compensation Committee of the Board. Subject to the express provisions of the Plan, the Board will have complete authority to interpret the Plan; to prescribe, amend, and rescind rules and regulations relating to it; to determine the terms and provisions of the respective Stock Appreciation Rights (“SAR”) Agreements (which need not be identical); and to make all other determinations necessary or advisable for the administration of the Plan.  The Board’s determinations on the matters referred to in this Section 2 will be conclusive and binding on all parties.

b. No member of the Board, or any employee of the Company authorized to administer the Plan, shall be liable for any action or determination made in good faith with respect to this Plan or any SAR Grant. To the full extent permitted by law, the Company shall indemnify and hold harmless each person made or threatened to be made a party to any civil or criminal action or proceeding by reason of the fact that such person, or such person's testator or intestate, is or was a member of the Board, or an authorized employee.

3. Participation in the Plan.  Each person who is now or shall become a director of the Company and who is not, while serving as director, an employee of the Company or any Subsidiary of the Company, shall be eligible to participate in the Plan (an “Eligible Director”, hereinafter also referred to as a “Grantee”).  A director of the Company shall not be deemed to be an employee of the Company solely by reason of the existence of a consulting contract between such director and the Company or any Subsidiary thereof pursuant to which the director agrees to provide consulting services as an independent consultant to the Company or its Subsidiaries on a regular or occasional basis for a stated consideration.

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4. SAR Shares Subject to the Plan.  Subject to the provisions of Section 10 hereof, this Plan has 400,000 “hypothetical” shares (the “Shares”) of $.10 par value common stock of SMSC (the “Common Stock”) available for the granting of SARs under the Plan.  The Plan does not permit any payments for a SAR Grant to be made in the Common Stock of SMSC.

If any SARs are not granted under the Plan in whole or in part, such as if an Eligible Director should cease to be a Board member before any SAR becomes vested, “hypothetical” Shares that could have been granted or do not vest shall remain available for the granting of new SARs under the Plan.

5. General Terms and Conditions of SAR Grants

a. Form of SARs.  Each SAR granted under this Plan shall be evidenced by a written SAR Agreement in such form as the Board shall from time to time approve, which SAR Agreement shall set forth the applicable date of grant (the “Grant Date”) and shall comply with and be subject to the terms and conditions set forth in the Plan.

b. Initial SARs.  .  Any Eligible Director first elected or appointed after June 1, 2009 shall automatically be granted 28,000 Initial SARs.  All Initial SARs shall be subject to the Vesting Schedule contained in Section 5(f) below.

c. Current Service SARs.  In addition to Initial SARs, each Eligible Director shall be automatically granted SARs equal to 3,500 shares (“Current SAR Grant”) on a quarterly basis beginning after one year of incumbency for each Eligible Director who was first elected or appointed after June 1, 2009 and after three years of incumbency for all Eligible Directors first elected or appointed prior to June 1, 2009.  All shares granted pursuant to a Current SAR Grant shall be fully vested upon the first anniversary of each Grant Date.  Current Service SARs shall be granted on each January 15, April 15, July 15, and October 15 (or, if any such day shall not be a business day, then on the next succeeding business day).

d. SAR Grant Value.  All SARs granted hereunder shall have a “Grant Value” equal to the “Fair Market Value” of a share of Common Stock on the Grant Date, as defined in Section 13(f).

e. SARs Nontransferable.  Each SAR granted under the Plan by its terms shall not be transferable by the Grantee otherwise than by will, or by the laws of descent and distribution.  No SAR or interest therein may be transferred, assigned, pledged, or hypothecated by the Grantee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment, or similar process.

f. Vesting of SARs.  For all Initial SARS granted after June 1, 2009, one-half (1/2) of the number of Initial SARs granted shall vest on the first anniversary of the date of grant, and the remaining one half (1/2) shall vest on the second anniversary of the date of grant. In the event of death, Disability or any termination from the Board, the Board shall have the discretion to accelerate the vesting of any Initial or Current Service SARs.

