Edgar Filing: MAXIM INTEGRATED PRODUCTS INC

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 29, 2007

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

For the Transition Period from to

COMMISSION FILE NO. 0-16538

MAXIM INTEGRATED PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE

94-2896096

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer I.D. No.)

120 SAN GABRIEL DRIVE,

SUNNYVALE, CALIFORNIA

94086

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s telephone number, including area code:

(408) 737-7600

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 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 ¨ No x

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):

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


Class: Common Stock,		Outstanding at September 1, 2008
$0.001 par value		320,553,460 shares

MAXIM INTEGRATED PRODUCTS, INC.

INDEX


		Page
PART I. FINANCIAL INFORMATION		3

ITEM 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets as of December 29, 2007 and June 30, 2007	3

	Condensed Consolidated Statements of Income for the Three Months and Six Months Ended December 29, 2007 and December 23, 2006	4

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 29, 2007 and December 23, 2006	5

	Notes to Condensed Consolidated Financial Statements	6-22

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23-30

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	30

ITEM 4.	Controls and Procedures	31

PART II. OTHER INFORMATION		33

ITEM 1.	Legal Proceedings	33

ITEM 1A.	Risk Factors	33

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

ITEM 3.	Defaults Upon Senior Securities	33

ITEM 4.	Submissions of Matters to a Vote of Security Holders	33

ITEM 5.	Other Information	33

ITEM 6.	Exhibits	33

SIGNATURES		34

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

MAXIM INTEGRATED PRODUCTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)


	December 29, 2007			June 30, 2007
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	1,007,426		$	577,068
Short-term investments		147,375			722,286

Total cash, cash equivalents and short-term investments		1,154,801			1,299,354

Accounts receivable, net		286,675			244,998
Inventories		255,165			262,713
Deferred tax assets		233,097			247,953
Other current assets		52,197			15,555

Total current assets		1,981,935			2,070,573

Property, plant and equipment, net		1,500,819			1,431,273
Other assets		155,841			104,938

TOTAL ASSETS	$	3,638,595		$	3,606,784

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	90,288		$	93,773
Income taxes payable		4,002			70,302
Accrued salary and related expenses		227,449			195,494
Accrued expenses		73,671			71,694
Deferred income on shipments to distributors		22,250			23,641

Total current liabilities		417,660			454,904

Other liabilities		31,972			19,946
Income taxes payable		101,945			—

Total liabilities		551,577			474,850

Commitments and contingencies (Note 11)

Stockholders’ equity:
Preferred stock		—			—
Common stock		321			321
Additional paid-in capital		202,097			292,603
Retained earnings		2,894,268			2,847,281
Accumulated other comprehensive loss		(9,668	)		(8,271	)

Total stockholders’ equity		3,087,018			3,131,934

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	3,638,595		$	3,606,784

See accompanying Notes to Condensed Consolidated Financial Statements.

MAXIM INTEGRATED PRODUCTS, INC

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three Months Ended				Six Months Ended
	December 29, 2007		December 23, 2006		December 29, 2007		December 23, 2006
	(Amounts in thousands, except per share data)
Net revenues	$	540,025	$	497,453	$	1,064,106	$	1,000,198
Cost of goods sold		204,409		189,270		410,924		392,957

Gross margin		335,616		308,183		653,182		607,241
Operating expenses:
Research and development		138,579		138,344		289,412		351,581
Selling, general and administrative		56,460		42,993		113,654		112,684

Total operating expenses		195,039		181,337		403,066		464,265

Operating income		140,577		126,846		250,116		142,976
Interest income and other, net		21,926		14,767		39,280		28,156

Income before provision for income taxes		162,503		141,613		289,396		171,132
Provision for income taxes		55,483		44,045		98,750		53,226

Net income	$	107,020	$	97,568	$	190,646	$	117,906

Earnings per share:
Basic	$	0.33	$	0.30	$	0.59	$	0.37
Diluted	$	0.33	$	0.30	$	0.58	$	0.36

Shares used in the calculation of earnings per share:
Basic		320,553		320,553		320,553		320,317

Diluted		326,284		329,620		327,913		328,862

Dividends declared per share	$	0.19	$	0.16	$	0.38	$	0.31

See accompanying Notes to Condensed Consolidated Financial Statements.

MAXIM INTEGRATED PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Six Months Ended
	December 29, 2007			December 23, 2006
	(in thousands)
Cash flows from operating activities:
Net income	$	190,646		$	117,906

Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation		114,369			252,058
Depreciation and amortization		64,824			50,236
Gain from sale of property, plant and equipment		(9,558	)		—
Deferred taxes		18,260			(70,115	)
Tax benefit related to stock based compensation		(3,346	)		(3,709	)
Excess tax benefit related to stock based compensation		(467	)		(8,145	)
Changes in assets and liabilities:
Accounts receivable		(41,677	)		20,220
Inventories		7,397			(36,979	)
Other current assets		(21,147	)		(3,340	)
Accounts payable		(5,952	)		(21,001	)
Income tax payable		(10,018	)		1,085
Deferred income on shipments to distributors		(1,391	)		64
Accrued liabilities—goodwill payments above settlement date fair value		(23,753	)		—
All other accrued liabilities		(37,468	)		2,837

Net cash provided by operating activities		240,719			301,117

Cash flows from investing activities:
Additions to property, plant and equipment		(133,683	)		(194,373	)
Proceeds from sale of property, plant, and equipment		14,158			—
Restricted Cash		(14,158	)		—
Other non-current assets		18,030			(1,491	)
Acquisition		(64,123	)		—
Purchases of available-for-sale securities		(111,010	)		(558,656	)
Proceeds from sales/maturities of available-for-sale securities		687,652			541,250

Net cash provided by (used in) investing activities		396,866			(213,270	)

Cash flows from financing activities:
Excess tax benefit related to stock based compensation		467			8,145
Payments on mortgage liability		(20	)		—
Settlement date fair value of goodwill payments		(70,363	)		—
Cash settlement of vested restricted stock units		(2,366	)		(2,254	)
Payouts under the RSU loan program		(14,738	)		(10,148	)
Issuance of common stock		—			25,674
Repurchase of common stock		—			(60,767	)
Dividends paid		(120,207	)		(100,116	)

Net cash used in financing activities		(207,227	)		(139,466	)

Net increase in and cash equivalents		430,358			(51,619	)
Cash and cash equivalents:
Beginning of period		577,068			422,333

End of period	$	1,007,426		$	370,714

Supplemental disclosures of cash flow information:
Income tax paid	$	118,102		$	125,818

Noncash investing and financing activities:
Accounts payable related to property, plant and equipment purchases	$	24,176		$	39,704

See accompanying Notes to Condensed Consolidated Financial Statements.

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited condensed interim consolidated financial statements of Maxim Integrated Products, Inc. and all of its majority-owned subsidiaries (collectively, the “Company” or “Maxim”) included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for fair presentation have been included. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The results of operations for the three and six months ended December 29, 2007 are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

The Company has a 52-to-53-week fiscal year that ends on the last Saturday in June. Accordingly, every sixth or seventh fiscal year will be a 53-week fiscal year. Fiscal year 2007 was a 53-week fiscal year.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

The accounting policy below represents an addition to the Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended June 30, 2007.

Intangible Assets and Goodwill

The Company accounts for intangible assets, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), which requires impairment losses to be recorded on intangible assets used in operations when indicators of impairment, such as reductions in demand or significant economic slowdowns in the semiconductor industry, are present. Reviews are performed to determine whether the carrying value of an asset is impaired, based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using: (i) quoted market prices or (ii) discounted expected future cash flows utilizing a discount rate consistent with the guidance provided in Financial Accounting Standards Board (“FASB”) Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements (“Concepts Statement 7”). Impairment is based on the excess of the carrying amount over the fair value of those assets.

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), the Company tests goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the fourth quarter or more frequently if the Company believes indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company generally determines the fair value of its reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill.

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 3: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”), which prescribes comprehensive guidelines for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on tax returns. FIN 48, effective for fiscal years beginning after December 15, 2006, seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company adopted the provisions of FASB Interpretation No. 48 on July 1, 2007 and applied the provisions of FIN 48 to all income tax positions. The cumulative effect of applying FIN 48 was a $9.4 million and $19.2 million decrease in retained earnings and additional-paid-in-capital, respectively, at the beginning of fiscal year 2008.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements. The statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. The statement emphasizes that fair value is a market-based measurement and not an entity-specific measurement. It also establishes a fair value hierarchy used in fair value measurements and expands the required disclosures of assets and liabilities measured at fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In addition, in February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (“FSP 157-1”) and FSP No.157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”). FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS 157 on the Company’s consolidated financial condition, results of operations and liquidity.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (“SFAS 158”). SFAS 158 amends SFAS No. 87, Employers’ Accounting for Pensions, SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, and SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. SFAS 158 requires employers to recognize in the statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status. It also requires employers to measure plan assets and obligations that determine the funded status as of the end of the fiscal year. Lastly, employers are required to recognize changes in the funded status of a defined benefit postretirement plan in the year that the changes occur with the changes reported in comprehensive income. SFAS 158 is required to be adopted by entities with fiscal years ending after December 15, 2006. The adoption of SFAS 158 in fiscal year 2007 did not have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.

