10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2006

OR

¨ 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. 0-14225

EXAR CORPORATION

(Exact Name of Registrant as specified in its charter)

Delaware	94-1741481
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

48720 Kato Road, Fremont, CA 94538

(Address of principal executive offices, Zip Code)

Registrant’s telephone number, including area code: (510) 668-7000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK

(Title of Class)

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

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

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2005 was $494,074,109 based on the last sales price reported for such date as reported on The NASDAQ National Market.

The number of shares outstanding of the Registrant’s Common Stock was 35,942,845 as of May 31, 2006, net of treasury shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s 2006 Definitive Proxy Statement to be filed not later than 120 days after the close of the 2006 fiscal year are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Report.

EXAR CORPORATION AND SUBSIDIARIES

INDEX TO

ANNUAL REPORT ON FORM 10-K

FOR FISCAL YEAR ENDED MARCH 31, 2006

		Page
	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	28
Item 2.	Properties	28
Item 3.	Legal Proceedings	28
Item 4.	Submission of Matters to a Vote of Security Holders	29
	PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30
Item 6.	Selected Consolidated Financial Data	31
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32-47
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 8.	Financial Statements and Supplementary Data	49-79
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	80
Item 9A.	Controls and Procedures	80
Item 9B.	Other Information	80
	PART III
Item 10.	Directors and Executive Officers of the Registrant	81
Item 11.	Executive Compensation	81
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	81
Item 13.	Certain Relationships and Related Transactions	81
Item 14.	Principal Accounting Fees and Services	81
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	82
Signatures		83

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PART I

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K (the “Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are generally written in the future tense and/or may generally be identified by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements contained in this Annual Report include, among others, statements made in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations- “Outlook for Fiscal Year 2007” and elsewhere regarding (1) the Company’s market share and competitive position, (2) the Company’s revenue growth, (3) the Company’s belief that its success will continue to depend on its distributors and sales representatives, (4) the Company’s product enhancements (5) the Company’s design wins, (6) the Company’s gross profits, (7) the Company’s research and development efforts and related expenses, (8) the Company’s selling, general and administrative expenses (9) the Company’s belief that its cash and cash equivalents, short-term marketable securities and cash flows from operations will be sufficient to satisfy working capital requirements and capital equipment needs for at least the next 12 months, (10) the effect of interest rates on the Company’s interest income, (11) the Company’s anticipation that it will continue to finance operations with cash flows from operations, existing cash and investment balances, and some combination of long-term and/or lease financing and additional sales of equity securities and (12) the possibility of future acquisitions and investments. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Factors that could cause actual results to differ materially from those included herein include, but are not limited to: the information contained under the captions “Part I, Item 1. Business,” “Part I, Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Company disclaims any obligation to update information in any forward-looking statement.

ITEM 1. BUSINESS

Overview

Exar Corporation (“Exar” or the “Company”) designs, develops and markets high-performance, high-bandwidth physical interface and access control solutions that facilitate the aggregation and transport of signals in access, metro and wide area networks over the worldwide communications infrastructure. The Company’s industry-proven analog and digital design expertise, system-level knowledge and standard complementary metal oxide semiconductors (“CMOS”) process technologies provides original equipment manufacturers (“OEMs”) with innovative, highly integrated circuits (“ICs”) addressing standards such as T/E carrier, ATM, SONET/SDH and Multi-Protocol Over SONET (“MPOS”). In addition, the Company has developed a portfolio of clock products that address various system needs for clock generation, distribution, skew adjustment and fail-safe applications. The clock and timing product lines leverage Exar’s phase locked-loop (“PLL”) technology that is used extensively in its existing network and transmission products. The clock and timing products are targeted at wireless base stations, network switches and routers.

The Company also provides a comprehensive family of serial communications solutions comprised of low voltage, single/multi-channel universal asynchronous receiver transmitters (“UARTs”). UARTs are well suited to increase data transfer efficiency for various industrial, telecommunications and consumer applications.

The Company designs and markets IC products that address select applications for the video and imaging markets. Late in fiscal year 2006, Exar introduced its first SATA/SAS Port-Multiplier product addressing the storage marketplace.

Exar was incorporated in California in 1971 and reincorporated in Delaware in 1991. Exar’s common stock trades on The NASDAQ National Market (“NASDAQ”) under the symbol “EXAR”. See the information in “Part II, Item 8,

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Financial Statements and Supplementary Data” for information on the Company’s financial position as of March 31, 2006 and 2005 and its results of operations and cash flows for the periods ended March 31, 2006, 2005 and 2004.

Exar believes its broad product offerings provide its customers the following benefits:

• increased bandwidth through the integration of multiple channels on a single device;

• reduced system noise/jitter to improve data integrity;

• a single source for a full range of transceivers, mappers and framer solutions and transmission rates;

• reduced overall system cost and size through the integration of multiple functions on a single device;

• accelerated time-to-market by allowing customers to focus on core competencies and outsource standards-based solutions; and

• unique value added features and functions.

Key elements of the Company’s solution include:

Commitment to Connectivity.    Exar remains steadfast in its commitment to connectivity—a strategic principle that drives Exar’s product strategies and serves as a foundation for customer and vendor engagements. Connectivity describes our distinctive approach in creating and providing value to our shareholders, employees, customers and suppliers.

Leading Analog and Mixed-Signal Design Expertise.    Exar has approximately thirty-five years of proven technical competency in developing analog and mixed-signal ICs. As a result, the Company has developed deep expertise in these areas and a comprehensive library of design elements. For example, the Company believes that it has particularly strong expertise in the design of high-speed, low-jitter phase-locked loops, which are key elements in its mixed-signal transceiver, jitter attenuator, data aggregation mapper products and clock devices. As a result, Exar can provide its customers with solutions that typically exceed standard specifications and allow them flexibility in designing other system elements.

Comprehensive Solutions to Enhance System Integration.    The combination of Exar’s design and system-level expertise allows it to provide a comprehensive solution that encompasses hardware, software and applications support. Exar believes that, by using its solutions, OEMs can efficiently integrate the Company’s devices into their systems, better leverage their development resources and reduce their time-to-market.

Compelling Performance Solutions.    The Company uses its systems expertise and its analog, digital and mixed-signal design techniques to architect high-performance products based on standard CMOS process technologies. Exar believes that these CMOS processes are proven, stable, predictable and able to meet its customers’ speed, power and performance requirements at a competitive price point.

The Company’s OEM customers include, among others, Adtran Inc. (“Adtran”), Alcatel, Cisco Systems Inc. (“Cisco”), Digi International, Inc. (“Digi International”), Fujitsu Limited (“Fujitsu”), Hewlett-Packard Company (“Hewlett-Packard”), Huawei Technologies Company, LTD. (“Huawei”), ITT Industries, Inc. (“ITT”), Lucent Technologies, Inc. (“Lucent”), Ericsson/Marconi, Mitsubishi Electronic Corporation of Japan (“Mitsubishi Electronics”), NEC Corporation (“NEC”), Nokia Corporation (“Nokia”), Plantronics, Inc. (“Plantronics”), Siemens A.G. (“Siemens”), and Tellabs, Inc. (“Tellabs”). For the fiscal year ended March 31, 2006, Alcatel represented 10.5% of the Company’s net sales.

Industry Background

Communications

The communications industry, and its underlying technology, has gone through a significant transformation during the last several years. It has been driven by the continuing adoption of broadband, and the increasing

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consumer demand for more services delivered at ever-faster speeds. This phenomenon has changed the complexion of the market, and the companies that support it. The industry is typified by increasing competition with the convergence of telecommunication and cable/satellite operators expanding to offer telecommunications, Internet and video services. Recently, the telecommunication industry has experienced consolidation as surviving carriers acquire wireline and wireless networks to compete with expanded coverage and services.

The network infrastructure—a highway of interconnections—must transmit varied traffic (voice, data and video) at different speeds over the Internet. To accomplish this, OEMs are designing complex ICs in multi-service equipment leveraging industry standard protocols and high data transmission speeds enabling networks to communicate with each other. In North America, the high-speed data traffic standard is Synchronous Optical Network (“SONET”), and in most of the rest of the world, it is Synchronous Data Hierarchy (“SDH”). Over optical fiber, the SONET/SDH standard ensures network reliability, data integrity and the interoperability of equipment deployed across the network from different manufacturers. Additionally, carriers are ramping up triple play services (voice, data and video) over converged wireless and wireline infrastructure using standards-based Multi-protocol over SONET/SDH solutions and on “greenfield” deployments using native Ethernet based technologies, while making sure that reliable and seamless services are offered across these multiple inter-networking domains. Beyond the wireline infrastructure, wireless services have also evolved during this period with more carriers offering consumers advanced capabilities such as video conferencing and wireless TV services.

The combined effect of all of these changes in the telecommunications market is driving IC manufacturers to increase the bandwidth supported by their devices by providing vertical integration (more functionality) and horizontal integration (more channels). This push to more cost effective devices in turn is increasing the adoption rate of these services in both the established and emerging markets. The Company believes that IC companies with analog and digital design expertise and a deep understanding of system-level applications will have a competitive advantage in this changing market environment.

Storage

The need for reliable and cost effective storage technologies has increased almost exponentially with the increased volume of data transmitted over the Internet. This data now includes critical business and personal information, which in many cases no longer has paper back-up.

This increase in the volume of data is already pushing IC manufacturers to constantly augment the throughput of their devices to data rates of three gigabytes per second and higher. The critical nature of the data is also pressuring IC manufacturers to pay constant attention to the performance of these devices especially at the physical layer.

Data reliability and security is improved by distributing the storage functionality across multiple hosts and drives. This method includes deploying port multipliers that provide access to multiple disk drives by a single host and deploying port selectors that allow multiple hosts to access a single drive. In some cases, both the port multiplier and port selector functionality is implemented in a single system that addresses both the reliability and redundancy requirements of a storage system.

Clock and Timing

During the past several years, clock and timing products have played a more ubiquitous and critical role within digital systems. The appetite of consumers for digital entertainment and instant global connectivity, and the drive for complex data processing require a broad range of timing solutions. This change in system dynamics is fueling the need to support higher speed synchronization and communication between complex microprocessors, memory, application specific integrated circuits (“ASICs”), and other elements on the system board. To effectively facilitate gigabyte rates in communications systems, clock and timing solutions now have to provide very high frequencies combined with stringent jitter performance.

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Consumer applications such as set top boxes and digital televisions require timing solutions that provide a high level of flexibility in terms of frequencies and programmability. Computing systems also need clocks and buffers that can manage vast arrays of memory within sophisticated workstations and servers. The timing market has to keep pace with these diverse applications that are driving the volumes and sophistication of clock synthesizers and related products.

Serial Communications

The move from parallel to serial interfaces for chip-to-chip or system-to-system interconnects is required to address the needs of the fastest-growing data communications markets. By converting parallel links into serial links, UARTs play a vital role in reducing the large number of wires and traces in legacy designs. In addition to this conversion, a UART offers additional benefits by off loading functions such as interrupt processing and data flow control from the CPU, which results in increased bandwidth.

UARTs are used in a wide range of communications equipment for control and diagnostics functions. UARTs are also used in system management to monitor Quality of Service (“QoS”) information, or to provide redundancy in fault tolerant systems. The Company’s highly integrated single/multi-channel UARTs have been specifically designed for communication systems with high throughput. These include servers, routers, network management equipment, computer telephony, remote access servers, wireless base stations and repeaters.

Multi-channel UARTs are commonly used in industrial applications such as process control and factory automation. Point-of-sale host systems often communicate to multiple remote terminals and self-service pumps at gas/petrol stations. These environments will typically have 8 to 32 (RS-232 or RS-485) ports by using multiple UARTs for communications.

Single and multi-channel UARTs are used in portable consumer applications such as multi-media products, Global Positioning System (“GPS”) and Personal Digital Assistant (“PDA”) devices. Products such as smart phones and PDAs utilize multiple serial interfaces to connect to Bluetooth, compact flash, IrDA, serial docking interface and GPS receivers for wireless or wired interface to global positioning systems. When a Bluetooth or GPS receiver is not integrated in the device, an external module can easily be connected via the UART interface in most applications. The Company’s UARTs are well suited for battery-operated applications that require mobility such as handheld data entry devices, security alarm and point-of-sale terminals.