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g. Exercise of SARs.  Any SAR, once vested, can be exercised within the complete discretion of the Grantee at any point in time prior to the expiration of any SAR.

All SAR Grants shall be exercised only in accordance with the Company’s current Trading Policy.

h. Payments Upon Exercise.  Upon the exercise of a SAR, a Grantee shall be entitled to receive an amount in cash equal to the excess of the fair market value of one share over the Grant Value per share specified in the related SAR Grant, multiplied by the number of shares in respect of which the SAR Grant is exercised. Full or fractional shares may be exercised.  Payment will be made within ten (10) business days of any exercise.

i. Termination of Grantee’s Directorship.  If a Grantee's directorship with the Company is terminated for any reason, other than by reason of death or Disability (as described in Subsections (j) and (k) below) prior to exercise, any vested SARs shall remain exercisable for a period equal to the lesser of three (3) years from the date of the termination of a Grantee’s Directorship or the outstanding exercise period for any SAR.

j. Death of Grantee.  If a Grantee’s directorship is terminated by reason of his death prior to the exercise of his SAR Grant, or if a Grantee whose directorship is terminated as a result of a Disability (as described in Subsection (k) below) shall die following the Grantee's termination of being a director, but prior to exercise of any vested SAR Grant, such SAR Grant shall be exercisable by the Grantee's Beneficiary to the extent of the number of SARs in which the Grantee was vested for a period equal to the lesser of three (3) years from the date of the termination of a Grantee’s Directorship or the outstanding exercise period for any SAR.

k. Disability of Grantee.  If a Grantee shall become Disabled during the Grantee's directorship with the Company and the Grantee's directorship with the Company is terminated as a consequence of such Disability, or if a Grantee whose directorship is terminated shall become Disabled following the Grantee’s termination of being a Director, but prior to the exercise of any vested SAR Grant, any SAR Grant shall be exercisable by the Grantee or the Grantee’s personal representative for a period equal to the lesser of three (3) years from the date of the termination of a Grantee’s Directorship or the outstanding exercise period for any SAR.

l. Delivery of Notice and Execution of SAR Grant Agreement.  Upon the determination to issue a SAR Award, the Company shall promptly issue a notice representing the Shares subject to the SAR Grant to the Grantee.  Each Grantee shall enter into, and be bound by the terms of, a SAR Grant Agreement which shall include or incorporate by reference the terms of the Plan and which shall contain such other terms, conditions and restrictions not inconsistent with the Plan as the Board shall determine.

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m. Tax Withholding.  The obligation of the Company to make payment upon any Payment Date of an SAR Grant shall be subject to all applicable Federal, state and local tax withholding requirements.  A Grantee shall be responsible for any portion of the Grantee’s tax liabilities associated with the exercise of any SAR Grants.

n. Next Business Day Rule.  To the extent that any SAR is granted on a day that is not a business day in which the NASDAQ is open, the Grant Date of any SAR shall be the next business day upon which the NASDAQ is open.

6. No Right to Continue as a Director.  Neither the Plan, the execution of any SAR Grant Agreement, nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain a director for any period of time, or at any particular rate of compensation.

7. No Stockholder’s Rights for Grantees.  A Grantee shall have no rights as a stockholder with respect to any Shares covered by SAR Grant, and no adjustments shall be made for any dividends paid before or after the exercise of any SAR.

8. No Right to Vote.  A Grantee shall have no right to vote any Shares as a result of the granting of any SAR.

9. No Right to Dividends.  A Grantee shall have no right to dividends as a result of the granting of any SARs.

10. Adjustments.  The number of Shares representing the number of SARs which may be issued under the Plan, as stated in Section 4 hereof, as well as the Grant Value per share under such outstanding SAR Awards, and the amount to be paid upon the Payment Date of any SAR, shall be suitably adjusted by the Board to reflect any stock dividend, stock split, shares combination, or similar change in the capitalization of the Company.  The Board shall use its reasonable judgment in determining a suitable adjustment.