In September 2006, the SEC released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), which addresses how uncorrected errors in previous years should be considered when quantifying errors in current year financial statements. SAB 108 requires registrants to consider the effect of all carry over and reversing effects of prior-year misstatements when quantifying errors in current year financial statements. SAB 108 does not change the SEC staff’s previous guidance on evaluating the materiality of errors. It allows registrants to record the effects of adopting SAB 108 guidance as a cumulative-effect adjustment to retained earnings. This adjustment must be reported in the annual financial statements of the first fiscal year ending after November 15, 2006. The adoption of this standard did not have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. The Company is required to adopt the provisions of SFAS 159 as of the beginning of the fiscal year that begins after November 15, 2007, although earlier adoption is permitted. The adoption of SFAS 159 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or liquidity.

In March 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements (“EITF 06-10”). EITF 06-10 provides guidance for determining a liability for the post-retirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007, although earlier adoption is permitted. The Company early adopted EITF 06-10 during the three months ended September 29, 2007 and recorded a cumulative effect adjustment as a net reduction to retained earnings of approximately $14.1 million. No corporate income tax benefit was netted against the charge to retained earnings because the liabilities being accrued are not deductible for corporate income tax purposes.

In June 2007, the FASB ratified EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities (“EITF 07-3”). EITF 07-3 requires nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities to be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. Entities should continue to evaluate whether they expect the goods to be delivered or services to be rendered. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. EITF 07-3 applies prospectively for new contractual arrangements entered into in fiscal years beginning after December 15, 2007. Earlier adoption is not permitted. The adoption of EITF 07-3 is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 improves the relevance, comparability and transparency of financial statements and eliminates diversity in practice that currently exists in accounting for transactions between an entity and noncontrolling interests. This standard is effective for annual periods beginning after December 15, 2008. Earlier adoption is prohibited. The Company does not believe the adoption of SFAS 160 will have a material effect on its consolidated financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”) which replaces SFAS No. 141, Business Combinations. SFAS 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This standard is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact of adopting SFAS 141(R) on the Company’s consolidated financial position or results of operations.

In December 2007, the FASB ratified EITF Issue No. 07-1, Accounting for Collaborative Arrangements (“EITF 07-01”). EITF 07-1 provides guidance on the classification, income statement presentation and disclosure associated with collaborative arrangements involving parties considered to be active participants to an activity and are exposed to significant risks and rewards which are dependent on the commercial success of the activity. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. The adoption of EITF 07-01 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133 (“SFAS 161”) which changes the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires the Company to provide enhanced disclosures about (a) how and why the Company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and (c) how derivative instruments and related hedged items affect the Company’s financial position, financial performance and cash flows. These disclosure requirements are effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of adopting SFAS 161 on its consolidated financial position, results of operations and cash flows.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting consistent with GAAP. SFAS 162 is effective sixty days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411 on September 16, 2008, The Meaning of ‘Present fairly in conformity with generally accepted accounting principles.’ The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 162 on its consolidated financial statements.

NOTE 4: STOCK-BASED COMPENSATION

The following table shows total stock-based compensation expense by type of award, and resulting tax effect, included in the Condensed Consolidated Statements of Income for the three months and six months ended December 29, 2007 and December 23, 2006:

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Three Months Ended				Six Months Ended
	December 29, 2007		December 23, 2006		December 29, 2007		December 23, 2006
	(in thousands)
Cost of goods sold
Stock options	$	7,960	$	10,620	$	19,107	$	41,788
Employee stock purchase plan		—		—		—		1,431
Restricted stock units		3,708		5,065		8,223		9,025

		11,668		15,685		27,330		52,244

Research and development expense
Stock options		13,678		21,955		46,142		121,103
Employee stock purchase plan		—		—		—		4,672
Restricted stock units		9,121		12,853		20,461		24,159

		22,799		34,808		66,603		149,934

Selling, general and administrative expense
Stock options		4,638		8,642		14,935		42,820
Employee stock purchase plan		—		—		—		1,431
Restricted stock units		2,611		3,038		5,501		5,629

		7,249		11,680		20,436		49,880

Total stock-based compensation expense
Stock options		26,276		41,217		80,184		205,711
Employee stock purchase plan		—		—		—		7,534
Restricted stock units		15,440		20,956		34,185		38,813

Pre-tax stock-based compensation expense		41,716		62,173		114,369		252,058
Less: Income tax effect		14,550		21,465		40,147		87,201

Net stock-based compensation expense	$	27,166	$	40,708	$	74,222	$	164,857

Compensation cost capitalized as part of inventory as of December 29, 2007 and June 30, 2007 was $13.0 million and $15.0 million, respectively.

SFAS No. 123(R) Share-Based Payment (“SFAS 123(R)”) requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Since the Company has adopted the alternative transition method, described in FSP SFAS 123(R)-3 Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, 100% of the realized tax benefits generated by stock based employee awards that were fully vested and outstanding upon the adoption of SFAS 123(R) are classified as excess tax benefits. Stock-based employee awards partially vested upon, or granted after, the adoption of SFAS 123(R) generate excess tax benefits to the extent that realized tax benefits exceed the deferred tax asset and proforma deferred tax asset attributable to such awards. The Company recorded $0.5 million and $8.1 million of excess tax benefits as financing cash inflows for the six months ended December 29, 2007 and December 23, 2006, respectively.

Share-Based Compensation and Other Adjustments Resulting From the Blackout Period

On September 8, 2006, the SEC was notified that the Company would delay filing its Annual Report on Form 10-K for the fiscal year ended June 24, 2006 due September, 23, 2006 as a result of the ongoing stock option investigation into the Company’s historical stock option granting practices. As a result of such delay, the Company has suspended the issuance of shares to employees upon exercise of stock options, vesting of restricted stock units or pursuant to planned purchases of stock under the Employee Stock Participation Plan until the Company becomes current with all of its required SEC filings and its registration statements on Form S-8 are declared effective (“Blackout Period”). The Company instituted multiple programs in an attempt to make employees whole during this period, as described below.

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Restricted Stock Unit (“RSU”) Loan Program

In October 2006, the Company offered certain domestic employees an opportunity to receive cash in the form of a non-recourse loan (“RSU Loan”) for common stock that they would have otherwise been able to receive in settlement for RSUs that vested during the Blackout Period. The program was not offered to executive officers or the Board of Directors. Employees accepting the offer were also entitled to additional shares of common stock if the Company’s stock price appreciates (“SAR”) between the vest date and the settlement date at the end of the Blackout Period. Employees foregoing the loan would receive shares of common stock at the conclusion of the Blackout Period. The Company also offered to cash-settle RSUs vesting during the Blackout Period held by foreign employees. These aforementioned loan offers were considered modifications of the RSUs triggering a change in the classification from equity to liability for all eligible awards vesting during the Blackout Period. In October 2006 the Company recorded a reclassification from additional paid in capital to accrued salary and related expenses of $19.4 million on the modification date and incremental compensation expenses of $2.2 million from the modifications. Vesting of eligible awards and changes in stock price will result in additional reclassifications from additional paid in capital to accrued salary and related expenses and additional compensation expenses in periods they occur. The Company made cash payments of $14.7 million pursuant to the RSU loan program and $2.4 million for settlement of RSUs held by foreign employees during the six months ended December 29, 2007 as a result of this program.

During the six months ended December 29, 2007 the Company recorded additional compensation expenses of $25.0 million and reclassifications from additional paid-in capital to accrued salary and related expenses of $1.7 million. The SAR given to domestic employees accepting the loan offer was valued using the Black-Scholes model at the date of grant. The Company recorded compensation expenses of $1.1 million and $3.1 million, respectively, from fully vested SARs issued in the three and six months ended December 29, 2007.

Other Modifications

Employee Stock Participation Plan (“ESPP”)

As a result of the aforementioned suspension of the issuance of shares under the Form S-8 registration statements, the September 30, 2006 planned stock purchases under the Company’s ESPP did not occur and all employee contributions made during the September 30, 2006 purchase period were refunded on or about September 28, 2006. The Company ceased withholdings as no future stock purchases can be made until the Company is current with all of its required SEC filings.

The Company had unrecognized compensation expenses of $6.2 million as of June 24, 2006 related to its ESPP. In addition, the Company began a new offering period on July 3, 2006 for new plan participants with a fair value of $1.3 million. The Company determined that the contribution refund results in a cancellation of all awards associated with the respective offerings without a concurrent offer to grant a replacement award, which is considered a repurchase for no consideration under SFAS 123(R). Accordingly, the Company recognized compensation expense including the acceleration of all unrecognized compensation expense totaling $7.5 million in the six months ended December 23, 2006.

Extension of Options that Expire after Reaching 10 Year Contractual Term and Cash Settlements of Such Expired Options

In September 2006, the Company approved the extension of the terms of vested stock options that expire during the Blackout Period as a result of the expiration of the 10 year contractual term. The extension was considered a modification under SFAS 123(R). The incremental compensation expense of the modification was based on the fair value of the option at the modification date after the extension compared to the fair value of the options prior to modification. The Company recognized additional compensation expense totaling $118.9 million for 8.3 million options in the three months ended September 23, 2006. The stock-based compensation expense adjustment was based on modified vested options held by employees that expired during the period from September 22, 2006 through the end of the Blackout Period.