Strategy

Exar strives to be a leading provider of physical layer high-performance, high-bandwidth IC solutions for use in the worldwide communications infrastructure. The Company also designs, develops and markets IC products that address the needs of the serial communications market. To achieve its business objectives, the Company employs the following strategies:

Focus on Growing Market Share within the Communications Markets.    Exar targets communications markets, including T/E carrier, ATM, SONET/SDH and MPOS. The Company has built substantial expertise in the areas of analog and digital design, systems architecture and applications support. Exar believes that the integration of these capabilities enables the Company to develop solutions addressing the high-bandwidth physical layer requirements of communications systems OEMs. The Company’s broad product offerings support differentiated features that the Company believes will enable it to increase its market share. Additionally, the Company seeks to expand its markets by incorporating adjacent functionality into its products.

Leverage Analog and Mixed-Signal Design Expertise to Provide Integrated System-Level Solutions.    Utilizing its strong analog and mixed-signal design expertise, the Company integrates mixed-signal physical interface devices with digital access control devices. The Company offers products that integrate transceivers, jitter attenuators and

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framers/ATM UNIs on a single IC. The Company’s data aggregation devices leverage its T/E carrier and SONET/SDH expertise, mapping multiple T3 data streams into a single SONET/SDH stream. These configurations enable OEMs to use less board space and reduce their overall system cost. In the last two years, the Company has utilized its PLL expertise to introduce new clock products for communications and server applications. Lastly, the Company expanded its mixed-signal expertise to solve signal integrity design challenges in the storage market with the introduction of SATA/SAS port multipliers.

Expand the Company’s Revenue Content Per System.    Exar’s analog and mixed-signal design expertise has enabled the Company to build what it believes to be a technological advantage in T/E transceivers and framers and SONET mapping and aggregation. The Company intends to leverage this advantage and its established customer relationships to capture design wins for its physical layer products, thereby increasing the Company’s overall revenue content per system.

Strengthen and Expand Strategic OEM Relationships.    Exar’s OEM customers include Alcatel, Cisco, Digi International, Hewlett-Packard, Huawei, Lucent, Marconi/Ericsson, NEC, Nokia and Tellabs. To promote the early adoption of its solutions, the Company actively seeks collaborative relationships with strategic OEMs during product development. The Company believes that OEMs recognize the value of Exar’s early involvement because designing their system products in parallel with the Company’s development can accelerate time-to-market for their end products. In addition, Exar believes that collaborative relationships help the Company to obtain early design wins and to increase the likelihood of market acceptance of its new products.

Leverage Broad Product Portfolio to Accelerate Communications Product Development.    Exar believes it has developed a strong presence in the serial communications market, where the Company has leading industry customers and proven technological capabilities. The Company’s design expertise has enabled it to offer a diverse portfolio of both industry standard and proprietary serial communications products. The Company plans to expand this portfolio by developing integrated solutions that extend the reach of its offerings into new input/output applications. In addition, the Company has further expanded its communications portfolio by offering a family of clock devices, which leverage technology common with its existing network and transmission products.

Use Standard CMOS Process Technologies to Provide Compelling Price/Performance Solutions.    Exar designs its products to be manufactured using standard CMOS processes. The Company believes that these processes are proven, stable and predictable and benefit from the extensive semiconductor-manufacturing infrastructure devoted to CMOS processes. Therefore, the Company believes that it can achieve a higher level of performance at a lower cost than competitors’ products based on alternative manufacturing technologies. However, in certain specialized cases the Company may use other process technologies to take advantage of their performance characteristics.

Leverage Fabless Semiconductor Model.    Exar has long-standing relationships with third-party assembly, test and wafer foundries to manufacture the Company’s ICs. The Company’s fabless approach allows it to avoid substantial capital spending, obtain competitive pricing, minimize the negative effects of industry cycles, reduce time-to-market, reduce technology and product risks, and facilitate the migration of the Company’s products to new CMOS process technologies, which reduces costs and power consumption and optimizes performance. By leveraging the fabless model, Exar can focus on its core competencies of sales and marketing as well as product design, development and support.

Products

Communications

Exar’s products for T/E carrier, ATM, SONET/SDH and MPOS applications include high-speed analog, digital and mixed-signal physical interface and access control ICs. The physical interface IC consists of a transmitter and receiver that, when integrated, is called a transceiver. Transceivers interface with the physical transmission media. Most of these high-speed, mixed-signal ICs convert digital inputs in a parallel format into a

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single bit stream that is many times faster than the original signal. Access control circuits are digital circuits that format, or frame, the data, perform error checking, and in some applications, aggregate signals by mapping multiple lower-speed data streams into one single higher-speed stream. The figure below illustrates where the Company’s products are employed within networking equipment.

Exar’s communications products include analog front ends (“AFEs”), transmitters, receivers, transceivers (also known as line interface units or “LIUs” or “PHYs”), jitter attenuators, framers, clocks, ATM UNIs and data aggregation mappers. These products are used in networking equipment such as SONET/SDH Add/Drop Multiplexers (“ADMs”), PBX, central office switches, digital cross connects, multi-service provisioning platforms, routers and Digital Subscriber Loop Access Multiplexes (“DSLAMs”).

T/E

Exar offers a broad range of products in the T1/E1 segment encompassing AFEs, short-haul and long-haul LIUs and LIU/framer combinations that incorporate reconfigurable, relayless, redundancy with integrated termination resistors and jitter attenuators. Used individually or in chip sets, Exar’s T1/E1/J1 devices offer customers key advantages including design flexibility, enhanced system reliability and standards compliance which are critical components of high-density, low-power system boards and line-cards. In addition, Exar’s T1/E1/J1 LIU combination products simplify the design process. Exar’s T1/E1 portfolio includes products with up to 21 channels of AFEs, up to 14 channels LIU/JA and up to 8 channel LIU/framer combinations.

Exar has developed a diversified portfolio of single/multi-channel T3/E3 physical interface solutions with integrated transceivers and jitter attenuators, that achieve high performance levels while reducing board space and overall power in multi-port applications. Extending its jitter attenuation capabilities, Exar incorporates desynchronization in its transceivers and data aggregation mappers to solve complex timing issues associated with mapping/demapping from SONET/SDH (synchronous) to T3/E3 (asynchronous) environments. In addition, the Company has integrated its LIU and framer functions into its multi-channel DS3/E3 LIU/Framer/JA combination device that offer customers additional design flexibility.

The Company also supplies a family of V.35 transceiver products used for data transmission, primarily in networking equipment such as routers and bridges.

SONET/SDH

Exar’s data aggregation mapper solutions leverage the Company’s expertise in T/E carrier with SONET/SDH, enabling the Company to provide unique solutions to the SONET/SDH market place. In addition to

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integrating SONET PHY capability into its data aggregation mappers, the Company also offers OC-3/12/48 PHYs and plans to complement these devices with additional OC-48 data aggregation solutions. Exar’s access control products include framers and ATM UNIs, in addition to its data aggregation mappers. Complementing Exar’s OC-3 to OC-48 SONET/SDH devices was the addition of a highly integrated and innovative OC-3/STM-1 to OC-192/STM-64 multi-rate framer. This product extends Exar’s SONET/SDH capabilities to cover all data rates starting from OC-3/STM-1 to OC-192/STM-64. In addition, the device enables significant flexibility in line card design coupled with substantial cost and power savings. Exar extended its mixed-signal technology leadership into next generation metro core and transport network markets with the introduction of the first in a family of multi-protocol over SONET/SDH framers. Deployment of these devices is ideal for the growing market shift towards the convergence of triple-play services over SONET/SDH.

Clock and Timing

Whether regulating data transmissions or executing system instructions, clocks perform the critical role of producing precisely timed and repeated pulses that synchronize the overall system or other embedded applications. In fiscal year 2004, Exar introduced a family of five new clock products targeted at high-performance system boards, offering flexibility to board designers by providing them with precision, low jitter, programmable skew, zero delay and fan out buffers. These were followed in fiscal year 2005 by a series of Intelligent Dynamic Clock Switch (“IDCS”) devices. These products offer features including dynamic switch, manual override, on-board redundancy and fail-safe operations plus other features that enable customers to easily develop applications that increase over-all system reliability. In fiscal year 2006, the Company further expanded its clock products by introducing several families of high performance, industry standard Zero Delay Buffers (“ZDB”) for the timing market segment. These ZDB devices are instrumental for effective distribution of clock signals across a printed circuit board’s (“PCBs”) timing topology. They have ubiquitous applications within all key market segments including networking, computation and consumer applications.

Storage

Market demand is driving the need for increased storage capacity for a host of consumer, home media, and industrial applications where cost effective, dense storage is a requirement. There are many approaches to data storage deployment: Storage Area Network (“SAN”), Direct Attached Storage (“DAS”), Network Attached Storage (“NAS”), Redundant Array of Inexpensive Disks (“RAID”) and Just a Bunch of Disks (“JBOD”). Each of these will support unique configurations (number of disk drives) and locations (internal to the system, or connected externally to an enclosure). Connecting to all of these storage environments entails supporting industry-adopted protocols including Serial Advanced Technology Attachment (“SATA”) and Serial Attached SCSI (“SAS”), among others. The SATA I/II specifications were recently standardized as a serial interconnect technology of choice between advanced host controllers and storage drives. Exar’s SATA/SAS port multipliers enable distribution of data across multiple disk drives from a single host. Exar’s port selectors enable multiple hosts to access a single drive. These approaches ensure greater data reliability and security.

Serial Communications

As a leader of UART solutions, Exar offers a broad line of industry-proven product families. Exar’s product portfolio consists of single, dual, quad and octal channel devices with enhanced feature sets, and a broad range of packaging options. These products provide an easy migration path from one product generation to the next. All are highly integrated UARTs that the Company believes are the defacto industry standard for UARTs with First-In First-Out (“FIFO”) used in multi-port applications. In fiscal year 2006, Exar introduced four innovative solutions: a multi-channel 66MHz PCI 3.0 compliant UART family, a small UART (5x5x0.9mm); 1.8 Volt single-channel UART in 24 and 32-pin QFN packages; and a dual-channel 66MHz PCI 3.0 compliant device. Collectively, these innovative products provide immediate competitive advantages to designers. Utilization of Exar’s devices accelerate time-to-market and performance capabilities by reducing development time and addressing the growing need for board space savings, lower power, and increased bandwidth requirements for communications, industrial and consumer applications.

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During fiscal year 2006, the Company developed an integrated 8-bit UART and RS-232 Transceiver device, the first in a family of innovative Combo devices for introduction in fiscal year 2007. By integrating these two functions into a simple space saving package, the series targets the growing market demand of consumer and battery powered applications including laptops and portable devices; desktop PCs; and industrial peripheral interfaces such as handheld terminals and Point-of-Sale (“POS”) systems, amongst others.

Exar sells its UART products to the remote access, data collection, industrial automation, point-of-sale, handheld/mobile and consumer markets.

Video and Imaging

Exar supplies high-performance analog-to-digital converters, and integrated analog front ends, for products such as copiers and scanners, digital still cameras, and multifunctional peripherals. These ICs incorporate scanning, faxing, copying and printing functions in a single integrated system. The Company uses advanced design techniques and process technologies to integrate low-power converter architectures with surrounding analog functions, thereby reducing system costs.

Sales and Customers

The Company markets its products globally through both direct and indirect channels. In North and South America through 21 independent sales representatives and two independent, non-exclusive primary distributors, as well as the Company’s own direct sales organization. The Company currently has domestic support offices in or near Atlanta, Boston, Chicago, Dallas, Los Angeles and Fremont, California. Additionally, the Company is represented in Europe and the Asia/Pacific region by its wholly-owned foreign subsidiaries and international support offices in Vallauris, France; Kawasaki, Japan; and Shanghai, China. In addition to these Exar offices, 21 independent sales representatives and other independent, non-exclusive distributors represent the Company in Europe and the Asia/Pacific region. The Company’s international sales represented 51.3%, 50.9% and 53.5% of net sales for the fiscal years ended March 31, 2006, 2005 and 2004, respectively.