In the event the Company is liquidated or a corporate transaction described in Section 424(a) of the Code and the Treasury Regulations issued thereunder occurs (as, for example, a merger, consolidation, acquisition of property or stock, separation or reorganization), each outstanding SAR Grant shall be assumed by the surviving or successor corporation if any.

11. Change in Control.  Notwithstanding any provisions to the contrary, in the event of a Change in Control, the Board may, within its discretion, within a period of twelve (12) months after such Change in Control, determine that each SAR Grant outstanding hereunder shall terminate within thirty (30) days after notice to the Grantees, and such Grantees shall receive, with respect to each SAR Grant, an amount equal to the excess of the Fair Market Value of such SAR Grant over the Grant Value, as determined under Section 5(d), to the extent such action is consistent with Section 409A of the Code, and any guidance issued thereunder.  Such amount shall be payable in cash.

12. Amendment or Discontinuance of the Plan.  The Board may suspend or discontinue the Plan or revise or amend it in any respect whatsoever; provided, however, that, without approval of the Grantees, no revision or amendment shall change the rights under any granted or vested SARs.

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13. Definition.  For purposes of the Plan the words and phrases used herein shall have the following meanings:

a. “Beneficiary” shall mean a Grantee’s spouse, if married, or the Grantee’s estate, if no spouse exists as of any applicable Payment Date.  A Grantee may, however, designate other individuals or entities as a Beneficiary for any payment, in accordance with procedures established by the Board.

b.           “Board” means the Board of Directors of SMSC.

c. “Change in Control” shall mean: (i) the acquisition of ownership of stock of the Company, by any person (including, without limitation, a corporation, trust, partnership, joint venture, limited liability company (a "Person") or by any group of Persons), whether directly, indirectly, beneficially or of record, in which acquisition, together with stock held by such person or group, represents more than 20% of the total voting power of all outstanding stock of the Company; (ii) any merger or consolidation of the Company which the stockholders of the Company before such merger or consolidation do not, as a result of the merger or consolidation, own at least 50% of the merger or consolidation; or (iii) any nomination and election of 50% or more of all members of the Board of Directors of the Company within a 36-month period whose election is without the recommendation of the Board.  "Change in Control" shall not include acquisition of the Company's stock by any Company employee benefit plans.

d. “Code” means the Internal Revenue Code of 1986, as amended from time to time.

e. “Disability” means a Grantee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death, or can be expected to last for a continuous period of not less than twelve (12) months.

f. “Fair Market Value” means, as of the date on which such Fair Market Value is to be determined, the closing price of a share of Common Stock as reported in The Wall Street Journal (or a publication or reporting service deemed equivalent to The Wall Street Journal for such purpose by the Board) for the over-the-counter market or any national securities exchange and other securities market which at the time are included in the stock price quotations of such publication.

g.           “SAR Grant” means an award of SARs granted under the Plan.

h. “Stock Appreciation Right” means a contractual right that allows a Grantee to receive payment for a SAR Grant equal to the value of any appreciation in the value of SMSC Common Stock over the Grant Value, as provided in Section 5(d), on the applicable exercise date.

i. “Subsidiary” means any entity as defined in Section 424(f) of the Code.

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14. Section 409A.  Section 409A of the Code was enacted as part of the American Jobs Creation Act of 2004 (“AJCA”).  The Final Regulations issued under Section 409A provide that SARs are not treated as a form of nonqualified deferred compensation, as long as the base value for each SAR is not less than the fair market value of a share of stock of service recipient at the time of grant and the right does not include any additional deferral features.  It is intended that the SAR Plan is not subject to the provisions of Section 409A, and the Plan shall be amended, if necessary, to comply with Final Regulations under Section 409A.  Notwithstanding the foregoing or anything herein to the contrary, in no event shall the Corporation be liable for any taxes or penalties owed as a result of the failure of the Plan or any deferral or payment made hereunder to comply with Section 409A.

15. Notice.  Any notice to the Company required by this Plan shall be in writing addressed to the General Counsel of the Company at its principal office, and shall be deemed delivered only when it is received by the General Counsel.