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

In September 2007 as a result of changes in NASDAQ regulations the Company decided to cash settle all options expiring during the Blackout Period (“goodwill payment”) based on the price at which 10% of the daily close prices of the Company’s common stock fall above this price for trading days from August 7, 2006 (the date on which the Company initiated a trading blackout on officers and other individuals) through the expiration date of the option. The cash payment is subject to the option holder executing a release of all claims relating to the option. The goodwill payment modification changed the classification of the associated awards from equity to liability instruments. The modification resulted in a reclassification from additional paid-in capital to accrued salaries and related expenses of $126.8 million and incremental compensation expenses of $27.5 million. At the end of each period, the Company will recognize any change in fair value of the options in its consolidated statements of income in the period of change until the options are settled.

Extension of Post-Termination Exercise Period

In September 2006, the Company also decided to extend the post-termination exercise period for employees holding vested options granted under the Dallas Semiconductor stock option plans, which were assumed by the Company as part of its acquisition of Dallas Semiconductor Corporation, who were terminated after September 22, 2006 and whose stock options would expire prior to reaching the 10 year contractual term during the Blackout Period. The extension provided these employees with 90 days to exercise vested options from the end of the Blackout Period. The Company calculated the incremental compensation expense of this modification in accordance with SFAS 123(R) and recognized compensation expense in the first quarter of its fiscal year 2007 totaling $0.8 million for 0.2 million options for the extension of the options held by these employees terminating employment during the Blackout Period.

Fair Value

The fair value of share-based awards granted to employees was estimated using a Black-Scholes option pricing model that used the following weighted-average assumptions:


	Stock Option Plan		Stock Option Plan
	Three Months Ended		Six Months Ended
	December 29, 2007	December 23, 2006	December 29, 2007	December 23, 2006
Expected holding period (in years)	6.3	6.3	6.4	6.3
Risk-free interest rate	4.1%	4.7%	4.5%	4.9%
Expected stock price volatility	45%	30%	38%	31%
Dividend yield	2.9%	2.1%	2.6%	2.1%

The fair value of each option is estimated on the date of grant using the Black-Scholes option valuation model. Expected volatilities are based on the implied volatilities from traded options on the Company’s stock except for the period during the Company’s black-out where the Company used historical stock prices to calculate volatilities. The Company analyzes historical exercise patterns of relatively homogeneous groups of employees to estimate the expected holding period. The risk-free interest rate is based on the U.S. Treasury yield. The Company determines dividend yield by dividing the annualized dividends per share by the quarter’s average stock price. The result is analyzed by the Company to decide whether it represents expected future dividend yield. Modification of the assumption is made as necessary. As required by SFAS 123(R), the Company also estimates forfeitures at the time of grant and makes revisions if the estimates change or the actual forfeitures differ from those estimates.

The weighted-average fair value of stock options granted during the second quarter and first six months of fiscal year 2008 was $9.37 per share and $9.71 per share, respectively. The weighted-average fair value of stock options granted during the second quarter and first six months of fiscal year 2007 was $9.14 per share and $8.54 per share, respectively.

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

STOCK OPTION PLANS

Stock Options and Restricted Stock Units

The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of December 29, 2007 and their activity during the period then ended:


	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value(1)
Balance at June 30, 2007	87,072,099		$	34.01
Options Granted	1,175,709			28.70
Options Exercised	—			—
Options Cancelled	(6,684,367	)		18.87

Balance at December 29, 2007	81,563,441			35.17

Exercisable, December 29, 2007	48,117,345			33.82	3.9	$	71,082,095

Vested and expected to vest, December 29, 2007	79,303,957			35.14	5.0	$	76,856,443

(1)

Aggregate intrinsic value for stock options represents the difference between exercise price and the closing price per share of the Company’s common stock on December 29, 2007, multiplied by the number of stock options outstanding, exercisable, or vested and expected to vest as of December 29, 2007.

As of December 29, 2007, there was $184.1 million of unrecognized stock compensation related to 33.4 million unvested stock options which is expected to be recognized over a weighted average period of approximately 1.9 years.

The following table summarizes outstanding and vested restricted stock units (“RSUs”) as of December 29, 2007 and their activity during the period then ended:


	Number of Shares		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value(¹)
Balance at June 30, 2007	6,657,429
Restricted stock units granted	1,123,366
Restricted stock units released	—
Restricted stock units cancelled	(278,240	)

Balance at December 29, 2007	7,502,555		1.6	$	195,066,430

Expected to vest, December 29, 2007	4,087,681		1.6	$	106,279,682

(1)	Aggregate intrinsic value for RSUs represents the closing price per share of the Company’s stock on December 29, 2007, multiplied by the number of RSUs outstanding or expected to vest as of December 29, 2007.

As of December 29, 2007, there was $14.0 million of unrecognized compensation expense related to 4.4 million unvested RSUs not subject to the RSU Loan Program, which is expected to be recognized over a weighted average period of approximately 2.7 years.

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 5: INVENTORIES

The components of inventories consist of:


	December 29, 2007		June 30, 2007
	(in thousands)
Raw materials	$	19,655	$	24,117
Work-in-process		180,824		175,746
Finished goods		54,686		62,850

	$	255,165	$	262,713

Inventory write downs were $8.2 million and $7.6 million, and $16.8 million and $14.6 million for the three and six months ended December 29, 2007 and December 23, 2006, respectively.

NOTE 6: EARNINGS PER SHARE

Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. For purposes of computing basic earnings per share, the weighted average number of outstanding common shares excludes unvested RSUs. Diluted earnings per share incorporates the incremental shares issuable upon the assumed exercise of stock options, assumed release of unvested RSUs and assumed issuance of stock under the ESPP using the treasury stock method. As discussed in Note 4, the Company will cash settle options that are expected to expire (reach the ten year contractual term) during the Blackout Period and cash settle vested RSUs. These options and RSUs are considered liability instruments under SFAS 123(R) and as such are excluded from the diluted earnings per share calculation.

The following table sets forth the computation of basic and diluted earnings per share.


	Three Months Ended				Six Months Ended
	December 29, 2007		December 23, 2006		December 29, 2007		December 23, 2006
	(Amounts in thousands, except per share data)
Numerator for basic earnings per share and diluted earnings per share
Net income	$	107,020	$	97,568	$	190,646	$	117,906

Denominator for basic earnings per share		320,553		320,553		320,553		320,317
Effect of dilutive securities:
Stock options, RSUs, and ESPP		5,731		9,067		7,360		8,545

Denominator for diluted earnings per share		326,284		329,620		327,913		328,862

Earnings per share:
Basic	$	0.33	$	0.30	$	0.59	$	0.37

Diluted	$	0.33	$	0.30	$	0.58	$	0.36

Approximately 68.2 million and 66.3 million of the Company’s stock options were excluded from the calculation of diluted earnings per share for the three months ended December 29, 2007 and December 23, 2006, respectively. Approximately 63.7 million and 67.0 million of the Company’s stock options were excluded from the calculation of diluted earnings per share for the six months ended December 29, 2007 and December 23, 2006, respectively. These options were excluded because they were determined to be antidilutive. However, such options could be dilutive in the future and, under those circumstances, would be included in the calculation of diluted earnings per share.

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 7: SHORT-TERM INVESTMENTS

All short-term investments at December 29, 2007 are classified as available-for-sale and consist primarily of U.S. Treasury and Federal Agency debt securities with original maturities beyond three months. Unrealized gains and losses, net of tax, on securities in this category are included in accumulated other comprehensive loss which is a separate component of stockholders’ equity. The cost of securities sold is based on the specific identification method. Interest earned on securities is included in “Interest income and other, net” in the Condensed Consolidated Statements of Income.

NOTE 8: SEGMENT INFORMATION

The Company operates and tracks its results as one reportable segment. The Company designs, develops, manufactures and markets a broad range of analog integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by SFAS 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”).

The Company has fifteen operating segments which aggregate into one reportable segment under SFAS 131. Under SFAS 131, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of SFAS 131, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas:

•

the nature of products and services;

•

the nature of the production processes;

•

the type or class of customer for their products and services; and

•

the methods used to distribute their products or provide their services.

The Company meets each of the aggregation criteria for the following reasons:

•

the sale of analog and mixed signal integrated circuits is the primary source of revenue for each of the Company’s fifteen operating segments;

•

the integrated circuits sold by each of the Company’s operating segments are manufactured using similar semiconductor manufacturing processes;

•

the integrated circuits marketed by each of the Company’s operating segments are sold to the same types of customers; and

•

all of the Company’s integrated circuits are sold through a centralized sales force and common wholesale distributors.

All of the Company’s operating segments share similar economic characteristics as they have a similar long term business model. The causes for variation among the Company’s operating segments are the same and include factors such as (i) life cycle and price and cost fluctuations, (ii) number of competitors, (iii) product differentiation and (iv) size of market opportunity. Additionally, each operating segment is subject to the overall cyclical nature of the semiconductor industry. The number and composition of employees and the amounts and types of tools and materials required are similar for each operating segment. Finally, even though the Company periodically reorganizes its operating segments based upon changes in customers, end markets or products, acquisitions, long-term growth strategies, and the experience and bandwidth of the senior executives in charge, the common financial goals for each operating segment remain constant.