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The Company’s OEM customers include, among others, the following:

Communications	Serial and Other Communications
•   Adtran •   Alcatel •   Cisco •   Huawei •   Lucent •   Marconi/Ericsson •   NEC •   Nokia •   Siemens •   Tellabs	•   Cisco •   Digi International •   Fujitsu •   Plantronics •   Hewlett-Packard •   Huawei •   Mitsubishi Electronics

Alcatel accounted for 10.5% of the Company’s net sales for the fiscal year ended March 31, 2006. For the fiscal years ended March 31, 2005 and 2004, no OEM customer accounted for 10% or more of the Company’s net sales. The Company sells its products to distributors and OEMs throughout the world. For the year ended March 31, 2006, worldwide sales through the Company’s two primary distributors for subsequent resale to OEMs or their subcontract manufacturers accounted for 40.0% of net sales. Future Electronics (“Future”) was and continues to be the Company’s largest primary distributor. Future, on a worldwide basis, represented 24.1%, 20.4% and 20.3% of net sales in fiscal years 2006, 2005 and 2004, respectively. The Company’s second largest primary distributor, Nu Horizons Electronics Corp. (“Nu Horizons”), accounted for 15.9%, 16.4% and 13.4% of net sales in fiscal years 2006, 2005 and 2004, respectively.

Manufacturing

Exar outsources all of its fabrication and assembly, as well as the majority of its testing operations. This fabless manufacturing model allows the Company to focus on its core competencies of sales and marketing as well as product design, development and support.

The majority of the Company’s current products are implemented in standard CMOS. The Company uses CMOS manufacturing processes to take advantage of that technology’s lower power consumption, cost-effectiveness, foundry availability and ever-increasing speed. Chartered Semiconductor Manufacturing Ltd. (“Chartered”) manufactures the majority of the Company’s CMOS semiconductor wafers from which the Company’s products are manufactured. The Company does not have long-term supply agreements with its suppliers. See “Part I, Item 1A Risk Factors.”

Most semiconductor wafers are shipped to the Company’s subcontractors in Asia for wafer test and assembly, where they are cut into individual die and packaged. Independent contractors in Hong Kong, Indonesia and the Philippines perform most of the Company’s assembly work. Following assembly, final test and quality assurance are performed either at the Company’s Fremont, California facility or at its subcontractors’ facilities in Asia.

Research and Development

Exar believes that ongoing innovation and the introduction of new products in its targeted and adjacent markets is essential to sustaining growth. Exar’s research and development is focused on developing high-performance analog, digital and mixed-signal solutions addressing the high-bandwidth requirements of both communications and storage systems OEMs. Exar continues to make significant investments in advanced design tools and high-performance standard cell libraries. By utilizing these tools, the Company pursues the development of design methodologies that are optimized for reducing design-cycle time and increasing the

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likelihood of first-time successes. In order to support high pin-count devices, the Company continues to develop high-performance packages for its new products in collaboration with packaging suppliers. Exar spent $24.7 million, $22.0 million and $21.8 million on research and development in fiscal years 2006, 2005 and 2004, respectively.

Competition

The semiconductor industry is intensely competitive and is characterized by rapid technological change and a history of price reductions as production efficiencies are achieved in successive generations of products. Although the market for analog and mixed-signal integrated circuits is generally characterized by longer product life cycles and less dramatic price reductions than the market for digital integrated circuits, the Company faces substantial competition in each market in which it participates. Competition in the Company’s markets is based principally on technical innovation, product features, timely introduction of new products, quality and reliability, performance, price, technical support and service. The Company believes that it competes favorably in all of these areas.

Because the IC markets are highly fragmented, the Company generally encounters different competitors in its various target markets. Competitors with respect to the Company’s communications products include Agere Systems, Applied Micro Circuits Corporation, Infineon Technologies North America Corp., Integrated Device Technology, Inc., Mindspeed Technologies, Inc., PMC Sierra, Inc., TranSwitch Corporation and Vitesse Semiconductor Corporation. Competitors in the clock products area include Cypress Semiconductor and Integrated Device Technology, Inc. Competitors in the Company’s serial communications and video and imaging markets include Royal Philips Electronics, Texas Instruments Incorporated and Wolfson Microelectronics LTD.

Backlog

Exar defines backlog to include OEM orders and distributor orders for which a delivery schedule has been specified for product shipment occurring during the succeeding six months. As of March 31, 2006, Exar’s backlog was $14.6 million, compared to $9.6 million as of March 31, 2005.

The Company’s business and, to a large extent, that of the semiconductor industry, has been characterized by short order-to-shipment schedules. Sales are made pursuant to either purchase orders for current delivery of standard items or agreements covering purchases over a period of time, which are frequently subject to revisions and cancellations. Lead times for the release of purchase orders depend on the scheduling practices of the individual customer, and the Company’s rate of bookings varies from month-to-month. In addition, Exar’s domestic distributor agreements generally permit the return of up to 10% of purchases of the preceding quarter for purposes of stock rotation and also provide for credits to distributors in the event that Exar reduces the price of any inventoried product. Since orders constituting the Company’s backlog are subject to changes in delivery schedules or to cancellations at the option of the customer without significant penalty, backlog is not necessarily an indication of future sales. The Company believes that its backlog as of any particular date may not be representative of actual sales for any succeeding six month period.

Intellectual Property Rights

The Company has 113 patents issued and 26 patent applications pending in the United States. The Company has 18 patents issued and 34 patent applications pending in various foreign countries. The Company’s existing patents will expire between 2006 and 2023, or sooner if it chooses not to pay renewal fees. The Company believes that its intellectual property is critical to its current and future success. However, the Company does not believe that it is materially dependent upon any one patent. To protect its intellectual property, the Company also relies on a combination of mask work registrations, trademarks, copyrights, trade secrets, employee and third party nondisclosure agreements and licensing arrangements. The Company may enter into license agreements or other agreements to gain access to externally developed products or technologies.

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The Company may fail to adequately protect its intellectual property. Others may gain access to the Company’s trade secrets or disclose such trade secrets to third parties. Some or all of the Company’s pending and future patent applications may not result in issued patents that provide it with a competitive advantage. Even if issued, such patents, as well as the Company’s existing patents, may be challenged and later determined to be invalid or unenforceable. In addition, others may develop similar or superior products without access to or without infringing upon the Company’s intellectual property, including intellectual property that is protected by trade secret and patent rights.

The Company cannot be sure that its products or technologies do not infringe patents that may be granted in the future pursuant to pending patent applications or that the Company’s products do not infringe any patents or proprietary rights of third parties. Occasionally, the Company is informed by third parties of alleged patent infringement. In the event that any relevant claims of third-party patents are found to be valid and enforceable, the Company may be required to:

• stop selling, incorporating or using its products that use the infringed intellectual property;

• obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property, although, such license may not be available on commercially reasonable terms, if at all; or

• redesign the Company’s products so as not to use the infringed intellectual property, which may not be technically or commercially feasible or meet customer requests.

If the Company were required to take any of the actions described above or defend against any claims from third parties, its business, financial condition and results of operations could be harmed. See “Part I, Item 1A. Risk Factors.”

Employees

As of March 31, 2006, the Company employed 255 full-time employees, with 118 in research and development, 44 in operations, 49 in marketing and sales and 44 in administration. Of the 118 research and development employees, 51 hold advanced degrees. The Company’s ability to attract, motivate and retain qualified personnel is essential to its continued success. See “Part I, Item 1A. Risk Factors” None of the Company’s employees is represented by a collective bargaining agreement, nor has the Company ever experienced a work stoppage due to labor issues. The Company believes its employee relations are good.

Available Information

The Company files electronically with the SEC its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current Reports on Form 8-K, and amendments to those Reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Those reports and statements (1) may be read and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549, (2) are available at the SEC’s internet site (http://www.sec.gov), which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC and (3) are available free of charge through our website (www.exar.com) as soon as reasonably practicable after electronic filing with, or furnishing to, the SEC. Information regarding the operation of the SEC’s public reference room may be obtained by calling the SEC at 1-800-SEC-0330. Copies of such documents may be requested by contacting the Company’s Investor Relations Department at (510) 668-7201 or by sending an e-mail through the Investor Relations page on the Company’s website. The Company has adopted a Code of Business Conduct and Ethics for its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Company has posted its Code of Business Conduct and Ethics on its website. Any future amendments to this code will also be posted to its website.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The names of the Company’s executive officers, and their ages as of March 31, 2006, are as follows:

Name	Age	Position
Roubik Gregorian	56	President, Chief Executive Officer and Director
Mir Bahram Ghaderi	54	Vice President and General Manager, Network and Transmission Products Division
Ronald W. Guire	57	Executive Vice President, Chief Financial Officer, Assistant Secretary and Director
Thomas R. Melendrez	52	General Counsel, Secretary and Vice President Business Development
Levent Ozcolak	44	Division Vice President and General Manager, Interface Products
Stephen W. Michael	59	Vice President, Operations and Reliability & Quality Assurance

Roubik Gregorian joined the Company in 1995 as President, Startech Division, when the Company acquired Startech Semiconductor, Inc., where he had served as President. During Dr. Gregorian’s tenure at the Company, he was appointed Chief Technology Officer and Vice President of the Communications Division in 1996 and Chief Technology Officer, Senior Vice President/General Manager, Communications Division, in 1998. Dr. Gregorian was promoted to Executive Vice President/General Manager, Communications Division in 2002 and to Chief Operating Officer in 2003. Dr. Gregorian served as the Company’s acting President and Chief Executive Officer from September 2004 to February 2005, when he was appointed to his current position of President and Chief Executive Officer. Dr. Gregorian has been a director of the Company since March 2005. From 1983 to 1994, Dr. Gregorian served as Vice President of Research and Development and Chief Technology Officer for Sierra Semiconductor where he directed the company’s product strategy and product development activities including the data communications and graphic products which were instrumental in taking the company public in 1991. From 1977 to 1983, Dr. Gregorian was manager of analog and telecommunications products at American Microsystems where he received several awards including one for developing the industry’s first PCM CODEC. Dr. Gregorian has been issued 27 patents, authored two textbooks and 45 technical articles. He received his M.S.E.E. and Ph.D. in Electrical Engineering from the University of California at Los Angeles, as well as a M.Sc. from Tehran University in Electrical Engineering.

Mir Bahram Ghaderi joined the Company in March 1995 as Director of Engineering, Startech Division, when the Company acquired Startech Semiconductor, Inc., where he had served as Vice President of Engineering. He was promoted to Divisional Vice President of Engineering, Communications Division in September 2001, and to his current position as Vice President and General Manager, Network and Transmission Products Division, in April 2003. Prior to joining Startech in 1994, he was Director of Engineering, Modem/Clock Products, at Sierra Semiconductor, Inc. Dr. Ghaderi has 25 years of product development experience in the semiconductor industry and received a M.S.E.E. and Ph.D. in Electrical Engineering from the University of California at Los Angeles, as well as a M.S.E.E. from Tehran University.

Ronald W. Guire is the Executive Vice President, Chief Financial Officer, and Assistant Secretary for Exar. He joined the Company in 1984 as Vice President and Treasurer; in 1985 his title was changed to Vice President, Chief Financial Officer (CFO) and Secretary (until June 2001 when he became Assistant Secretary), and in 1995 Mr. Guire was named Executive Vice President. Mr. Guire has been a director of the Company since 1985. Mr. Guire was a partner in the certified public accounting firm of Graubart & Co. from 1979 until joining the Company. Mr. Guire is a member of the California Society of Certified Public Accountants and a member of Financial Executives International. Mr. Guire holds a B.S. in Accounting from California College of Commerce and has been a certified public accountant since 1977.

Thomas R. Melendrez joined the Company in April 1986 as Corporate Attorney. He was promoted to Director, Legal Affairs in July 1991, and again to Corporate Vice President, Legal Affairs in March 1993. In March 1996, Mr. Melendrez was promoted to Corporate Vice President, General Counsel. In June 2001, Mr. Melendrez was appointed Secretary of the Company. In April 2003, Mr. Melendrez assumed, in addition to

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his other duties, the responsibilities of Vice President, Business Development. Mr. Melendrez has over 25 years of legal experience in the semiconductor and related industries. He received a B.A. from the University of Notre Dame, a J.D. from the University of San Francisco, and an M.B.A. from Pepperdine University.