16. Expenses.  The administrative or other expenses of the Plan shall be paid by the Company.

17. Severability.  In the event that any one or more provisions of the Plan or any Agreement, or any action taken pursuant to the Plan or such Agreement, should, for any reason, be unenforceable or invalid in any respect under the laws of the United States, any state of the United States or any other government, such unenforceability or invalidity shall not affect any other provision of the Plan or of such or any other Agreement, but in such particular jurisdiction and instance the Plan and the affected Agreement shall be construed as if such unenforceable or invalid provision had not been contained therein or as if the action in question had not been taken thereunder.

18. Gender and Number.  The masculine gender, where appearing herein, shall be deemed to include the feminine gender, and the singular shall be deemed to include the plural, unless the context clearly indicates to the contrary.

19. Conflict.  In the event of a conflict between the terms of this Plan and the terms of any Agreement, the terms of this Plan shall govern.

20. Governing Law.  This Plan and all determinations made and actions taken pursuant hereto shall be governed by the law of the State of New York, without regard to the provisions governing conflict of laws, and construed accordingly.

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EX-10.2

Exhibit 10.2

Standard Microsystems Corporation

Plan for Deferred Compensation in Common Stock

for Outside Directors

As Amended and Restated, effective May 22, 2009

1. Purpose

The purpose of this Plan is to provide for deferred payment of certain portions of the compensation of Eligible Directors of Standard Microsystems Corporation, at their election, in accordance with the provisions hereof and to increase the proprietary interest of the Eligible Directors in the Corporation by tying the value of such deferred compensation to the performance of the Corporation’s Common Stock.

2. Definitions

As used herein, the following terms shall have the meanings set forth below:

“Account” shall mean the Account established for a Participant pursuant to Section 4.

“Basic Retainer” shall mean, for each fiscal year of service, the sum of the quarterly cash fees paid in advance to an Eligible Director for service on the Board of Directors and any committee thereof on which the Eligible Director serves, excluding any per-meeting fee or expense reimbursement.

“Beneficiary” shall mean the person or persons designated by a Participant in accordance with Section 6 to receive any amount, or any shares of Common Stock, payable under this Plan by reason of the Participant’s death or incompetence.

“Board of Directors” shall mean the Board of Directors of the Corporation.

“Change in Control” shall mean a change in ownership or effective control of the Corporation, determined in accordance with Section 409A of the Code.

“Code” shall mean the U.S. Internal Revenue Code of 1986, as amended from time to time.

“Committee” shall mean the persons appointed by the Board of Directors to administer this Plan in accordance with Section 8.

“Common Stock” shall mean the shares of Common Stock of the Corporation.

“Corporation” shall mean Standard Microsystems Corporation.

“Director” shall mean a member of the Board of Directors.

“Eligible Director” shall mean any individual who is a Director and who is not an employee of the Corporation or any of its subsidiaries.

“Market Value” shall mean, with respect to one share of Common Stock on any date (or if the Common Stock shall not have traded on that day, then the next succeeding business day on which the Common Stock shall have traded), the closing sale price of a share of Common Stock in the principal market in which the Common Stock trades (or if such price is not reported, the mean of the closing bid and asked prices).

“Participant” shall mean any Eligible Director who has made an election, or is deemed to have made an election, under Section 3 to defer any portion of his or her Basic Retainer.

“Phantom Share Unit” or “PSU” shall mean a notional unit of measurement equivalent to one share of Common Stock, with none of the attendant rights of a holder of such share, including, without limitation, the right to vote such share or the right to receive dividends thereon, except to the extent otherwise specifically provided herein.

“Plan” shall mean this Plan for Deferred Compensation in Common Stock for Outside Directors, as amended from time to time.

“Second Effective Date” shall mean May 22, 2009.

“Separation from Service” shall have the meaning ascribed to it in Section 409A of the Code.

3. Deferral Elections

(a)           Not later than December 1 of any year, an Eligible Director may make an election to defer pursuant to this Plan all or any portion of Basic Retainers earned and payable in subsequent fiscal years.