Enterprise-wide information is provided in accordance with SFAS 131. Geographical revenue information is based on the customers’ ship-to location. Long-lived assets consist of property, plant and equipment. Property, plant and equipment information is based on the physical location of the assets at the end of each reporting period.

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Net revenues from unaffiliated customers by geographic region were as follows:


	Three Months Ended				Six Months Ended
	December 29, 2007		December 23, 2006		December 29, 2007		December 23, 2006
	(in thousands)
United States	$	103,545	$	110,514	$	207,379	$	224,803
China		183,808		143,983		363,008		277,945
Japan		41,143		51,824		86,884		101,117
Rest of Asia		111,120		93,670		205,708		195,759
Europe		88,783		84,925		177,888		175,215
Rest of World		11,626		12,537		23,239		25,359

	$	540,025	$	497,453	$	1,064,106	$	1,000,198

Net long-lived assets by geographic region were as follows:


	December 29, 2007		Jun. 30 2007
	(in thousands)
United States	$	1,152,479	$	1,107,743
Philippines		203,602		204,354
Rest of World		144,738		119,176

	$	1,500,819	$	1,431,273

NOTE 9: COMPREHENSIVE INCOME

Comprehensive income consists of net income and net unrealized gains (losses) on available-for-sale investments and forward exchange contracts, and deferred income taxes on unrealized exchange gains (losses) on intercompany receivables. The components of comprehensive income and related tax effects were as follows:


	Three Months Ended						Six Months Ended
	December 29, 2007			December 23, 2006			December 29, 2007			December 23, 2006
	(in thousands)
Net income, as reported	$	107,020		$	97,568		$	190,646		$	117,906
Change in unrealized gains (losses) on investments, net of tax benefit (expense) of $60, $(710), $(530) and $(2,683), respectively		(104	)		1,237			923			4,507
Change in unrealized losses on forward exchange contracts, net of tax benefit (expense) of $(142), $(96), $9 and $(13), respectively		246			165			(16	)		25
Deferred tax on unrealized exchange gain (loss) on intercompany receivables		(2,244	)		(616	)		(2,304	)		(1,778	)

Total comprehensive income	$	104,918		$	98,354		$	189,249		$	120,660

Accumulated other comprehensive gain (loss) presented in the Condensed Consolidated Balance Sheets as of December 29, 2007 and June 30, 2007 consist of net unrealized gains (losses) on available-for-sale investments of $0.6 million and $(0.4) million, respectively, net unrealized gains (losses) on forward exchange contracts of $0.1 million and $0.1 million, respectively, net foreign currency translation gain (loss) adjustments of $(1.5) million and $(1.5) million, respectively and deferred income tax of $(8.8) million and $(6.5) million, respectively on unrealized exchange gains related to an intercompany receivable that is of a long-term investment nature.

NOTE 10: INCOME TAXES

The effective income tax rate for the three months ended December 29, 2007 and December 23, 2006 was 34.1% and 31.1%, respectively. The effective income tax rate for the six months ended December 29, 2007 and December 23, 2006 was also 34.1% and 31.1%, respectively. The increase in the effective tax rate for three and six months

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

ended December 29, 2007 compared to the three and six months ended December 23, 2006 was primarily due to the final phase out of the extraterritorial income exclusion by the American Jobs Creation Act of 2004 and the expiration of the Federal research tax credit on December 31, 2007. The effective rates were lower than the U.S. federal and state combined statutory rate primarily due to tax benefits generated by the research and development credit and the domestic production activities deduction.

The Company’s net deferred tax asset at December 29, 2007 was $305.0 million. The Company believes it is more likely than not that the net deferred tax assets will be realized based on historical earnings and expected levels of future taxable income. Levels of future taxable income are subject to the various risks and uncertainties as described in this Report and in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007. An increase in the valuation allowance against net deferred tax assets may be necessary if it becomes more likely than not that all or a portion of the net deferred tax assets will not be realized. The Company periodically assesses the need for increases to the deferred tax asset valuation allowance.

On July 1, 2007, the Company adopted FASB Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. The Company has historically classified unrecognized tax benefits as income taxes payable, which was included within the current liabilities section of the Company’s Condensed Consolidated Balance Sheet or as a reduction to deferred tax assets to the extent that the unrecognized tax benefits related to net operating loss or tax credit carryforwards. As a result of the adoption of FIN 48, the Company now classifies unrecognized tax benefits as a current liability to the extent that settlement is anticipated within one year, as a non-current liability to the extent that settlement is anticipated beyond one year, or as a reduction to deferred tax assets to the extent that the unrecognized tax benefit relates to deferred tax assets such as operating loss or tax credit carryforwards.

The Company evaluated and assessed its tax positions under the recognition and measurement guidelines of FIN 48. The adoption of FIN 48 resulted in an increase to the Company’s contingent tax liability reserves of $28.6 million. Of this amount, approximately $9.4 million was accounted for as a reduction to beginning retained earnings and approximately $19.2 million as a reduction to additional paid-in capital. The amount of unrecognized tax benefits at the beginning of fiscal year 2008 was $123.6 million, excluding interest and penalties of $9.8 million. Of this amount, $61.3 million relates to unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate and the remaining $62.3 million relates to unrecognized tax benefits that, if recognized, would be credited to additional paid-in capital. The Company reports interest and penalties related to unrecognized tax benefits as a component of income tax expense, which is consistent with its methodology prior to the adoption of FIN 48. The amount of interest and penalties accrued as of the beginning of fiscal year 2008 was $9.8 million. The amount of interest and penalties accrued during the three and six months ended December 29, 2007 was $1.6 million and $3.2 million respectively.

A summary of the tax years that remain subject to examination, as of December 29, 2007, for the Company’s major jurisdictions are:


United States - Federal		2004 - forward
United States - Various States		2003 - forward
Japan		2007 - forward
Philippines		2005 - forward
Thailand		2003 - forward
United Kingdom		2007 - forward

The Company has various state income tax returns that are currently being examined by the state taxing authorities. Management expects that these examinations will conclude within the next 12 months and that as a result unrecognized tax benefits could reasonably be expected to decline by between $4.1 million and $5.1 million within the next 12 months.

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 11: COMMITMENTS AND CONTINGENCIES

Stock Option Litigation

Beginning on or about May 22, 2006, several derivative actions were filed against certain current and former executive officers and directors of the Company. These derivative lawsuits were filed in: (1) the U.S. District Court for the Northern District of California, as In re Maxim Integrated Products, Inc. Derivative Litigation, Lead Case No. 5:06-cv-03344-JW, which consolidates McKinney v. Beck, et al. (Case No. 06-3344) and Horkay v. Beck, et al. (Case No. 06-3395), City of Pontiac Policemen’s and Firemen’s Retirement System v. Hood, et al. (Case No. 06-03754) and Corey v. Gifford, et al. (Case No. 06-03755); (2) the California Superior Court, Santa Clara County, as Louisiana Sheriffs’ Pension & Relief Fund v. Gifford et al. (Case No. 1-06-CV-065626); and (3) the Delaware Court of Chancery, as Ryan v. Gifford, et al. (Case No. Civ 2213-N). The complaints allege, among other things, that certain of Maxim’s current and former executive officers and directors breached their fiduciary duties to the Company by engaging in alleged wrongful conduct of back-dating stock options as well as violating Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company is named solely as a nominal defendant against whom the plaintiffs seek no recovery.

The parties to the Delaware derivative litigation entered into a stipulated settlement agreement on September 16, 2008, conditioned upon approval of the Delaware Court of Chancery and subject to dismissal of all other pending derivative lawsuits. Currently, there is no trial date scheduled in any of the other actions.

On February 6, 2008, a class action lawsuit was filed in the United States District Court for the Northern District of California against Maxim and its former chief executive officer and former chief financial officer. The complaint alleges that the Company and certain of its officers and directors violated the federal securities laws by making false and misleading statements and omissions relating to the grants of stock options. The complaint seeks, on behalf of persons who purchased the Company’s common stock during the period from April 29, 2003 to January 17, 2008, unspecified damages, interest and costs and expenses, including attorneys’ fees and disbursements. The action has been stayed pending completion of the restatement of the Company’s consolidated financial statements.

Stock Option Inquiry by Regulatory Authorities

On June 6, 2006, the Company was contacted by the SEC regarding an informal inquiry relating to the Company’s past stock options grants and practices. On December 4, 2007, the Company settled the matter with the SEC without admission of any guilt or wrongdoing and without any assessment of penalties against the Company. On June 29, 2006, the Company received a subpoena from the U.S. Attorney for the Northern District of California (“U.S. Attorney”) requesting documents relating to its stock option grants and practices. The Company cooperated with the U.S. Attorney and was informed that the U.S. Attorney’s office does not intend to pursue the matter.