Levent Ozcolak joined the Company in 1985 after completing school as a Design Engineer. He held several engineering management positions prior to his promotion to Director of Engineering, Video and Imaging Division in 1998. Mr. Ozcolak was appointed Director of Marketing, Video and Imaging Division in 1999, and Director of Marketing, Interface Products Division in 2003. He was promoted to General Manager, Interface Products Division in 2004, and to his current position of Division Vice President and General Manager, Interface Products in 2005. Mr. Ozcolak has over 20 years of product development experience in the semiconductor industry and holds a B.S. in Electrical Engineering from the Massachusetts Institute of Technology and an M.S. in Electrical Engineering from the University of California at Los Angeles, as well as an M.B.A. from the University of Phoenix.

Stephen W. Michael joined Exar as Vice President New Market Development in September 1992. In July 1995, he was appointed Vice President Operations, and in May 2001, he was appointed to his current position of Vice President, Operations and Reliability & Quality Assurance. Mr. Michael has thirty years of semiconductor industry experience. Prior to joining Exar, Mr. Michael was Vice President and General Manager, Analog and Custom Products with Catalyst Semiconductor. Prior to joining Catalyst Semiconductor, he served in various senior positions at GE Semiconductor, Intersil, Fairchild and National Semiconductor. He holds a B.S. in Electrical Engineering from the University of California at Davis.

ITEM 1A.     RISK FACTORS

We are subject to a number of risks. Some of these risks are endemic to the high-technology industry and are the same or similar to those disclosed in our previous SEC filings, and some new risks may arise in the future. You should carefully consider all of these risks and the other information in this Annual Report before investing in us. The fact that certain risks are endemic to the high-technology industry does not lessen the significance of these risks.

As a result of these risks, our business, financial condition or results of operations could be materially and adversely affected. This could cause the trading price of our common stock to decline, and stockholders might lose some or all of their investment.

IF WE ARE UNABLE TO GENERATE REVENUE ABOVE CURRENT LEVELS FROM THE SALE OF OUR COMMUNICATIONS PRODUCTS, OR OUR REVENUE FROM THESE PRODUCTS DECLINES, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL BE MATERIALLY AND ADVERSELY IMPACTED.

We continue to focus a significant portion of our research and sales resources on the communications market with the expectation that the communications sector will grow over the long term. Given our dependence on the communications market to support revenue growth, we must continue to generate additional sales from this market by successfully marketing the existing product portfolio, introducing new products and securing design wins which are released into production or by gaining market share. If we are unable to generate increased revenue from our communications products or our revenue from these products declines, our business, financial condition, and results of operations will be materially and adversely impacted.

THE UNCERTAINTY IN THE U.S. AND GLOBAL ECONOMIES, AS WELL AS THE COMMUNICATIONS EQUIPMENT MARKET, MAY CONTINUE TO MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Periodic declines or fluctuations in corporate profits, lower capital equipment spending, the impact of conflicts throughout the world, terrorist acts, natural disasters, the outbreak of communicable diseases such as the

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Avian Flu and other geopolitical factors have had, and may continue to have, a negative impact on the U.S. and global economies. Our revenue and profitability have generally followed the modest recovery of the communications equipment industry. This modest recovery has affected carrier capital equipment spending which in turn has affected the demand for our customers’ products, thus affecting our revenues and profitability. Communications service providers and equipment manufacturers continue to experience consolidation in their industries. Although there currently appears to be positive signs for growth, further delay or reduction in anticipated communications equipment spending levels may adversely affect our business, financial condition and results of operations.

We are unable to predict the timing, strength or duration of the communications market recovery or effects of equipment manufacturer consolidation. If the sector does not continue to recover measurably, or declines, our business, financial condition and results of operations may be materially and adversely impacted.

IF WE FAIL TO DEVELOP AND INTRODUCE NEW PRODUCTS IN OUR CORE OR NEW MARKETS THAT MEET EVOLVING MARKET NEEDS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY IMPACTED.

The markets for our products are characterized by:

• changing technologies;

• evolving and competing industry standards;

• changing customer requirements;

• increasing costs of product development;

• long design-to-production cycles;

• competitive solutions;

• frequent product introductions and enhancements;

• increasing functional integration;

• increasing price pressure;

• moderate to slow growth;

• capital equipment spending levels and/or deployment; and/or

• changing competitive landscape (consolidation, financial conditions).

Our success depends in part on the successful development of new products for our core markets. We must: (i) be able to anticipate customer and market requirements and changes in technology and industry standards; (ii) be able to accurately define and develop, on a timely basis, new products; (iii) be able to gain access to and use technologies in a cost-effective manner; (iv) continue to expand our technical and design expertise; (v) be able to timely introduce and cost-effectively have manufactured new products; (vi) be able to differentiate our products from our competitors’ offerings; and (vii) gain customer acceptance of our products. In addition, we must continue to have our products designed into our customers’ future products and maintain close working relationships with key customers to develop new products that meet their evolving needs. Moreover, we must be able to respond to shifts in market demands, the trend towards increasing functional integration and other changes in a rapid and cost-effective manner. Migration from older products to newer products may result in volatility of earnings during periods of transition of the products.

Products for communications applications are based on continually evolving industry standards and new technologies. Our ability to compete will depend in part on our ability to identify and ensure compliance with these industry standards. The emergence of new standards could render our products incompatible with systems

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developed by major communications equipment manufacturers. As a result, we could be required to invest significant time, effort and expenses to develop and qualify new products to ensure compliance with industry standards.

The process of developing and supporting new products is complex, expensive and uncertain, and if we fail to accurately predict and understand our customers’ changing needs and emerging technological trends, our business may be harmed. We cannot assure that we will be able to identify new product opportunities successfully, develop and bring to market new products, achieve design wins, ensure when and which design wins actually get released to production, or respond effectively to technological changes or product announcements by our competitors. In addition, we may not be successful in developing or using new technologies or may incorrectly anticipate market demand and develop products that achieve little or no market acceptance. Our pursuit of necessary technological advances may require substantial time and expense and may ultimately prove unsuccessful. Failure in any of these areas may harm our business, financial condition and results of operations.

IF WE ARE UNABLE TO CONVERT A SIGNIFICANT PORTION OF OUR DESIGN WINS INTO ACTUAL REVENUE, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY IMPACTED.

We have secured a significant number of design wins for new and existing products. Such design wins are necessary for revenue growth. However, many of our design wins may never generate revenues if their end-customer projects are unsuccessful in the market place or the end-customer terminates the project, which may occur for a variety of reasons. Additionally, some of our design wins are with privately-held, early-stage companies that may fail to bring their product to market. If design wins do generate revenue, the time lag between the design win and meaningful revenue may be in excess of eighteen months. If we fail to convert a significant portion of our design wins into substantial revenue, our business, financial condition and results of operations could be materially and adversely impacted.

OUR FINANCIAL RESULTS MAY FLUCTUATE SIGNIFICANTLY BECAUSE OF A NUMBER OF FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL.

Our financial results may fluctuate significantly. Some of the factors that affect our financial results, many of which are difficult or impossible to control or predict, are:

• our difficulty predicting revenues and ordering the correct mix of products from suppliers due to limited visibility provided by customers and channel partners coupled with a high number of orders placed for products to be shipped in the same quarter;

• the reduction, rescheduling, cancellation or timing of orders by our customers and channel partners due to, among others, the following factors;

• management of customer, subcontractor and/or channel inventory;

• dependency on a single product with a single customer;

• volatility of demand for equipment sold by our large customers, which in turn, introduces demand volatility for our products;

• temporary disruption in customer demand as customers change or modify their complex subcontract manufacturing supply chain;

• the inability of our customers to obtain components from their other suppliers; and

• disruption in the sales or distribution channels;

• changes in sales and implementation cycles for our products;

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• the ability of our suppliers, customers and communications service providers to obtain financing or to fund capital expenditures;

• changes in the mix of products that our customers purchase;

• risks associated with entering new markets, such as increased competition, should we decide to do so;

• the announcement or introduction of products by our competitors;

• loss of market share by our customers;

• competitive pressures on selling prices or product availability;

• pressures on selling prices overseas due to foreign currency exchange fluctuations;

• erosion of average selling prices coupled with the inability to sell newer products with higher average selling prices, resulting in lower overall revenue and margins;

• market and/or customer acceptance of our products;

• consolidation among our competitors, our customers and/or our customers’ customers;

• changes in our customers’ end user concentration or requirements;

• loss of one or more major customers;

• significant changes in ordering pattern by major customers;

• our or our channel partners’ ability to maintain adequate inventory levels;

• the availability and cost of materials and services, including foundry, assembly and test capacity, needed by us from our foundries and suppliers;

• discontinuance of wafer fabrication or packaging technologies by our suppliers;

• if wafer fabrications or packaging and test suppliers discontinue or experience extended disruption of supply, we may incur increased costs to obtain alternative suppliers or investment in inventory to meet continuity of supply obligations to customers;

• temporary disruptions in our or our customers’ supply chain due to natural disaster, fire, outbreak of communicable diseases such as the Avian Flu, or labor disputes;

• fluctuations in the manufacturing output, yield capabilities, and capacity of our suppliers;

• fluctuation in suppliers’ capacity due to reorganization, relocation or shift in business focus;

• problems, costs, or delays that we may face in shifting our products to smaller geometry process technologies and in achieving higher levels of design and device integration;

• our ability to successfully introduce and transfer into production new products and/or integrate new technologies;

• increase in manufacturing costs;

• increase in mask tooling costs associated with advanced technologies;

• the amount and timing of our investment in research and development;

• costs and business disruptions associated with shareholder or regulatory issues;

• the timing and amount of employer payroll tax to be paid on our employees’ gains on stock options exercised;

• increasing costs and time associated with compliance with accounting rules or other regulatory requirements;

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• changes in accounting or other regulatory rules, such as the future requirement to record expenses for employee stock option grants;

• fluctuations in interest rates and/or market values of our marketable securities;

• litigation costs associated with the defense of suits brought or complaints made against us; and/or

• legislators’ desire or ability to renew favorable tax legislation in a timely manner, which may subject our tax provision to volatility.

As a consequence, operating results for a particular future period are difficult to predict and prior results are not necessarily indicative of results to be expected in the future. Any of the foregoing factors, or any other factors discussed elsewhere herein, may have a material adverse effect on our business, financial condition and results of operations.

WE HAVE MADE AND MAY IN THE FUTURE MAKE ACQUISITIONS AND SIGNIFICANT STRATEGIC EQUITY INVESTMENTS, WHICH MAY INVOLVE A NUMBER OF RISKS. IF WE ARE UNABLE TO ADDRESS THESE RISKS SUCCESSFULLY, SUCH ACQUISITIONS AND INVESTMENTS COULD HAVE A MATERIALLY ADVERSE IMPACT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We have undertaken a number of strategic acquisitions and investments in the past and may do so from time to time in the future. The risks involved with these acquisitions and investments include, among others:

• the possibility that we may not receive a favorable return on our investment or incur losses from our investment, or the original investment may become impaired;

• failure to satisfy the strategic objectives;

• our assumption of known or unknown liabilities or other unanticipated events or circumstances; and/or

• the diversion of management’s attention from normal daily operations of the business.

Additional risks involved with acquisitions include, among others:

• difficulties in integrating the operations, technologies, products and personnel of the acquired company or its assets;

• difficulty in supporting acquired products or technologies;

• difficulties or delays in the transfer of manufacturing flows and supply chains of products of acquired businesses;

• failure to retain key personnel;

• unexpected capital equipment outlays and related expenses;

• difficulties in entering markets in which we have limited or no direct prior experience and where competitors in such markets may have stronger market positions;

• insufficient revenues to offset increased expenses associated with acquisitions;

• under-performance problems with an acquired company;

• issuance of common stock that would dilute our current stockholders’ percentage ownership;

• recording of goodwill and non-amortizable intangible assets that will be subject to periodic impairment testing and potential impairment charges against our future earnings;

• incurring amortization expenses related to certain intangible assets;

• the opportunity cost associated with committing capital in such investments;

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• incurring large and immediate write-offs; and/or

• becoming subject to litigation.

Risks involved with strategic equity investments include, among others:

• the possibility of litigation resulting from these types of investments;

• the possibility that we may not receive a favorable return on our investments or incur losses from these investments, or the original investment may become impaired;

• a change or poorly executed strategic plan; and/or

• the opportunity cost associated with committing capital in such investments.