(b)           Notwithstanding the foregoing, within the 30-day period immediately following the date on which he/she becomes an Eligible Director, each Eligible Director may elect to defer 0, 50 or 100% of his/her future Basic Retainers earned and payable in the fiscal quarter following the fiscal quarter in which the election is made and thereafter.  Any portion of a Basic Retainer earned prior to the effectiveness of the Eligible Director’s initial election under this Plan shall be paid in cash and not deferred, except to the extent he/she is deemed to have made an election pursuant to Section 3(d).  If an Eligible Director shall fail or omit to file an election form within the period specified in this Section 3(b), he/she shall thereby be deemed to have elected that (i) 50% of his/her Basic Retainer shall be deferred and (ii) paid in a single lump sum payment upon his/her Separation from Service.

(c)           All deferral elections shall be made in accordance with the following:

(i)           A deferral election shall be made in writing, on a form provided by the Committee for such purpose.

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(ii)           In the election form, the Eligible Director, shall specify that 0%, 50%, or 100% of such Eligible Director’s Basic Retainer shall be deferred.

(iii)           In the election form, the Eligible Director shall specify when he or she will receive the amounts in his/her General Account (as defined hereafter) and his/her Dividend Equivalent Subaccount (as defined hereafter).  The Eligible Director may elect to receive such amounts in a lump sum payment upon Separation from Service or as a series of substantially equal installment payments on a fixed schedule over a period of up to ten years following his/her Separation from Service.

(d)           Each Eligible Director’s deferral election(s) made pursuant to Section 3(a) or 3(b) shall remain in effect throughout any period in which such Eligible Director shall be an Eligible Director; provided that, at any time, a Participant may make a subsequent election to change the timing of the payment(s) of the amounts previously accrued in his/her Account and/or amounts to be accrued in his/her Account within the same fiscal year in which the subsequent deferral election is made, by submitting such request in writing on a form provided by the Committee for such purposes.  Any subsequent deferral election shall only apply (i) to the extent the election is made at least 12 months prior to the date the first payment under this Plan would otherwise have been made and (ii) to the extent that the subsequent election provides for an additional deferral of at least five years for each payment from the date on which such payment otherwise would have been made pursuant to the election made in accordance with Section 3(c)(iii) above or, for those Directors who were Participants prior to the Second Effective Date, five years from the date of Separation from Service (which is the date all amounts in the Account would have otherwise been made).  In the event that a subsequent deferral election fails to meet the requirements of (i) and/or (ii) in the preceding sentence, the Participant’s previous elections shall remain in full force and effect.

4. Accounts

For each Participant, there shall be established on the books and records of the Corporation, for bookkeeping purposes only, a separate Account to reflect the Participant’s interest under this Plan.  Records of each Account shall distinguish between PSUs credited in connection with the Corporation’s issuance of a dividend on its Common Stock (the “Dividend Equivalent Subaccount”), and all other PSUs credited to the Account (the “General Account”).  The Account so established shall be maintained in accordance with the following:

(a)           On the fifteenth day of the second month of each fiscal quarter of service as an Eligible Director, a Participant’s General Account shall be credited with a number of PSUs (including any fractional PSU rounded to one decimal place) that shall equal the product obtained by multiplying (i) the percentage elected pursuant to Section. 3 by (ii) the quotient obtained by dividing (x) one-quarter of such participant’s Basic Retainer (prorated, however, for actual period of service during such fiscal quarter subsequent to the Participants election to defer hereunder), by (y) the Market Value on the fifteenth day of the second month of such fiscal quarter.

(b)           A Participant’s interest in his or her Account shall be fully vested and nonforfeitable at all times.

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(c)           As of each date on which the Corporation pays a dividend on its Common Stock, each Participant’s Dividend Equivalent Subaccount shall be credited with additional PSUs, the number of which shall be determined by (i) multiplying the number of PSUs in the Participant’s Account on the record date for such dividend by the per-share amount of the dividend so paid, and (ii) dividing the amount determined pursuant to clause (i) by the Market Value of one share of Common Stock on the dividend payment date.1

(d)           In the event of any change in the Common Stock occurring by reason of any stock dividend, recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares, or any rights offering to purchase such shares at a price substantially below fair market value, or any similar change affecting the Common Stock, the number and kind of shares represented by PSUs shall be appropriately adjusted to reflect such change in such manner as the Committee, in its sole discretion, may deem appropriate.  The Committee shall give notice to each Participant of any adjustment made pursuant to this Section 4(d), and such adjustment shall be effective and binding for all purposes of this Plan.