Other Legal Proceedings

In the third quarter of fiscal year 2007, the Company settled ongoing litigation involving trade secret allegations brought by Analog Devices, Inc. (“ADI”) against the Company, and certain of its employees, relating to analog to digital converters. Under the terms of the settlement agreement, the Company paid ADI $19.0 million in fiscal 2007, which amount was accrued in the fourth quarter of fiscal year 2006. The Company also agreed that for a four year period from the date of settlement, the Company will not develop new standalone analog to digital converters having certain specified resolutions, speeds and purposes. This restriction does not include the use of analog to digital converters when embedded on the same die with a more comprehensive device, system or functionality.

In December 2005, Master Chips bvba (“Master Chips”), a former distributor of the Company’s products in Belgium, filed a demand for arbitration against the Company before the International Court of Arbitration of the International Chamber of Commerce alleging that the Company failed to give adequate advance notice to Master Chips of termination of the distribution agreement under Belgian law and that the Company failed to pay Master Chips commissions on part sales (Case No. 14 123 RCH/JHN). Master Chips sought the recovery of the alleged value of their entire business at the time of termination which they claimed exceeded $12 million and an unspecified amount for the alleged underpayment of commissions. In response to the arbitration demand, the Company asserted a claim against Master Chips alleging that the Company over-paid commissions on part sales. In July 2008, the arbitrator issued a final award awarding Master Chips approximately $9.1 million on all claims. The Company accrued for this award in fiscal year 2006.

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Following the issuance of the partial arbitration award and before the issuance of the final award, in March 2008 the Company filed a petition to vacate the arbitration award in the U.S. District Court for the Northern District of California alleging that the interim award, along with the final award when so issued, should be vacated (C 08-00721 JW). In its answer, Master Chips asserted that the partial award (along with any final award) should not be vacated and filed a cross-petition to confirm the arbitration award. In August 2008, the Court denied the Company’s petition to vacate the arbitration award and confirmed the arbitration award.

In addition to the above, the Company is subject to other legal proceedings and claims that arise in the normal course of business. The Company does not believe that the ultimate outcome of matters arising in the normal course of business will have a material adverse effect on the financial position of the Company.

Potential Tax Liabilities Under Section 409A of the Internal Revenue Code and Other Tax Penalties

As a result of the Company’s investigation into its historical stock option granting practices, the Company has determined that a number of its outstanding stock option awards were granted at exercise prices below the fair market value of its stock on the appropriate accounting measurement date. A significant adverse tax consequence is that the re-measured options vesting after December 31, 2004, or options that are materially modified after October 3, 2004, are potentially subject to option holder excise tax under Section 409A of the Internal Revenue Code (and, as applicable, similar excise taxes under state law) (“Section 409A”). Option holders who hold options which are determined to have been granted with exercise prices below the fair market value of the underlying shares of common stock on the appropriate measurement date would be subject to taxes, penalties and interest under Section 409A if no action is taken to cure the options from exposure under Section 409A before December 31, 2008. The Company took action in fiscal year 2008 to cure certain options from exposure under Section 409A. There can be no assurance that Maxim’s action cured all potential circumstances in which Section 409A would apply. Should it be found that excise taxes under Section 409A apply to option holders subsequent to the Company’s ability to cure the options from exposure to Section 409A, and the Company decides to reimburse option holders for such taxes, the Company’s results of operations may be materially adversely affected.

Also as a result of the Company investigation into equity awards, the Company has determined that certain payroll taxes, interest and penalties apply under various sections of the Internal Revenue Code, various state tax statutes, and tax statutes in various foreign jurisdictions. Maxim has reviewed these potential liabilities and accrued estimated probable amount of the liability. There can be no assurance that Maxim’s accruals covered all potential circumstances in which additional payroll taxes, interest and penalties would apply. Should it be found that additional payroll taxes, interest and penalties would apply, the Company’s results of operations may be materially adversely affected.

Indemnifications

The Company indemnifies certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which the Company’s products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. The terms of the Company’s indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to the Company’s potential liability for indemnification relating to intellectual property infringement claims.

Legal Fees Associated with Indemnification Obligations, Defense and Other Related Costs

Pursuant to the Company’s charter documents and indemnification agreements, the Company has certain indemnification obligations to its officers, directors, and certain former officers and directors. Pursuant to such obligations, the Company has incurred expenses related to legal fees and expenses advanced to certain former officers of the Company who are subject to pending civil charges by the SEC and other governmental agencies in connection with Maxim’s historical stock option granting practices. The Company expenses such amounts as incurred.

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 12: SELF-INSURANCE ACCRUALS

The Company is self-insured with respect to defective product claims, employment practice claims and general liability. Accruals are primarily based on the actuarially estimated, undiscounted cost of claims, which includes incurred-but-not-reported claims. Amounts accrued for defective product claims, employment practice claims, workers’ compensation claims and general liability in the amount of $14.3 million and $14.5 million, are included in accrued expenses in the Condensed Consolidated Balance Sheets as of December 29, 2007 and June 30, 2007, respectively.

In addition to the above, the Company is primarily self-insured with respect to healthcare benefits for most of its domestic employees. Accruals are primarily based on estimated incurred-but-not-reported claims. Amounts accrued for employee healthcare claims included in accrued salary and salary related expenses in the Condensed Consolidated Balance Sheets were immaterial as of December 29, 2007 and June 30, 2007, respectively.

NOTE 13: COMMON STOCK REPURCHASES

From fiscal years 2002 through 2006, the Board of Directors authorized the Company to repurchase up to 53.5 million shares of the Company’s common stock from time to time at the discretion of the Company’s management. As of December 29, 2007, approximately 5.7 million shares remained available for repurchase under the repurchase authorization approved by the Board of Directors, which has no expiration date.

The Company repurchased 2.1 million shares of its common stock for $60.8 million during the first quarter of fiscal year 2007. Common stock repurchased is retired and is not held as treasury stock.

In connection with the stock options investigation, the Company suspended repurchases of stock under this program as of September 23, 2006.

NOTE 14: BENEFITS

The Company and the former Chief Executive Officer (“CEO”) entered into a deferred compensation plan, pursuant to which the CEO deferred receipt of a portion of his cash compensation. Deferred compensation bears interest and was payable to the CEO over a stipulated period. On December 31, 2006, John F. Gifford retired from his positions as Company President, Chief Executive Officer, and Chairman of the Board of Directors. On January 5, 2007, the Company and Mr. Gifford entered into a Binding Memorandum of Understanding (“MOU”) which superseded the employment agreement and amended the deferred compensation plan previously entered into between the Company and Mr. Gifford. He remained with the Company on a part-time basis as a strategic advisor until January 26, 2007. In connection with the MOU, the Company recorded a $3.1 million post retirement obligation for Mr. Gifford. In addition, in January 2007 and May 2008, the Company paid Mr. Gifford $22.4 million and $7.1 million, respectively, representing the vested balance of his deferred compensation account. As of December 29, 2007 and June 30, 2007, the deferred compensation balances, including interest thereon, totaled $7.0 million and $6.9 million, respectively, which is included in accrued salary and related expenses in the Condensed Consolidated Balance Sheets.

The Company’s former CEO resigned in fiscal year 2007. As part of his resignation, he was provided with certain retirement benefits which included office space, administrative assistance, and health benefits. In accordance with SFAS No. 112, Employers’ Accounting for Postemployment Benefit, the Company recorded a charge for the net present value of these benefits of $3.1 million in fiscal year 2007. Accrued in other liabilities in the Consolidated Balance Sheet at December 29, 2007 and June 30, 2007 was $2.9 million and $3.0 million for such benefits.

As a result of the Company’s historical acquisition of Dallas Semiconductor, the Company assumed responsibility associated with certain split-dollar life insurance policies held by certain former Dallas Semiconductor officers and directors. The policies are owned by the individuals with the Company maintaining a limited collateral assignment on each policy. As a result of the adoption of EITF 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements, during the first quarter of 2008, the Company recognized a $14.1 million cumulative effect

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

adjustment to retained earnings. The Company had $6.5 million included in other assets as of December 29, 2007 associated with the limited collateral assignment to the policies. The Company had a $13.4 million obligation included in other liabilities as of December 29, 2007 related to the anticipated continued funding associated with these policies.

NOTE 15: OTHER ASSETS

The components of other assets consist of:


	December 29, 2007		June 30, 2007
	(in thousands)
Deferred tax assets	$	71,948	$	61,027
Intangible assets		62,386		4,934
Deposits for property, plant and equipment		1,123		17,709
Other		20,384		21,268

	$	155,841	$	104,938

NOTE 16: ACQUISITIONS

On October 29, 2007 the Company acquired the Storage Products Division of Vitesse Semiconductor. The total cash consideration associated with the acquisition was $64.1 million consisting of $62.8 million in cash, $0.8 million in direct legal costs associated with the acquisition, $0.5 million related to the buyout of an existing arrangement between Vitesse and a vendor. The Company also assumed $2.0 million of liabilities. The Company will pay additional cash consideration of up to $12.0 million based on product shipments of the acquired business. The contingent consideration will be payable on a quarterly basis and such amounts will be recorded as goodwill. The Company allocated the acquisition cost to assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The acquired assets included $4.9 million in tangible assets, $0.9 million in customer order backlog, $28.4 million in intellectual property, $22.2 million in customer relationships and $9.6 million in goodwill.