We cannot assure that we will be able to address these risks successfully without substantial expense, delay or other operational or financial problems. Any delays or other such operations or financial problems could adversely impact our business, financial condition and results of operations.

WE MAY NOT INTEGRATE ACQUIRED TECHNOLOGY SUCCESSFULLY.

We have made and may in the future acquire intellectual property to accelerate our time to market for new products. Acquisitions of intellectual property may involve risks such as successful technical integration into existing products, market acceptance of new products, and achievement of planned return on investment. The potential failure of product introduction utilizing acquired intellectual property could lead to an impairment of capitalized intellectual property acquisition costs.

COMPETITION IN THE MARKETS IN WHICH WE PARTICIPATE, OR MAY PARTICIPATE, MAY MAKE IT MORE DIFFICULT FOR US TO BE SUCCESSFUL.

We compete against an established group of semiconductor companies that focus on similar markets. These competitors include Applied Micro Circuits Corporation, Integrated Device Technology Inc., Mindspeed Technologies Inc., PMC Sierra Inc., Royal Philips Electronics, Texas Instruments Incorporated, TranSwitch Corporation, Vitesse Semiconductor Corporation and Wolfson Microelectronics LTD. Additionally, we are facing competition from other established companies and start-up businesses that seek to enter the markets in which we participate.

We have experienced increased competition at the design stage, where customers evaluate alternative solutions based on a number of factors, including price, performance, product features, technologies, and availability of long-term product supply and/or roadmap guarantee. Additionally, we experience, in some cases, severe pressure on pricing from some of our competitors or cost expectations from customers. Such circumstances may make some of our products unattractive due to price or performance measures. These circumstances may result in us losing design opportunities or may decrease our revenue and margins as a result of the price competition. Also, competitors from new companies in emerging countries with significant lower costs could affect selling price and gross margins.

WE DEPEND ON THIRD-PARTY FOUNDRIES TO MANUFACTURE OUR INTEGRATED CIRCUITS. ANY DISRUPTION IN OR LOSS OF THE FOUNDRIES’ CAPACITY TO MANUFACTURE OUR PRODUCTS SUBJECTS US TO A NUMBER OF RISKS, INCLUDING THE POTENTIAL FOR AN INADEQUATE SUPPLY OF PRODUCTS AND HIGHER MATERIALS COSTS. THESE RISKS MAY LEAD TO DELAYED PRODUCT DELIVERY OR INCREASED COSTS, WHICH COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We do not own or operate a semiconductor fabrication facility, or a foundry. Most of our products are based on complementary metal oxide semiconductor, or CMOS, processes. Chartered Semiconductor Manufacturing Ltd., or Chartered, located in Singapore, manufactures the majority of the CMOS wafers from which our

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products are manufactured. Chartered produces semiconductors for many other companies (many of which have greater requirements than us), and therefore we may not have access on a timely basis to sufficient capacity or certain process technologies. In addition, we are reliant on Chartered’s continued financial health and ability to continue to invest in smaller geometry manufacturing processes and foundries.

Many of our new products are designed to take advantage of smaller geometry manufacturing processes. Due to the complexity and increased cost of migrating to smaller geometries, we may experience problems, which could result in design and production delays of our products. If such delays occur, our products may have delayed market acceptance or customers may select our competitors’ products during the design process.

We do not have long-term wafer supply agreements with Chartered or our other foundries that would guarantee wafer or product quantities, prices, delivery or lead times. Rather, the foundries manufacture our products on a purchase order basis. We provide Chartered and our other foundries with rolling forecasts of our production requirements. However, the ability of our foundries to provide wafers is limited by the foundries’ available capacity. In addition, we cannot be certain that we will continue to do business with Chartered or our other foundries on terms as favorable as our current terms. Significant risks associated with our reliance on third party foundries include:

• the lack of assured process technology and wafer supply;

• financial and operating stability of the foundries;

• limited control over delivery schedules;

• limited manufacturing capacity of the foundries;

• limited control over quality assurance, manufacturing yields and production costs; and/or

• potential misappropriation of our intellectual property.

We could experience a substantial delay or interruption in the shipment of our products or an increase in our costs due to any of the following:

• a manufacturing disruption experienced by foundries utilized by us or sudden reduction or elimination of any existing source or sources of semiconductor manufacturing materials or processes, which might include the potential closure, change of ownership, change of management or consolidation by one of our foundries;

• extended time required to identify, qualify and transfer to alternative manufacturing sources for existing or new products;

• failure of our suppliers to obtain the raw materials and equipment;

• financial and operating stability of the foundry or any of our suppliers;

• acts of terrorism or civil unrest or an unanticipated disruption due to communicable diseases, political instability, natural disasters; and/or

• a sudden, sharp increase in demand for semiconductor devices, which could strain the foundries’ manufacturing resources and cause delays in manufacturing and shipment of our products.

IF OUR FOUNDRIES DISCONTINUE OR LIMIT THE AVAILABILITY OF THE MANUFACTURING PROCESSES NEEDED TO MEET OUR DEMANDS OR ARE UNABLE TO PROVIDE THE TECHNOLOGIES NEEDED TO MANUFACTURE OUR PRODUCTS, WE MAY FACE PRODUCTION DELAYS, WHICH COULD MATERIALLY AND ADVERSELY IMPACT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Our wafer requirements represent a small portion of the total production of the foundries that manufacture our products. As a result, we are subject to the risk that a foundry may cease production of a wafer fabrication

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process required by us. Additionally, we cannot be certain that our foundries will continue to devote resources to the production of our products or continue to advance the process design technologies on which the manufacturing of our products are based. Each of these events could increase our costs and harm our ability to deliver our products on time, or force us to terminate affected products, thereby materially and adversely affecting our business, financial condition and results of operations.

TO SECURE FOUNDRY CAPACITY, WE MAY BE REQUIRED TO ENTER INTO FINANCIAL AND OTHER ARRANGEMENTS WITH FOUNDRIES, WHICH COULD RESULT IN THE DILUTION OF OUR EARNINGS OR OTHERWISE HARM OUR OPERATING RESULTS.

Allocation of a foundry’s manufacturing capacity may be influenced by a foundry customer’s size, the existence of a long-term agreement with the foundry or other commitments. To address foundry capacity constraints, we and other semiconductor companies that rely on third-party foundries have utilized various arrangements, including equity investments in or loans to foundries in exchange for guaranteed production capacity, joint ventures to own and operate foundries or “take or pay” contracts that commit a company to purchase specified quantities of wafers over extended periods. While we are not currently a party to any of these arrangements, we may decide to enter into these arrangements in the future. We cannot be sure, however, that these arrangements will be available to us on acceptable terms, if at all. Any of these arrangements could require us to commit substantial capital and, accordingly, could require us to reduce our cash holdings, incur additional debt or secure equity financing. This could result in the dilution of our earnings or the ownership of our stockholders or otherwise harm our operating results. Furthermore, there can be no assurance that we will be able to obtain sufficient foundry capacity in the future pursuant to such arrangements.

OUR DEPENDENCE ON THIRD-PARTY SUBCONTRACTORS TO ASSEMBLE AND TEST OUR PRODUCTS SUBJECTS US TO A NUMBER OF RISKS, INCLUDING THE POTENTIAL FOR AN INADEQUATE SUPPLY OF PRODUCTS AND HIGHER MATERIALS COSTS. THESE RISKS MAY LEAD TO DELAYED PRODUCT DELIVERY OR INCREASED COSTS, WHICH COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We depend on independent subcontractors in Asia for all of the assembly and the majority of the testing of our products. Our reliance on these subcontractors involves the following risks:

• our reduced control over manufacturing yields, production schedules and product quality;

• the potential closure, change of ownership, change in business conditions or relationships, change of management or consolidation by one or more of our subcontractors;

• long term financial stability of our subcontractors and their ability to invest in new capabilities and equipment;

• disruption of services due to the outbreak of communicable diseases such as the Avian Flu, acts of terrorism, natural disasters, labor disputes, or civil unrest;

• disruption of manufacturing or test services due to relocation of subcontractor manufacturing facilities;

• failure of our subcontractors to obtain the raw materials and equipment;

• entry into “take-or-pay” agreements;

• difficulties in selecting, qualifying and integrating new subcontractors;

• reallocation or limited manufacturing capacity of the subcontractors;

• a sudden, sharp increase in demand for semiconductor devices, which could strain the subcontractor’s manufacturing resources and cause delays in manufacturing and shipment of our products;

• limited warranties from the subcontractors for products assembled and tested for us;

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• the possible unavailability of qualified assembly or test services;

• the subcontractors may cease production on a specific package type used to assemble product required by us and the possible inability to obtain an alternate source to supply the package;

• potential increases in assembly and test costs; and/or

• the third party subcontractors abilities to transition to smaller package types and to new package compositions.

These risks may lead to shipment delays and supply constraints of our products or increased cost for the finished products, either of which could adversely affect our business, financial condition or results of operations.

OUR RELIANCE ON FOREIGN SUPPLIERS EXPOSES US TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS, ANY OF WHICH COULD MATERIALLY AND ADVERSELY IMPACT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We use semiconductor wafer foundries and assembly and test subcontractors throughout Asia to manufacture a significant portion of our products. Our dependence on these subcontractors involves the following risks:

• disruption of services due to political, civil, labor, and economic instability;

• disruption of services due to natural disasters or outbreak of communicable diseases such as the Avian Flu;

• disruption of transportation to and from Asia;

• embargoes or other regulatory limitations affecting the availability of raw materials, equipment or services;

• changes in tax laws, tariffs and freight rates; and/or

• compliance with local or international regulatory requirements.

These risks may lead to delays in product delivery or increased costs, either of which could harm our profitability and customer relationships, thereby materially and adversely impacting our business, financial condition and results of operations.

WE DEPEND IN PART ON THE CONTINUED SERVICE OF OUR KEY ENGINEERING AND MANAGEMENT PERSONNEL AND OUR ABILITY TO IDENTIFY, HIRE, INCENT AND RETAIN QUALIFIED PERSONNEL. IF WE LOST KEY EMPLOYEES OR FAILED TO IDENTIFY, HIRE, INCENT AND RETAIN THESE INDIVIDUALS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY IMPACTED.

Our future success depends, in part, on the continued service of our key design engineering, technical, sales, marketing and executive personnel and our ability to identify, hire, incent, and retain other qualified personnel.

In the future, we may not be able to continue to attract and retain qualified personnel, including executive officers and other key management and technical personnel necessary for the management of our business. Competition for skilled employees having specialized technical capabilities and industry-specific expertise continues to be a considerable risk inherent in the markets in which we compete. Volatility or lack of positive performance in our stock price and the ability to offer options to as many or in amounts consistent with past practices, as a result of regulations regarding the expensing of options, may also adversely affect our ability to retain key employees, all of whom have been granted stock options. The failure to retain and recruit, as necessary, key design engineers, technical, sales, marketing and executive personnel could harm our business, financial condition and results of operations.

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RECENT RULEMAKING BY THE FINANCIAL ACCOUNTING STANDARDS BOARD WILL REQUIRE US TO EXPENSE EQUITY COMPENSATION GIVEN TO EMPLOYEES AND NON-EMPLOYEE DIRECTORS THAT WILL SIGNIFICANTLY HARM OPERATING RESULTS.

We historically have used stock options as a significant component of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention, and provide competitive compensation packages. Stock options are also utilized to attract and retain non-employee directors. The Financial Accounting Standards Board has adopted changes that will require companies to record a charge to earnings for stock option grants and other equity incentives, which will have a significant impact on our results of operations. We are required to implement the standard as of April 1, 2006. By causing us to incur significantly increased compensation costs, this accounting change will reduce our reported earnings.