5. Payment of Account Balances

Payment with respect to a Participant’s Account shall be made in accordance with the following:

(a)           A Participant’s Account shall become payable in accordance with the Participant’s election pursuant to Section 3 above.  Such payment(s) shall be made to the Participant or the Participant’s Beneficiary, as the case may be.  On each elected payment date, the Corporation shall make payment by issuing in the name of such Participant or Beneficiary a number of shares of Common Stock, rounded down to the nearest whole number,  equal to the percentage of the total number of PSUs in the General Account and the percentage of the total number of PSUs in the Dividend Equivalent Sub Account, each as of the date of payment, as elected by the Participant pursuant to Section 3, provided that the balance of the Account will be paid in full on the last elected payment date.  The Corporation shall continue to maintain an Account on behalf of the Participant and the Participant shall continue to receive additional PSUs pursuant to Section 4(c) until all amounts in the Account have been distributed pursuant to the terms of the Plan.

(b)           Notwithstanding any other provision in this Section 5 to the contrary, the entire balance of each Participant’s Account shall become immediately due and payable in shares of Common Stock upon the occurrence of a Change in Control, as hereinafter defined.  Payment with respect to such balance shall be in a number of whole shares of Common Stock determined as provided in Section 5(a), substituting the occurrence of such Change in Control for the date of termination of a Participant’s service as a Director.   Payment shall be made as soon as practicable, and in any event within 10 days, after the occurrence of such Change in Control.

(c)           There shall be deducted from the amount of any payment otherwise required to be made under this Plan all federal, state and local taxes required by law to be withheld with respect to such payment.

__________________ 

1 WS: Confirm calculation.

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6. Designation and Change of Beneficiary

Each Participant shall file with the Committee a written designation of one or more persons as the Beneficiary who shall be entitled to receive any amount, including shares of Common Stock, payable under this Plan by reason of the Participant’s death or incompetency.  A Participant may, from time to time, revoke or change his or her Beneficiary designation, without the consent of any previously designated Beneficiary, by filing a new written designation with the Committee.  The last such designation received by the Committee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless delivered to the Committee prior to the Participant’s death or incompetency, and in no event shall it be effective as of a date prior to such delivery.  If at the date of a Participant’s death or incompetency, there is no designation of a Beneficiary in effect for the Participant pursuant to the provisions of this Section 6, or if no Beneficiary designated by the Participant in accordance with the provisions hereof survives to receive any amount payable under this Plan by reason of the Beneficiary’s death or incompetency, the Participant’s estate shall be treated as the Participant’s Beneficiary for purposes of this Plan.

7. Rights of Participants

A Participant’s rights and interests under this Plan shall be subject to the following provisions:

(a)           A Participant shall have the status of a general unsecured creditor of the Corporation with respect to his or her right to receive any payment under this Plan.  This Plan shall constitute a mere promise by the Corporation to make payments in the future of the benefits provided for herein.  It is intended that the arrangements reflected in this Plan be treated as unfunded for tax purposes.

(b)           The Corporation may, but shall not be required to, establish a trust to assist it in funding any of its payment obligations under this Plan.  If any such trust is established, all of the assets of the trust shall, at all times prior to payment to Participants, remain subject to the claims of the Corporation’s creditors; and no Participant or Beneficiary shall have any preferred claim on, or any beneficial ownership interest in, any assets of the trust. Any trust so established shall also contain such other terms and provisions as will permit the trust to be treated as a “grantor trust”, of which the Corporation is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Code (or any successor provisions).  If any such trust is established, the Corporation shall be relieved of its obligation hereunder to pay any amounts or shares of Common Stock to any Participant or Beneficiary, to the extent that such amounts or shares are paid to the Participant or Beneficiary from such trust.