The unaudited condensed consolidated financial statements for the six months ended December 29, 2007 include the operations of Vitesse’s Storage Products Division commencing as of the acquisition date. No supplemental pro forma information is presented for the acquisition due to the immaterial effect of the acquisition on the Company’s results of operations.

NOTE 17: GOODWILL AND INTANGIBLE ASSETS

The Company classifies goodwill and acquired intangible assets within other assets in the Condensed Consolidated Balance Sheets.

The Company’s carrying value of goodwill as of December 29, 2007 is $9.6 million which relates to the acquisition. In connection with the Company’s acquisition of the Storage products division of Vitesse Semiconductor the Company obtained $28.4 million in intellectual property, $22.2 million in customer relationships, $0.9 million in customer order backlog, and $9.6 million in goodwill. The useful lives of the significant definite lived intangible assets are as follows:


Asset		Life
Intellectual Property		5 years
Customer Relationships		10 years

Intangible assets consisted of the following:


	December 29, 2007
	Original Cost		Accumulated Amortization		Net
	(in thousands)
Intellectual property	$	28,430	$	948	$	27,482
Customer relationships		22,230		371		21,859

Total intangible assets	$	50,660	$	1,319	$	49,341

MAXIM INTEGRATED PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Amortization expense of $0.9 million associated with intellectual property was recorded in cost of goods sold during the second quarter of fiscal year 2008 while amortization expense of $0.4 million associated with customer relationships was recorded in Selling, general and administrative expenses in the second quarter of fiscal year 2008.

The following table presents the amortization of intangible assets:


	Three Months Ended				Nine Months Ended
	December 29, 2007		December 23, 2006		December 29, 2007		December 23, 2006
	December 29, 2007		December 23, 2006		December 29, 2007		December 23, 2006
	(in thousands)				(in thousands)
Intellectual property	$	948	$	—	$	948	$	—
Customer relationships		371		—		371		—

Total accumulated amortization	$	1,319	$	—	$	1,319	$	—

The following table represents the estimated future amortization expense of intangible assets as of December 29, 2007:


Fiscal Year	Amount
	(in thousands)
2008 (remaining 6 months)	$	3,955
2009		7,909
2010		7,909
2011		7,909
2012		7,909
2013		4,118
Thereafter		9,632

Total intangible assets	$	49,341

NOTE 18: SUBSEQUENT EVENTS

In January 2008, the Company announced the wind down and eventual closure of its wafer manufacturing facility in Dallas over an 18-month time period and the restructuring of certain businesses including the cancellation of research and development for the handset radio frequency transceiver product line. Estimated restructuring costs associated with these actions of $6.2 million will be incurred over the 18 month time period for severance and benefits for the employees to be terminated. In connection with the closure of the Dallas facility, the Company also reevaluated the useful lives and salvage values of the fixed assets used in the facility based on the new period of intended use. As a result, the Company changed its depreciable lives and salvage values resulting in the recognition of additional depreciation of $22.6 million in fiscal year 2008.

ITEM 2.

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

The Company disclaims any duty to and undertakes no obligation to update any forward-looking statement, whether as a result of new information relating to existing conditions, future events or otherwise or to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events except as required by federal securities laws. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should carefully review future reports and documents that the Company files from time to time with the SEC, such as its annual reports on Form 10-K (particularly Management’s Discussion and Analysis of Financial Condition and Results of Operations), its quarterly reports on 10-Q (particularly Management’s Discussion and Analysis of Financial Condition and Results of Operations), and any current reports on Form 8-K.

Overview

Maxim Integrated Products, Inc. (“Maxim” or “the Company” and also referred to as “we,” “our” or “us”) designs, develops, manufactures, and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits, for a large number of geographically diverse customers and is incorporated in the state of Delaware. The Company also provides a range of high-frequency process technologies and capabilities that can be used in custom designs. The analog market is fragmented and characterized by many diverse applications, a great number of product variations and, with respect to many circuit types, relatively long product life cycles. The Company is a global company with manufacturing facilities in the United States, testing facilities in the Philippines and Thailand, and sales and circuit design offices throughout the world. The major end-markets the Company’s products are sold in are the communications, computing, consumer and industrial markets.

CRITICAL ACCOUNTING POLICIES

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of our financial condition and results of operations, and that require us to make our most difficult and subjective accounting judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include revenue recognition and accounts receivable allowances, which impact the recording of revenues, valuation of inventories, which impacts costs of goods sold and gross margins, the assessment of recoverability of long-lived assets, which impacts write-offs of fixed assets, accounting for stock-based compensation, which impacts cost of goods sold, gross margins and operating expenses, accounting for income taxes, which impacts the income tax provision, and assessment of contingencies, which impacts charges recorded in cost of goods sold and selling, general and administrative expenses. We have other significant accounting policies that either do not generally require estimates and judgments that are as difficult or subjective, or it is less likely that such accounting policies would have a material impact on our reported results of operations for a given period. The accounting policy below represents an addition to the Company’s significant accounting policies as disclosed in our Annual Report on Form 10-K for the year ended June 30, 2007.

Intangible Assets and Goodwill

We account for intangible assets, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset (“SFAS 144”), which requires impairment losses to be recorded on intangible assets used in operations when indicators of impairment, such as reductions in demand or significant economic slowdowns in the semiconductor industry, are present. Reviews are performed to determine whether the carrying value of an asset is impaired, based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using: (i) quoted market prices or (ii) discounted expected future cash flows utilizing a discount rate consistent with the guidance provided in FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements “Concepts Statement 7.” Impairment is based on the excess of the carrying amount over the fair value of those assets.

Intangible Asset (“SFAS 142”), we test goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the fourth quarter or more frequently if we believe indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We generally determine the fair value of our reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill.

RESULTS OF OPERATIONS

Net Revenues

Net revenues were $540.0 million and $497.5 million for the three months ended December 29, 2007 and December 23, 2006, respectively, an increase of 8.5%. Net revenues for the six months ended December 29, 2007 and December 23, 2006, were $1,064.1 million and $1,000.2 million, respectively, an increase of 6.4%. The increase in net revenues for the three and six months ended December 29, 2007 as compared to the three and six months ended December 23, 2006 was primarily due to increased unit shipments of approximately 11% and 11%, respectively. The increase in unit shipments was offset somewhat by a change in product mix related to increased sales of products with lower average selling prices.

During the three months ended December 29, 2007 and December 23, 2006, approximately 81% and 78%, respectively, of net revenues were derived from customers outside of the United States. During the six months ended December 29, 2007 and December 23, 2006, approximately 81% and 78%, respectively, of net revenues were derived from customers outside of the United States. While the majority of these sales are denominated in U.S. dollars, we enter into foreign currency forward contracts to mitigate our risks on firm commitments and net monetary assets denominated in foreign currencies. The impact of changes in foreign exchange rates on revenue and our results of operations for the three and six months ended December 29, 2007 and December 23, 2006 was immaterial.

Gross Margin

Our gross margin as a percentage of net revenues was 62.1% and 62.0% for the three months ended December 29, 2007 and December 23, 2006, respectively. The gross margin percentage increased primarily due to a $4.0 million decrease in stock-based compensation during the three months ended December 29, 2007 as compared to the three months ended December 23, 2006. Inventory write downs increased by $0.6 million during the three months ended December 29, 2007 as compared to the three months ended December 23, 2006. Inventory write downs were $8.2 million for the three months ended December 29, 2007 as compared to $7.6 million for the three months ended December 23, 2006, respectively. In addition to the above, gross margin was negatively impacted due to product mix changes combined with decreased average unit selling prices which contributed to an unfavorable impact on gross margin percentage for the for the three months ended December 29, 2007 as compared to the three months ended December 23, 2006.

Our gross margin percentage was 61.4% and 60.7% for the six months ended December 29, 2007 and December 23, 2006, respectively. The increase in the gross margin percentage for the six months ended December 29, 2007 as compared to the six months ended December 23, 2006, is due to a $24.9 million decrease in stock-based compensation. This decrease was primarily due to the extension of the terms of vested stock options that expire during the Blackout Period as a result of the expiration of the 10 year contractual term and the resulting modification charge. The above was offset by a $2.2 million increase in inventory write downs for inventory is excess of demand during the six months ended December 29, 2007 as compared to the six months ended December 23, 2006. Inventory write downs were $16.8 million and $14.6 million for the six months ended December 29, 2007 and December 23, 2006, respectively. In addition, product mix combined with decreased average unit selling prices contributed to an unfavorable impact on gross margin percentage for the for the three months ended December 29, 2007 as compared to the three months ended December 23, 2006.

Research and Development

Research and development expenses were $138.6 million and $138.3 million for the three months ended December 29, 2007 and December 23, 2006, respectively, which represented 25.7% and 27.8% of net revenues, respectively. Although research and development expenses in absolute dollars was flat quarter over quarter, stock-based compensation decreased by $12.0 million. This decrease was offset by $9.4 million increase in salary and related expenses primarily from salary increases and hiring additional engineers to support our research and development and process development efforts for the three months December 29, 2007 as compared to the three months ended December 23, 2006.