OUR RELIANCE ON FOREIGN CUSTOMERS COULD CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS, WHICH COULD MATERIALLY AND ADVERSELY IMPACT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

International sales accounted for 51.3%, 50.9% and 53.5% of net sales for the fiscal year ended March 31, 2006, March 31, 2005 and March 31, 2004, respectively. International sales will likely continue to account for a significant portion of our revenues, which would subject us to the following risks:

• changes in regulatory requirements;

• tariffs and other barriers;

• timing and availability of export or import licenses;

• disruption of services due to political, civil, labor, and economic instability;

• disruption of services due to natural disasters;

• disruptions to customer operations due to the outbreak of communicable diseases such as the Avian Flu;

• difficulties in accounts receivable collections;

• difficulties in staffing and managing foreign subsidiary and branch operations;

• difficulties in managing sales channel partners;

• difficulties in obtaining governmental approvals for communications and other products;

• limited intellectual property protection;

• foreign currency exchange fluctuations;

• the burden of complying with foreign laws and treaties; and/or

• potentially adverse tax consequences.

In addition, because sales of our products have been denominated primarily in United States dollars, increases in the value of the United States dollar could increase the relative price of our products such that they become more expensive to customers in the local currency of a particular country. Increases in the value of the United States dollar could also evoke customers to apply pricing pressures on our products. Increased international activity in the future may result in increased foreign currency denominated sales. Furthermore, because some of our customers’ purchase orders and agreements are governed by foreign laws, we may be limited in our ability, or it may be too costly for us, to enforce our rights under these agreements and to collect damages, if awarded.

THE COMPLEXITY OF OUR PRODUCTS MAY LEAD TO ERRORS, DEFECTS AND BUGS, WHICH COULD SUBJECT US TO SIGNIFICANT COSTS OR DAMAGES AND ADVERSELY AFFECT MARKET ACCEPTANCE OF OUR PRODUCTS.

Although we, our customers and our suppliers rigorously test our products, nonetheless they may contain undetected errors, weaknesses, defects or bugs when first introduced or as new versions are released. If any of

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our products contain production defects, reliability, quality or compatibility problems that are significant to our customers, our reputation may be damaged and customers may be reluctant to continue to buy our products, which could adversely affect our ability to retain and attract new customers. In addition, these defects or bugs could interrupt or delay sales of affected products, which could adversely affect our results of operations.

If defects or bugs are discovered after commencement of commercial production of a new product, we may be required to make significant expenditures of capital and other resources to resolve the problems. This could result in significant additional development costs and the diversion of technical and other resources from our other development efforts. We could also incur significant costs to repair or replace defective products. These costs or damages could have a material adverse effect on our financial condition and results of operations.

IF OUR DISTRIBUTORS OR SALES REPRESENTATIVES STOP SELLING OR FAIL TO SUCCESSFULLY PROMOTE OUR PRODUCTS, OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.

We sell many of our products through two non-exclusive distributors and numerous sales representatives. Our non-exclusive distributors and sales representatives may carry our competitors’ products, which could adversely impact or limit the sales of our products. Additionally, they could reduce or discontinue sales of our products or may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect. Moreover, we depend on the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital. In turn, these distributors and sales representatives are subject to general economic and semiconductor industry conditions. We believe that our success will continue to depend on these distributors and sales representatives. If some or all of our distributors and sales representatives experience financial difficulties, or otherwise become unable or unwilling to promote and sell our products, our business, financial condition and results of operations could be adversely affected.

BECAUSE OUR COMMUNICATIONS INTEGRATED CIRCUITS TYPICALLY HAVE LENGTHY SALES CYCLES, WE MAY EXPERIENCE SUBSTANTIAL DELAYS BETWEEN INCURRING EXPENSES RELATED TO RESEARCH AND DEVELOPMENT AND THE GENERATION OF REVENUE DERIVED FROM THESE PRODUCTS.

Due to the communications integrated circuit, or IC, equipment product development cycle, we have typically experienced at least an eighteen-month time lapse between our initial contact with a customer to realizing volume shipments. We first work with customers to achieve a design win, which may take nine months or longer. Our customers then complete the design, testing and evaluation process and begin to ramp up production, a period which typically lasts an additional nine months. The customers of communications equipment manufacturers may also require a period of time for testing and evaluation, which may cause further delays. As a result, a significant period of time may elapse between our research and development efforts and our realization of revenue, if any, from volume purchasing of our communications products by our customers. Due to length of the communications IC equipment product development cycle, the risk of project cancellation by the customer is present for an extended period of time.

OUR BACKLOG MAY NOT RESULT IN FUTURE REVENUE.

Due to the possibility of customer changes in delivery schedules and quantities actually purchased, cancellation of orders, distributor returns or price reductions, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. A reduction of the order backlog during any particular period, or the failure of our backlog to result in future revenue, could negatively impact our business, financial condition and results of operations.

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FIXED OPERATING EXPENSES AND OUR PRACTICE OF ORDERING MATERIALS IN ANTICIPATION OF FUTURE CUSTOMER DEMAND COULD MAKE IT DIFFICULT FOR US TO RESPOND EFFECTIVELY TO SUDDEN SWINGS IN DEMAND AND RESULT IN HIGHER THAN EXPECTED COSTS AND EXCESS INVENTORY. SUCH SUDDEN SWINGS IN DEMAND COULD THEREFORE HAVE A MATERIAL ADVERSE IMPACT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Our operating expenses are relatively fixed in the short to medium term, and, therefore, we have limited ability to reduce expenses quickly and sufficiently in response to any revenue shortfall. In addition, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. From time to time, in response to anticipated long lead times to obtain inventory and materials from our outside suppliers and foundries, we may order materials in advance of anticipated customer demand. This advance ordering may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize. This incremental cost could have a materially adverse impact on our business, financial condition and results of operations.

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD HARM OUR COMPETITIVE POSITION.

Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, mask work registrations, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts, we may be unable to protect our proprietary information. Such intellectual property rights may not be recognized or if recognized, it may not be commercially feasible to enforce. Moreover, we cannot be certain that our competitors will not independently develop technology that is substantially similar or superior to our technology.

More specifically, we cannot be sure that our pending patent applications or any future applications will be approved, or that any issued patents will provide us with competitive advantages or will not be challenged by third parties. Nor can we be sure that, if challenged, our patents will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do business. Furthermore, others may independently develop similar products or processes, duplicate our products or processes or design around any patents that may be issued to us.

WE COULD BE REQUIRED TO PAY SUBSTANTIAL DAMAGES OR COULD BE SUBJECT TO VARIOUS EQUITABLE REMEDIES IF IT WERE PROVEN THAT WE INFRINGED THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

As a general matter, the semiconductor industry is characterized by substantial litigation regarding patents and other intellectual property rights. If a third party were to prove that our technology infringed a third party’s intellectual property rights, we could be required to pay substantial damages for past infringement and could be required to pay license fees or royalties on future sales of our products. If we were required to pay such license fees whenever we sold our products, such fees could exceed our revenue. In addition, if it were proven that we willfully infringed a third party’s proprietary rights, we could be held liable for three times the amount of the damages that we would otherwise have to pay. Such intellectual property litigation could also require us to:

• stop selling, incorporating or using our products that use the infringed intellectual property;

• obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property, which license may not be available on commercially reasonable terms, if at all; and/or

• redesign our products so as not to use the infringed intellectual property, which may not be technically or commercially feasible.

Furthermore, the defense of infringement claims and lawsuits, regardless of their outcome, would likely be expensive to resolve and could require a significant portion of management’s time. In addition, rather than

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litigating an infringement matter, we may determine that it is in our best interests to settle the matter. Terms of a settlement may include the payment of damages and our agreement to license technology in exchange for a license fee and ongoing royalties. These fees could be substantial. If we were required to pay damages or otherwise became subject to such equitable remedies, our business, financial condition and results of operations would suffer. Similarly, if we were required to pay license fees to third parties based on a successful infringement claim brought against us, such fees could exceed our revenue.

OUR STOCK PRICE IS VOLATILE.

The market price of our common stock has fluctuated significantly to date. In the future, the market price of our common stock could be subject to significant fluctuations due to:

• our anticipated or actual operating results;

• announcements or introductions of new products by us or our competitors;

• technological innovations by us or our competitors;

• product delays or setbacks by us, our customers or our competitors;

• potential supply disruptions;

• sales channel interruptions;

• concentration of sales among a small number of customers;

• conditions in the communications and semiconductor markets;

• the commencement and/or results of litigation;

• changes in estimates of our performance by securities analysts;

• decreases in the value of our investments, thereby requiring an asset impairment charge against earnings;

• our repurchasing shares of our common stock;

• announcements of merger or acquisition transactions;

• the impact of expensing stock options; and/or

• general global economic and market conditions.

In the past, securities and class action litigation has been brought against companies following periods of volatility in the market prices of their securities. We may be the target of one or more of these class action suits, which could result in significant costs and divert management’s attention, thereby harming our business, results of operations and financial condition.

In addition, in recent years the stock market has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, including semiconductor companies, and that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations may harm the market price of our common stock.

EARTHQUAKES AND OTHER NATURAL DISASTERS MAY DAMAGE OUR FACILITIES OR THOSE OF OUR SUPPLIERS.

Our corporate headquarters in Fremont, California is located near major earthquake faults that have experienced seismic activity. In addition, some of our customers and suppliers are located near fault lines. In the event of a major earthquake or other natural disaster near our headquarters, our operations could be disrupted. Similarly, a major earthquake or other natural disaster affecting one or more of our major customers or suppliers could adversely impact the operations of those affected, which could disrupt the supply of our products and harm our business.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Exar’s executive offices, marketing and sales, research and development, manufacturing, test and engineering operations are located in Fremont, California in two adjacent buildings that the Company owns, which consist of approximately 151,000 square feet. Additionally, the Company owns approximately 4.5 acres of partially developed property adjacent to its headquarters, which is presently being held for future office expansion. The Company believes that its existing facilities are suitable and adequate for its current needs. The Company leases additional space for sales offices in the United States in or near Atlanta, Boston, Chicago, Dallas, as well as internationally in or near Kawasaki, Japan, Shanghai, China, and Vallauris, France.

ITEM 3. LEGAL PROCEEDINGS

On November 16, 2004, Ericsson Wireless Communications, Inc. initiated a lawsuit against Exar Corporation in San Diego Superior Court. In its third amended complaint, Ericsson asserts causes of action for negligence, strict product liability, and unfair competition against Exar. Through its complaint, Ericsson seeks unspecified monetary damages and unspecified injunctive relief. The case is based on Ericsson’s purchase of allegedly defective products from Vicor Corporation, a former customer of Exar to whom Exar sold untested semi-custom wafers. The Court granted Ericsson to file its third amended complaint on April 28, 2006. Exar’s response to the Third Amended Complaint is due on or before May 30, 2006. The Court recently continued the trial from September 29, 2006 to March 29, 2007 and discovery is continuing. Exar disputes the allegations in Ericsson’s third amended complaint, believes it has meritorious defenses, and intends to defend the lawsuit vigorously. At this stage of the litigation and without additional information, Exar is unable to determine the probability that the claim asserted by Ericsson will result in liability. As of the date of this Report, Exar does not believe that the litigation will have a material impact on its financial condition, results of operations, or liquidity.

On April 15, 2005, Vicor filed a cross-complaint against Exar in San Diego Superior Court. In the cross-complaint, Vicor alleged, among other things, that Exar sold it integrated circuits that were defective, that failed to meet agreed-upon specifications, and that Exar intentionally concealed material facts regarding the specifications of the integrated circuits that Vicor alleges it bought from Exar. In its cross-complaint, Vicor alleges that it is entitled to indemnification from Exar for any damages that Vicor must pay to Ericsson as a result of the causes of action asserted by Ericsson against Vicor. Vicor asserted causes of action against Exar for breach of contract, breach of express contract warranty, breach of implied warranties of merchantability and fitness, breach of the covenant of good faith and fair dealing, fraud, negligence, strict liability, implied contractual indemnity, and equitable indemnity. On May 9, 2005, Exar filed a demurrer to all but one of the indemnity causes of action in Vicor’s Cross-Complaint. On June 17, 2005, the San Diego Superior Court sustained Exar’s demurrer to all of Vicor’s causes of action except the claims for implied contractual indemnity and equitable indemnity without leave to amend. Exar answered the two remaining causes of action on July 5, 2005. Trial on the cross-complaint asserted by Vicor is scheduled for September 29, 2006. Exar disputes the allegations in Vicor’s cross-complaint, believes it has meritorious defenses, and intends to defend the lawsuit vigorously. At this stage of the litigation and without additional information, Exar is unable to determine the probability that the claim asserted by Vicor will result in liability. As of the date of this Report, Exar does not believe that the litigation will have a material impact on its financial condition, results of operations, or liquidity.