(c)           A Participant’s right to payments under this Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Participant or his or her Beneficiary.

8. Administration

(a)           This Plan shall be administered by or under the direction of the Compensation Committee of the Board of Directors (the “Committee”).

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(b)           All decisions, actions or interpretations of the Committee under this Plan shall be final, conclusive and binding upon all parties.

(c)           No member of the Committee shall be personally liable by reason of any contract or other instrument executed by such member or on his or her behalf in his or her capacity as a member of the Committee nor for any mistake of judgment made in good faith, and the Corporation shall indemnify and hold harmless each member of the Committee, and each employee, officer, or director of the Corporation or any of its subsidiaries to whom any duty or power relating to the administration or interpretation of this Plan may be delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Board of Directors) arising out of any act or omission to act in connection with this Plan unless arising out of such person’s own fraud or bad faith.

(d)           Any instrument may be delivered to the Committee by certified mail, return receipt requested, addressed to the Committee at the principal executive office of the Corporation.  A copy of any instrument so delivered shall similarly and simultaneously be mailed to the Secretary of the Corporation.  Delivery shall be deemed complete on the third business day after such mailing in New York, New York or Hauppauge, New York.

(e)           There are reserved for issuance pursuant to this Plan, 100,000 shares of Common Stock.

9. Amendment or Termination

(a)           The Board of Directors may, with prospective or retroactive effect, amend, suspend or terminate this Plan or any portion thereof at any time; provided, however, that no amendment of this Plan shall deprive any Participant of any right to receive payment due him or her under the terms of this Plan as in effect prior to such amendment without his or her written consent and provided further that any such amendment or termination shall comply with the requirements of Section 409A of the Code.

(b)           Any amendment that the Board of Directors would be permitted to make pursuant to the preceding paragraph may also be made by the Committee where appropriate to facilitate the administration of this Plan or to comply with applicable law or any applicable rules and regulations of governing authorities, provided that the cost of this Plan to the Corporation is not materially increased by such amendment.

10. Compliance with Section 409A of the Code.

(a)           This Plan is intended to comply and shall be administered in a manner that is intended to comply with Section 409A of the Code and shall be construed and interpreted in accordance with such intent.  To the extent that any deferral hereunder is subject to Section 409A of the Code, it shall be deferred and paid in a manner that will comply with Section 409A of the Code, including proposed, temporary or final regulations or any other guidance issued by the Secretary of the Treasury and the Internal Revenue Service with respect thereto (the “Guidance”).  Any provision of this Plan that would cause a deferral or payment to fail to satisfy Section 409A of the Code shall have no force and effect until amended to comply with Section 409A of the Code (which amendment may be retroactive to the extent permitted by the Guidance).

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(b)           It is intended that each installment, if any, of the payments provided to the Participant hereunder shall be treated as a separate “payment” for purposes of Section 409A of the Code.  Notwithstanding anything herein to the contrary, neither the Corporation nor the Participant shall have the right to accelerate or defer the delivery of any such payment except to the extent specifically permitted or required by Section 409A of the Code.

(c)           Notwithstanding the foregoing or anything herein to the contrary, in no event shall the Corporation be liable for any taxes or penalties owed as a result of the failure of the Plan or any deferral or payment made hereunder to comply with Section 409A.

11. Successor Corporation

The obligations of the Corporation under this Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation, or other reorganization of the Corporation, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Corporation.  The Corporation agrees that it will make appropriate provision for the preservation of Participants’ rights under this Plan in any agreement or plan which it may enter into or adopt to effect any such merger, consolidation, reorganization or transfer of assets.

12. Effective Date

This Plan was adopted March 4, 1997 and initially became effective immediately following the 1997 annual meeting of the stockholders of the Corporation.  The Amended and Restated Plan shall be effective as of May 22, 2009.

13. Governing Law

The provisions of this Plan shall be governed by and construed in accordance with the laws of the State of New York.

7

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 July 7, 2009

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: July 7, 2009

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 May 31, 2009 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: July 7, 2009