Research and development expenses were $289.4 million and $351.6 million for the six months ended December 29, 2007 and December 23, 2006, respectively, which represented 27.2% and 35.2% of net revenues, respectively. The decrease in research and development expenses was primarily due to decreased stock-based compensation. Stock- based compensation decreased by $83.3 million primarily due to the extension of the terms of vested stock options that expire during the Blackout Period as a result of the expiration of the 10 year contractual term and the resulting modification charge. The above decrease was offset by a $22.5 million increase in salary and related expenses primarily from salary increases and hiring additional engineers to support our research and development and process development efforts for the six months December 29, 2007 as compared to the six months ended December 23, 2006.

The level of research and development expenditures as a percentage of net revenues will vary from period to period, depending, in part, on the level of net revenues and, in part, on our success in recruiting the technical personnel needed for our new product introductions and process development, and on the level of stock-based compensation expense. We view research and development expenditures as critical to maintaining a high level of new product introductions, which in turn are critical to our plans for future growth.

Selling, General and Administrative

Selling, general and administrative expenses were $56.5 million and $43.0 million for the three months ended December 29, 2007 and December 23, 2006, respectively, which represented 10.5% and 8.6% of net revenues, respectively. The increase in selling, general, and administrative expenses for the three months ended December 29, 2007 as compared to the three months ended December 23, 2006 was primarily due to an increase of $6.0 million in legal expenses and an increase of $7.0 million in accounting fees associated with our stock option investigation, subsequent restatement of our previously filed financial statements, private litigation and other associated activities. In addition, salary and related expenses increased by $1.9 million due to increased headcount for the three months ended December 29, 2008 as compared to the three months ended December 24, 2007. The above increases were offset by a decrease of $4.4 million in stock-based compensation during the three months ended December 29, 2007 as compared to the three months ended December 23, 2006.

Selling, general and administrative expenses were $113.7 million and $112.7 million for the six months ended December 29, 2007 and December 23, 2006, respectively, which represented 10.7% and 11.3% of net revenues, respectively. The decrease in selling, general, and administrative expenses for the six months ended December 29, 2007 as compared to the six months ended December 23, 2006 was primarily due to the decrease of stock-based compensation. Stock based compensation decreased by $29.4 million primarily due to the extension of the terms of vested stock options that expire during the Blackout Period as a result of the expiration of the 10 year contractual term and the resulting modification charge. The above decrease was offset by an increase of $11.4 million in legal expenses and an increase of $10.9 million in accounting fees associated with our stock option investigation, subsequent restatement of our previously filed financial statements, private litigation and other associated activities. In addition, salary and related expenses increased by $4.7 million due to salary increases and hiring headcount during the six months ended December 29, 2008 as compared to the six months ended December 24, 2007.

The level of selling, general and administrative expenditures as a percentage of net revenues will vary from period to period, depending on the level of net revenues, our success in recruiting sales and administrative personnel needed to support our operations, and the level of stock-based compensation expense. We expect a significant increase in selling, general and administrative expenditures in fiscal years 2007 and 2008 for expenses associated with our restatement, related private litigation and other associated activities, particularly, for accounting, legal and other professional service fees.

Stock-based Compensation


	Three Months Ended				Six Months Ended
	December 29, 2007		December 23, 2006		December 29, 2007		December 23, 2006
	December 29, 2007		December 23, 2006		December 29, 2007		December 23, 2006
	(in thousands)
Cost of goods sold
Stock options	$	7,960	$	10,620	$	19,107	$	41,788
Employee stock purchase plan		—		—		—		1,431
Restricted stock units		3,708		5,065		8,223		9,025

		11,668		15,685		27,330		52,244

Research and development expense
Stock options		13,678		21,955		46,142		121,103
Employee stock purchase plan		—		—		—		4,672
Restricted stock units		9,121		12,853		20,461		24,159

		22,799		34,808		66,603		149,934

Selling, general and administrative expense
Stock options		4,638		8,642		14,935		42,820
Employee stock purchase plan		—		—		—		1,431
Restricted stock units		2,611		3,038		5,501		5,629

		7,249		11,680		20,436		49,880

Total stock-based compensation expense
Stock options		26,276		41,217		80,184		205,711
Employee stock purchase plan		—		—		—		7,534
Restricted stock units		15,440		20,956		34,185		38,813

Pre-tax stock-based compensation expense		41,716		62,173		114,369		252,058
Less: Income tax effect		14,550		21,465		40,147		87,201

Net stock-based compensation expense	$	27,166	$	40,708	$	74,222	$	164,857

Interest Income and Other, Net

Interest income and other, net was $21.9 million and $14.8 million for the three months ended December 29, 2007 and December 23, 2006, respectively. This increase was primarily due to a $9.6 million gain on sale of certain fixed assets. This increase was offset slightly by decreased interest income due to lower average interest rates combined with lower invested cash, cash equivalents, and short-term investments balances.

Interest income and other, net was $39.3 million and $28.2 million for six months ended December 23, 2006, respectively. This increase was primarily due to a $9.6 million gain on sale of certain fixed assets and increased interest income resulting from higher average interest rates offset slightly by lower average invested cash, cash equivalents, and short-term investments balances.

Provision for Income Taxes

The effective income tax rate for the three and six months ended December 29, 2007 and December 23, 2006 was 34.1% and 31.1%, respectively. The increase in the effective tax rate for three and six months ended December 29, 2007 compared to three and six months ended December 23, 2006 was primarily due to the final phase out of the extraterritorial income exclusion by the American Jobs Creation Act of 2004 and the expiration of the Federal research tax credit on December 31, 2007. The effective rates were lower than the U.S. federal and state combined statutory rate primarily due to tax benefits generated by the research and development credit and the domestic production activities deduction.

The Company’s net deferred tax asset at December 29, 2007 was $305.0 million. The Company believes it is more likely than not that the net deferred tax assets will be realized based on historical earnings and expected levels of future taxable income. Levels of future taxable income are subject to the various risks and uncertainties as described in this report. An increase in the valuation allowance against net deferred tax assets may be necessary if it becomes more likely than not that all or a portion of the net deferred tax assets will not be realized. The Company periodically assesses the need for increases to the deferred tax asset valuation allowance.

On July 1, 2007, the Company adopted FASB Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. The Company has historically classified unrecognized tax benefits as income taxes payable, which was included within the current liabilities section of our Condensed Consolidated Balance Sheet or as a reduction to deferred tax assets to the extent that the unrecognized tax benefits related to net operating loss or tax credit carryforwards. As a result of the adoption of FIN 48, the Company now classifies unrecognized tax benefits as a current liability to the extent that settlement is anticipated within one year; as a non current liability to the extent that settlement is anticipated beyond one year; or as a reduction to deferred tax assets to the extent that the unrecognized tax benefit relates to deferred tax assets such as operating loss or tax credit carryforwards.

The Company evaluated and assessed its tax positions under the recognition and measurement guidelines of FIN 48. The adoption of FIN 48 resulted in an increase to our contingent tax liability reserves of $28.6 million. Of this amount approximately $9.4 million was accounted for as a reduction to beginning retained earnings and approximately $19.2 million as a reduction to additional paid-in capital. The amount of unrecognized tax benefits at the beginning of fiscal year 2008 was $123.6 million, excluding interest and penalties of $9.8 million. Of this amount, $61.3 million relates to unrecognized tax benefits that, if recognized, would impact our effective tax rate and the remaining $62.3 million relates to unrecognized tax benefits that, if recognized, would be credited to additional paid in capital.

The Company reports interest and penalties related to unrecognized tax benefits as a component of income tax expense, which is consistent with its methodology prior to the adoption of FIN 48. The amount of interest and penalties accrued as of the beginning of fiscal year 2008 was $9.8 million. The amount of interest and penalties accrued during the three and six months ended December 29, 2007 was $1.6 million and $3.2 million respectively.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements. The statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. The statement emphasizes that fair value is a market-based measurement and not an entity-specific measurement. It also establishes a fair value hierarchy used in fair value measurements and expands the required disclosures of assets and liabilities measured at fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In addition, in February 2008, the FASB issued FSP No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (“FSP 157-1”) and FSP No.157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”). FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its

scope. FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS 157 on the Company’s consolidated financial condition, results of operations and liquidity.

In March 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements (“EITF 06-10”). EITF 06-10 provides guidance for determining a liability for the post-retirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007, although earlier adoption is permitted. We early adopted EITF 06-10 during the three months ended September 29, 2007 and recorded a cumulative effect adjustment as a net reduction to retained earnings of approximately $14.1 million. No corporate income tax benefit was netted against the charge to retained earnings because the liabilities being accrued are not deductible for corporate income tax purposes.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 improves the relevance, comparability and transparency of financial statements and eliminates diversity in practice that currently exists in accounting for transactions between an entity and noncontrolling interests. This standard is effective for annual periods beginning after December 15, 2008. Earlier adoption is prohibited. We do not believe the adoption of SFAS 160 will have a material effect on our consolidated financial position, results of operations and cash flows.