On March 4, 2005, Exar filed a complaint in Santa Clara Superior Court against Vicor. In the complaint, Exar sought a declaration regarding the respective rights and obligations, including warranty and indemnity rights and obligations, under the written contracts between Exar and Vicor for the sale of untested, semi-custom wafers. In addition, Exar sought a declaration that it was not responsible for any damages that Vicor must pay to Ericsson or any other customer of Vicor arising from claims that Vicor sold allegedly defective products.

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On March 17, 2005, Vicor filed a cross-complaint against Exar and Rohm Device USA, LLC and Rohm Co., Ltd, the owners and operators of the foundry which supplied the untested, semi-custom wafers that Exar sold to Vicor. In the cross-complaint, Vicor alleged, among other things, that Exar sold it integrated circuits that were defective, that failed to meet agreed-upon specifications, and that Exar intentionally concealed material facts regarding the specifications of the integrated circuits that Vicor alleges it bought from Exar. In its cross-complaint, Vicor also alleges that it is entitled to indemnification from Exar for any damages that Vicor must pay to Ericsson and other Vicor customers as a result of the causes of action asserted by Ericsson in the San Diego case discussed above and any other claims that may be made against Vicor. In the cross-complaint, Vicor asserted causes of action against Exar for breach of contract, breach of express contract warranty, breach of implied warranties of merchantability and fitness, breach of covenant of good faith and fair dealing, fraud, negligence, strict liability, implied contractual indemnity, and equitable indemnity. On May 23, 2005, Exar filed a demurrer to each cause of action in Vicor’s cross-complaint in Santa Clara County. On July 15, 2005, the Santa Clara Superior Court sustained Exar’s demurrer to each of the causes of action asserted by Vicor. The Court granted Vicor leave to amend the cross-complaint to assert a cause of action for declaratory relief only. On August 1, 2005, Vicor filed its amended cross-complaint seeking a declaration of the parties respective rights and obligations, including warranty and indemnity rights, under the alleged contracts between Exar and Vicor for the sale of untested, semi-custom wafers. In addition, Vicor sought a declaration that Exar was obligated to indemnify it for any damages resulting from claims brought against Vicor by its customers. No trial date has been set in the matter, although a motion is currently pending to coordinate the San Diego action with the action in Santa Clara. Exar disputes the allegations in Vicor’s cross-complaint, believes it has meritorious defenses, and intends to defend the lawsuit vigorously. At this stage of the litigation and without additional information, Exar is unable to determine the probability that the claim asserted by Vicor will result in liability. As of the date of this Report, Exar does not believe that the litigation will have a material impact on its financial condition, results of operations, or liquidity.

The Company is not currently a party to any other material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of fiscal year 2006, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The common stock of Exar is traded on NASDAQ under the symbol “EXAR.” The following table sets forth the range of high and low sales prices of the Company’s common stock for the periods indicated, as reported by NASDAQ. The listed quotations represent inter-dealer prices without retail markups, markdowns or commissions.

	Common Stock Prices
	High		Low
FISCAL 2006
Quarter Ended March 31, 2006	$	14.29	$	12.00
Quarter Ended December 31, 2005	$	14.52	$	11.80
Quarter Ended September 30, 2005	$	16.79	$	13.12
Quarter Ended June 30, 2005	$	15.65	$	11.94
FISCAL 2005
Quarter Ended March 31, 2005	$	15.19	$	13.12
Quarter Ended December 31, 2004	$	15.76	$	13.26
Quarter Ended September 30, 2004	$	15.13	$	12.29
Quarter Ended June 30, 2004	$	19.94	$	13.76

The Company has never paid cash dividends on its common stock and presently intends to continue this policy in order to retain earnings for use in its business. The Company had approximately 189 stockholders on record as of May 31, 2006. The closing sales price for Exar’s common stock, as reported by NASDAQ on May 31, 2006 was $13.20 per share.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7. of this Report.

	Years Ended March 31,
	2006(A)			2005(B)			2004(C)		2003(D,E)			2002(F)
	(In thousands, except per share amounts)
Consolidated Statements of Operation Data:
Net sales	$	67,024		$	57,369		$	67,196	$	67,008		$	54,988
Gross profit		45,475			39,156			43,959		36,811			30,964
Income (loss) from operations		(507	)		(2,321	)		2,747		(4,221	)		(8,882	)
Net income (loss)		7,786			5,319			4,636		(32,300	)		4,028
Net income (loss) per share:
Basic	$	0.20		$	0.13		$	0.11	$	(0.81	)	$	0.10
Diluted	$	0.20		$	0.13		$	0.11	$	(0.81	)	$	0.10
Shares used in computation of net income (loss) per share:
Basic		38,152			41,532			40,656		39,674			38,921
Diluted		38,510			42,423			42,510		39,674			41,996
	As of March 31,
	2006			2005			2004		2003			2002
	(In thousands)
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term and long-term marketable securities	$	329,528		$	446,285		$	436,996	$	422,110		$	404,201
Working capital		335,896			447,292			437,881		368,489			351,867
Total assets		401,397			503,203			495,885		479,225			503,035
Long-term obligations		222			265			265		312			385
Retained earnings		90,140			82,354			77,035		72,399			104,699
Stockholders’ equity	$	387,405		$	490,047		$	480,271	$	466,766		$	491,505

(A) Fiscal 2006 included impairment charges of $1.2 million related to the Company’s investment in TechFarm Ventures (Q), L.P. (“TechFarm Fund”).

(B) Fiscal 2005 included a gain on legal settlement of $1.2 million.

(C) Fiscal 2004 included impairment charges of $6.0 million related to the Company’s investment in IMC Semiconductor, Inc. (“IMC”) ($5.0 million) and TechFarm Fund ($1.0 million).

(D) Fiscal 2003 included a charge of $2.3 million to cost of sales related to the write-down of inventory the Company determined to be excess.

(E) Fiscal 2003 included impairment charges of $35.9 million related to the Company’s investment in IMC ($35.4 million) and TechFarm Fund ($0.5 million).

(F) Fiscal 2002 included an impairment charge of $0.7 million related to the Company’s investment in TechFarm Fund.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in “Risk Factors” above and elsewhere in this Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. Please see “Forward Looking Statements” in Part I above. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors, including, among others, those identified above under Part I, Item 1A. “Risk Factors.”

Overview

Exar Corporation (“Exar” or the “Company”) designs, develops and markets high-performance, high-bandwidth physical interface and access control solutions that facilitate the aggregation and transport of signals in access, metro and wide area networks over the worldwide communications infrastructure. The Company’s industry-proven analog and digital design expertise, system-level knowledge and standard complementary metal oxide semiconductors (“CMOS”) process technologies provides original equipment manufacturers (“OEMs”) with innovative, highly integrated circuits (“ICs”) addressing standards such as T/E carrier, ATM, SONET/SDH and Multi-Protocol Over SONET (“MPOS”). In addition, the Company has developed a portfolio of clock products that address various system needs for clock generation, distribution, skew adjustment and fail-safe applications. The clock and timing product lines leverage Exar’s phase-locked loop (“PLL”) technology that is used extensively in its existing network and transmission products. The clock and timing products are targeted at wireless base stations, network switches and routers.

The Company also provides one of the industry’s most comprehensive families of serial communications solutions comprised of low voltage, single/multi-channel universal asynchronous receiver transmitters (“UARTs”). UARTs are well suited to increase data transfer efficiency for various industrial, telecommunications and consumer applications.

The Company designs and markets IC products that address select applications for the video and imaging markets. Late in fiscal year 2006, Exar introduced its first SATA/SAS Port-Multiplier product addressing the storage marketplace.

Exar believes its products offer its customers the following benefits:

• increased bandwidth through the integration of multiple channels on a single device;

• reduced system noise/jitter to improve data integrity;

• a single source for a full range of transceivers, mappers and framer solutions and transmission rates;

• reduced overall system cost and size through the integration of multiple functions on a single device;

• accelerated time-to-market by allowing customers to focus on core competencies and outsource standards-based solutions; and

• unique value added features and functions.

The Company’s OEM customers include, among others, Adtran Inc. (“Adtran”), Alcatel, Cisco Systems Inc. (“Cisco”), Digi International, Inc. (“Digi International”), Fujitsu Limited (“Fujitsu”), Hewlett-Packard Company (“Hewlett-Packard”), Huawei Technologies Company, LTD. (“Huawei”), ITT Industries, Inc. (“ITT”), Lucent Technologies, Inc. (“Lucent”), Ericsson/Marconi, Mitsubishi Electronic Corporation of Japan (“Mitsubishi Electronics”), NEC Corporation (“NEC”), Nokia Corporation (“Nokia”), Plantronics, Inc. (“Plantronics”), Siemens A.G. (“Siemens”), and Tellabs, Inc. (“Tellabs”). For the fiscal year ended March 31, 2006, Alcatel represented 10.5% of the Company’s net sales.

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The Company markets its products in North and South America through independent sales representatives and independent, non-exclusive distributors, as well as the Company’s own direct sales organization. The Company is represented in Europe and the Asia/Pacific region by its wholly-owned foreign subsidiaries, independent sales representatives and independent, non-exclusive distributors. The Company’s international sales represented 51.3%, 50.9%, and 53.5% of net sales for the fiscal years ended March 31, 2006, 2005 and 2004, respectively. These international sales consist primarily of export sales from the United States that are denominated in United States dollars. Such international related operations expenses expose the Company to fluctuations in currency exchange rates because the Company’s foreign operating expenses are denominated in foreign currency while its sales are denominated in United States dollars. Although foreign sales within certain countries or foreign sales comprised of certain products may subject the Company to tariffs, the Company’s profit margin on international sales, adjusted for differences in product mix, is not significantly different from that realized on the Company’s sales to domestic customers. The Company’s operating results are subject to quarterly and annual fluctuations as a result of several factors that could materially and adversely affect the Company’s future profitability, as described above in “Risk Factors.”

Fiscal Year 2006 Review

In order to augment and complement the Company’s SONET product offerings and strengthen its market position, the Company acquired for $11.1 million in cash a significant part of Infineon Technologies North America Corp.’s Optical Networking (“ON”) Business Unit on April 14, 2005. The acquisition includes assets relating to the multi-rate TDM framer products, Fiber Channel over SONET/SDH, Resilient Packet Ring (“RPR”), as well as certain intellectual property for Data over SONET products.

During fiscal year 2006, the Company experienced continued sales growth in the network and transmission market through sales of its existing and acquired products, the serial communications market and slightly lower sales in the video and imaging markets. The Company believes that increased sales of its communications products are due in part to the gradual recovery experienced by the telecommunications market as carriers increase capital investment in network upgrades.

For fiscal year 2006, sales of the Company’s communications products, which encompass network and transmission products and serial communication products, represented 95.5% of its net sales, as compared to 91.9% and 81.1% of its net sales for the fiscal years ended March 31, 2005 and 2004, respectively.

Gross margins as a percentage of net sales in fiscal 2006 were 67.8% as compared to 68.3% and 65.4% for fiscal years 2005 and 2004, respectively. In the second half of fiscal 2006, the Company achieved operating profitability of $0.7 million. For fiscal year 2006, net income was $7.8 million.

In the second quarter of fiscal 2006, the Company completed a Modified “Dutch Auction” Self Tender Offer (“tender offer”) whereby it repurchased 7,500,000 shares of its common stock for $120.0 million plus costs of approximately $0.8 million. The Company’s cash and cash equivalents and short-term marketable securities were $329.5 million at March 31, 2006. For additional information about the tender offer, please see the Schedule TO-I filed with the SEC on July 25, 2005.

During the year, the Company introduced a number of new communications ICs, that provide an expanded line of T/E carrier products, SONET/SDH products, clock devices, as well as its first storage product and a multi-channel 66MHz PCI 3.0 UART.

Outlook for Fiscal Year 2007

The Company believes that near-term market trends are consistent with improvement in end market demand and that inventories at OEM customers and distributors, while increasing, appear to be at appropriate levels to support end demand. Looking forward to the medium to long-term, the Company believes that broadband

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connectivity will grow and that carriers will increase their capital spending in the wireline and wireless areas. Therefore, the Company believes that it should be able to grow its revenue in line with end demand. The Company anticipates that revenue growth will be driven by increased sales from its network and transmission products, serial communications products and clock products, and also initial revenue from products targeting the storage application market.