In December 2007, the FASB ratified EITF Issue No. 07-1, Accounting for Collaborative Arrangements (“EITF 07-01”). EITF 07-1 provides guidance on the classification, income statement presentation and disclosure associated with collaborative arrangements involving parties considered to be active participants to an activity and are exposed to significant risks and rewards which are dependent on the commercial success of the activity. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. The adoption of EITF 07-01 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133 (“SFAS 161”) which changes the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires the Company to provide enhanced disclosures about (a) how and why the Company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and (c) how derivative instruments and related hedged items affect our financial position, financial performance and cash flows. These disclosure requirements are effective for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the impact of adopting SFAS 161 on our consolidated financial position, results of operations and cash flows.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting consistent with GAAP. SFAS 162 is effective sixty days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411 on September 16, 2008, The Meaning of ‘Present fairly in conformity with generally accepted accounting principles.’ We are currently evaluating the potential impact, if any, of the adoption of SFAS 162 on our consolidated financial statements.

BACKLOG

At the end of the second quarter of fiscal year 2008, backlog shippable within the next 12 months was approximately $356 million, including approximately $304 million requested for shipment in the third quarter of fiscal year 2008. The Company’s previous quarter ending backlog shippable within the next 12 months was approximately $414 million, including approximately $361 million that was requested for shipment in the second quarter of fiscal year 2008.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of funds for the six month period ended December 29, 2007 were net cash generated from operating activities of $240.7 million.

The principal uses of funds for the six month period ended December 29, 2007 included dividends paid of approximately $120.2 million, $133.7 million for property, plant and equipment, $118.1 million for income tax payments, $64.1 million for the acquisition of the storage products division from Vitesse Semiconductor Corporation, $94.1 million for cash settlements of expiring options and $17.1 million for cash settlements of vested RSUs and payouts under the RSU loan program.

As of December 29, 2007, the Company’s available funds consisted of $1,154.8 million in cash, cash equivalents, and short-term investments. This amount represents a decrease of $144.6 million from $1,299.4 million as of June 30, 2007. The Company anticipates that the available funds and cash generated from operations will be sufficient to meet cash and working capital requirements, including its anticipated level of capital expenditures and dividend payments for the next twelve months.

Significant Cash Outlays Resulting From the Restatement of Previously Reported Financial Statements

Since the beginning of the stock option investigation through June 28, 2008, we have incurred significant cash outlays as noted below:

•

We have incurred $91.9 million for expenses associated with the investigation, subsequent restatement of our previously filed financial statements, private litigation and other associated activities, particularly, for accounting, legal and other professional service fees. We will incur significant expenses for these in fiscal year 2009.

•

We have paid $117.3 million to individual option holders to compensate them for stock options that contractually expired subsequent to the suspension of the Company’s S-8 Registration Statements at which time employees were no longer able to exercise their vested stock options (the “Blackout Period”). We will incur significant cash payments subsequent to June 28, 2008 for additional options that expire during the Blackout Period.

•

We have issued $54.8 million in non-recourse loans to individuals holding RSUs that vested during the Blackout Period. We will loan additional amounts subsequent to June 28, 2008 for RSUs that vest during the Blackout Period and such amounts may be significant.

•

We have paid $10.0 million to international employees for RSUs which vested during the Blackout Period for which we were unable to deliver shares of common stock. We will pay additional amounts subsequent to June 28, 2008 to certain international employees for RSUs which vest during the Blackout Period.

In addition to the above, while we intend to vigorously defend against lawsuits related to our past stock options granting practices, we do not presently know whether we will be successful in such lawsuits. If we are not successful, we may be required to pay substantial cash settlement expenses which could have a material adverse impact on our results of operations and liquidity.

Off-Balance-Sheet Arrangements

As of December 29, 2007, the Company did not have any material off-balance-sheet arrangements, as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.

ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s market risk has not changed materially from the interest rate and foreign currency risks disclosed in Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

ITEM 4:

CONTROLS AND PROCEDURES

Stock Option Investigation

As described in the Explanatory Note, in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and in Note 2 of our Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended June 24, 2006, we have restated certain of our historical consolidated financial statements to record additional stock-based compensation expense as a result of errors identified in connection with our independent stock option review. We have also included in the restatement certain other adjustments to these historical consolidated financial statements.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our current chief executive officer (“CEO”) and our interim chief financial officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of December 29, 2007. The purpose of these controls and procedures is to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, and that such information is accumulated and communicated to our management, including our CEO and our CFO, to allow timely decisions regarding required disclosures.

Our management, including the CEO and the CFO, has concluded that the Company’s disclosure controls and procedures were not effective as of December 29, 2007 due to the presence of the material weaknesses in our internal control over financial reporting relating to deficiencies in our (1) control environment, due to the Company’s failure to maintain proper tone and control consciousness at the executive management level, effective policies and procedures for monitoring our stock administration department, effective monitoring controls to detect or prevent non-compliance with the Company’s policies regarding option grants, and proper lines of communication regarding identification and processing of stock option transactions; and (2) controls over stock option practices and the related accounting for stock option transactions, due to the Company’s failure to maintain sufficient procedures and controls over granting and accounting for stock options, lack of sufficient staffing, accounting knowledge and training among the personnel dealing with stock options, and lack of complete and consistent documentation for stock option transactions. These material weaknesses are more fully described in our Annual Report on Form 10-K for the fiscal year ended June 24, 2006, and continue to exist as of September 29, 2007.

Changes in Internal Control over Financial Reporting

Other than the remedial actions described in Item 9A in our Annual Report on Form 10-K for the fiscal year ended June 24, 2006 that took place or were ongoing during the three months ended December 29, 2007, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended December 29, 2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Implementation of Remedial Actions of Material Weaknesses

Throughout the second half of fiscal year 2007 and fiscal year 2008, the Company has implemented the remedial actions described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended June 24, 2006.

As of the date of this filing, the Company has completed its evaluation of such remedial actions, including the design of the new policies, procedures and controls it has instituted, which have been in place for a sufficient period of time,

and has tested their operating effectiveness. The Company considers that as of the date of this filing, the corrective steps have improved the effectiveness of the Company’s internal control over financial reporting and have remediated the material weaknesses discussed above.

Inherent Limitations on the Effectiveness of Internal Controls

A system of internal control over financial reporting is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP and no control system, no matter how well designed and operated, can provide absolute assurance. The design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of its inherent limitations, internal control over financial reporting may not prevent or detect financial statement errors and misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

PART II. OTHER INFORMATION

ITEM 1:

LEGAL PROCEEDINGS

The information set forth above under Note 11 contained in the “Notes to Condensed Consolidated Financial Statements” is incorporated herein by reference.

ITEM 1A:

RISK FACTORS

A description of the risks associated with our business, financial condition and results of operations is set forth in Item 1A – Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, which is herein incorporated by reference. We have no material changes in our risks from such description.

ITEM 2:

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

NOT APPLICABLE

ITEM 3:

DEFAULTS UPON SENIOR SECURITES

NOT APPLICABLE

ITEM 4:

SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

NOT APPLICABLE

ITEM 5:

OTHER INFORMATION

NOT APPLICABLE

ITEM 6:

EXHIBITS

(a)

Exhibits


3.1		Restated Certificate of Incorporation of the Company (1)

3.3		Amendments to Restated Certificate of Incorporation of the Company (2)

3.4		Amended and Restated Bylaws of the Company (3)

3.4(a)		Certificate of Amendment to the Bylaws of the Company effective December 21, 2006 (4)

3.4(b)		Certificate of Amendment to the Bylaws of the Company effective November 15, 2007 (5)

4.1		Reference is made to Exhibits 3.1, 3.3 and 3.4, 3.4(a) and 3.4(b).

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated by reference to exhibit 3.1 in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 1995.

(2)

Incorporated by reference to exhibit number 3.3 in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 1997, to exhibit 3.3 in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 1998, to exhibit number 3.3 in the Company’s Quarterly Report on Form 10-Q for the three months ended December 25, 1999, and to exhibit number 3.3 in the Company’s Quarterly Report on Form 10-Q for the three months ended December 30, 2000.

(3)	Incorporated by reference to exhibit 3.4 in the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2002.

(4)	Incorporated by reference to exhibit 3.4(b) in the Company’s Current Report on Form 8-K filed December 22, 2006.

(5)	Incorporated by reference to exhibit 3.1 in the Company’s Current Report on Form 8-K filed November 21, 2007.

SIGNATURES

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


Date: September 30, 2008	MAXIM INTEGRATED PRODUCTS, INC.

	By:	/s/ Alan P. Hale
		Vice President, Interim Chief Financial Officer and Principal Accounting Officer

Exhibit Index


Exhibit Number		Description
3.1		Restated Certificate of Incorporation of the Company (1)

3.3		Amendments to Restated Certificate of Incorporation of the Company (2)

3.4		Amended and Restated Bylaws of the Company (3)

3.4(a)		Certificate of Amendment to the Bylaws of the Company effective December 21, 2006 (4)

3.4(b)		Certificate of Amendment to the Bylaws of the Company effective November 15, 2007 (5)

4.1		Reference is made to Exhibits 3.1, 3.3, 3.4, 3.4(a) and 3.4(b).

31.2		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated by reference to exhibit 3.1 in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 1995.

(2)

(3)	Incorporated by reference to exhibit 3.4 in the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2002.

(4)	Incorporated by reference to exhibit 3.4(b) in the Company’s Current Report on Form 8-K filed December 22, 2006.

(5)	Incorporated by reference to exhibit 3.1 in the Company’s Current Report on Form 8-K filed November 21, 2007.

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