The Company does, however, continue to experience limited visibility with respect to customer demand and ordering patterns for its communications products resulting from short order-to-delivery times. These net sales expectations are subject to change as customer demand and related customer component inventory levels change. The Company’s future results of operations and financial condition may be negatively impacted as a result of such factors.

Critical Accounting Policies and Estimates

The preparation of the Company’s financial statements and accompanying disclosures in conformity with GAAP, the accounting principles generally accepted in the United States, requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and the accompanying notes. The U.S. Securities and Exchange Commission (“SEC”) has defined a company’s critical accounting policies as policies that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company has identified its most critical accounting policies and estimates to be as follows: (1) net sales; (2) reserves for excess inventories; (3) income taxes; and (4) non-marketable equity securities, which are addressed below. The Company also has other key accounting policies that involve the use of estimates, judgments and assumptions that are significant to understanding the Company’s results. For additional information, see “Part II, Item 8. “Financial Statements and Supplementary Data,” and “Notes to Consolidated Financial Statements Note 2—Accounting Policies.” Although the Company believes that its estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates if the assumptions, judgments and conditions upon which they are based turn out to be inaccurate.

Net Sales

Net sales are comprised of product deliveries principally to OEMs or their contract manufacturers and non-exclusive distributors. The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and collection is reasonably assured. The Company’s delivery terms are primarily FOB shipping point, at which time title and all transit risk transfer to the customer. The Company has agreements with its non-exclusive domestic distributors that provide for estimated returns and allowances to these distributors. The Company records an estimated allowance, at the time of delivery to such distributors, based on authorized and historical patterns of returns and other concessions. The following is a description of the provisions of these agreements allowing the distributors certain volume-based discounts and rights of return:

(a) Volume Discounts.    The Company provides for discounts based on the volume of product ordered by a non-exclusive distributor for a specific product with a specified volume range for a given customer over a period not to exceed one year. Exar records a provision for future volume discounts when the related revenue is recognized. The provision is based on historical information and other known factors. If the Company’s provision does not accurately reflect future volume discounts, the Company’s net sales could be materially and adversely affected.

(b) Stock Rotation.    The Company allows a non-exclusive distributor to exchange products, generally in an amount of up to 10% of the amount purchased in the preceding quarter, provided that a purchase order from the distributor for an equal dollar amount of other products is in place at the time the

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exchange is authorized. The Company uses historical information along with current market conditions and other known factors to support the estimated allowance recorded against sales for potential future stock rotations. This estimated allowance is recorded in the same period that the related revenue is recognized. If the recorded estimated allowance does not accurately reflect future stock rotations, the Company’s net sales could be materially and adversely affected. Salable rotated stock is returned to the Company’s inventory. Returned product that is deemed unsalable is scrapped and expensed.

As of March 31, 2006, the Company had $1.0 million of estimated allowances for future volume discounts and stock rotation related to sales that were recorded during the fiscal year ended March 31, 2006. The Company has estimated volume discounts and stock rotation required by its distributors. However, the Company’s actual results could differ from its original estimated allowances, therefore requiring adjustments to revenues in the relevant period.

Inventories

The Company’s policy is to establish a provision for excess inventory that is greater than approximately six months of forecasted demand, unless there are other factors indicating that the inventory will be sold at a profit after six months. Among other factors, management considers known backlog of orders, projected sales and marketing forecasts, shipment activity, inventory-on-hand at the Company’s primary distributors, past and current market conditions, anticipated demand for the Company’s products, changing lead times in the manufacturing process and other business conditions when determining if a provision for excess inventory is required. The Company’s net inventories at March 31, 2006 were $5.5 million, compared with $3.7 million at March 31, 2005. Should the assumptions used by management in estimating the provision for excess inventory differ from actual future demand or should market conditions become less favorable than those projected by management, additional inventory write-downs may be required, which would have a negative impact on the Company’s gross margins. See “Part I, Item 1A. Risk Factors ‘The Company’s Financial Results May Fluctuate Significantly Because Of A Number Of Factors, Many Of Which Are Beyond The Company’s Control’.”

Income Taxes

Income taxes are accounted for under the asset and liability method. The Company makes certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain deferred tax assets and liabilities, which arise from timing differences in the recognition of revenue and expense for tax and financial statement purposes. Such deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base, operating losses and tax credit carryforwards. Changes in tax rates affect the deferred income tax assets and liabilities and are recognized in the period in which the tax rates or benefits are enacted.

The Company must determine the probability that it will be able to utilize its deferred tax assets. If the Company determines that recovery is unlikely, then a valuation allowance against its deferred tax assets must be recorded by increasing its income tax expense. As of March 31, 2006, the Company believed that its deferred tax assets recorded on its Consolidated Balance Sheets will be realized. However, should there be a change in its ability to utilize or recover its deferred tax assets, an additional income tax expense would be incurred in the period in which it was determined that the recovery is not probable.

Non-Marketable Equity Securities

Non-marketable equity securities are accounted at historical cost and are subject to a periodic impairment review. This impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. The indicators the Company uses to identify those events and circumstances include the investee’s revenue and earnings trends relative to predefined

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milestones and overall business prospects; the technological feasibility of the investee’s products and technologies; the general market conditions in the investee’s industry; and the investee’s liquidity, debt ratios and the rate at which the investee is using cash. Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other-than-temporarily impaired, in which case the investment is written down to its impaired value. When an investee is not considered viable from a financial or technological point of view, the entire investment is written down, since the estimated fair market value is considered to be nominal. Impairment of non-marketable equity securities is recorded in other-than-temporary loss on long-term investments in the Consolidated Statements of Operations.

During the fiscal year ended March 31, 2006, the Company assessed the value of certain discontinued companies and the remaining portfolio companies within TechFarm Ventures (Q), L.P. (“TechFarm Fund”). The Company believed that these changes permanently impaired the carrying value of its investment in the TechFarm Fund. In the fiscal year ended March 31, 2006, the Company recorded an impairment charge against its earnings of $1.2 million, thereby reducing its carrying value in the TechFarm Fund to $0.6 million.

Results of Operations

The following table shows certain Consolidated Statements of Operations as a percentage of net sales for the periods indicated:

	Fiscal Years Ended March 31,
	2006		2005		2004
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales:
Product cost of sales	30.8		31.7		34.6
Amortization of purchased intangible assets	1.4		—		—
Total cost of sales	32.2		31.7		34.6
Gross profit	67.8		68.3		65.4
Operating expenses:
Research and development	36.8		38.4		32.5
Selling, general and administrative	31.8		36.0		28.8
Total operating expenses	68.6		74.4		61.3
Gain from legal settlement	—		2.1		—
Income (loss) from operations	(0.8	)	(4.0	)	4.1
Other income, net:
Interest and other income, net	18.3		14.9		10.6
Other-than-temporary loss on long-term investment	(1.8	)	—		(8.9	)
Total other income, net	16.5		14.9		1.7
Income before income taxes	15.8		10.9		5.8
Provision for income taxes	4.2		1.6		(1.1	)
Net income	11.6	%	9.3	%	6.9	%

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Net Sales by Product Line

The following table shows net sales by product line in absolute dollars and as a percentage of net sales for the periods indicated (in thousands):

	Fiscal Years Ended March 31,									2006 vs 2005 Change			2005 vs 2004 Change
	2006			2005			2004
Net sales:
Communications	$	63,995		$	52,720		$	54,489		$	11,275		$	(1,769	)
Percentage of net sales		95.5	%		91.9	%		81.1	%
Video, Imaging and Other	$	3,029		$	4,649		$	12,707		$	(1,620	)	$	(8,058	)
Percentage of net sales		4.5	%		8.1	%		18.9	%
Total net sales	$	67,024		$	57,369		$	67,196		$	9,655		$	(9,827	)

Fiscal Year 2006 versus Fiscal Year 2005

Net sales for fiscal year 2006 increased $9.7 million, or 16.8%, compared to fiscal year 2005 primarily due to increased sales volume in existing communications products and sales of the SONET product from the ON acquisition.

Communications net sales for fiscal year 2006 increased by $11.3 million, or 21.4% as compared to fiscal year 2005. Net sales in the network and transmission market for fiscal year 2006 increased $7.4 million, or 44.8%, as compared to net sales in fiscal year 2005.

Growth in the network and transmission market resulted from increased T1/E1 (+ 12%), T3/E3 (+17%) and SONET (+414%) product sales. Growth in SONET product sales was derived by increased sales volume of existing products of 15.6% and sales of the SONET product from the ON acquisition.

Net sales in the serial communications market for fiscal year 2006 increased $3.9 million, or 10.7%, primarily due to increased sales volume offset by normal price erosion on a limited number of products.

Video, imaging and other net sales for the fiscal year 2006 decreased by $1.6 million, or 34.8%, as compared to the fiscal year 2005. The decline in video, imaging and other product sales year-over-year reflect reduced shipments to Hewlett-Packard and the completion of a customer’s older program.

Fiscal Year 2005 versus Fiscal Year 2004

Net sales for fiscal year 2005 decreased $9.8 million, or 14.6%, compared to fiscal year 2004, which included a one-time technology license agreement revenue of $0.5 million. This reduction in net sales was primarily due to reduced sales volume in video, imaging and other products. Also during fiscal year 2005, the Company experienced a reduction in demand for its communications products following strong second half demand in fiscal year 2004.

Communications net sales for fiscal year 2005 decreased by $1.8 million, or 3.2%, compared to fiscal year 2004. During fiscal year 2005, the Company’s OEM and distributor customers reduced their inventory levels of the Company’s communications products, thereby reducing product demand on the Company. Despite this trend, net sales in the network and transmission market for fiscal year 2005 increased $0.8 million, or 5.0%, as compared to net sales for fiscal year 2004.

Growth in the network and transmission market resulted from increased T1/E1 (+ 13%) and SONET (+14%) product sales, while T3/E3 product sales remained flat.

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Serial communications net sales for fiscal year 2005 decreased $2.1 million, or 5.4%, compared to fiscal year 2004, primarily due to the effects of distributor inventory reductions, normal price erosion on a limited number of products and reduced sales volume due to the end of life of customers’ older programs.

Video, imaging and other net sales for the fiscal year 2005 decreased by $8.1 million, or 63.4%, as compared to the fiscal year 2004. The decline in video, imaging and other product sales year-over-year reflect continued reductions in sales volume to Hewlett-Packard, in addition to the completion of last-time buy orders for non-strategic products.

Net Sales by Channel and Geography

The following table shows net sales by channel in absolute dollars and as a percentage of net sales for the periods indicated (in thousands):

	Fiscal Years Ended March 31,									2006 vs 2005 Change		2005 vs 2004 Change
	2006			2005			2004
Primary distributors	$	26,838		$	21,130		$	22,627		$	5,708	$	(1,497	)
Percentage of net sales		40.0	%		36.8	%		33.7	%
OEM	$	40,186		$	36,239		$	44,569		$	3,947	$	(8,330	)
Percentage of net sales		60.0	%		63.2	%		66.3	%

Fiscal Year 2006 versus Fiscal Year 2005

Net sales for fiscal year 2006 to the Company’s primary distributors, Future Electronics (“Future”) and Nu Horizons Corp. (“Nu Horizons”), increased 27.0% compared to fiscal year 2005. The increase is primarily due to increased market demand for a number of serial communications products.

Net sales for the fiscal year 2006 to OEMs and their subcontract manufacturers increased 10.9% compared to fiscal year 2005 due to sales of the acquired SONET product to Alcatel partially offset by reduced shipments to Hewlett-Packard and the completion of an older customer’s program.

Fiscal Year 2005 versus Fiscal Year 2004

Net sales for fiscal year 2005 to the Company’s primary distributors, Future and Nu Horizons decreased 6.7% compared to fiscal year 2004. The decrease was due to reduction in inventory levels by the distributors.

Net sales for the fiscal year 2005 to OEMs and their subcontract manufacturers decreased 18.7%, compared to fiscal year 2004, due to reduced imaging product sales to Hewlett-Packard’s contract manufacturers located in Asia.

The following table shows net sales by geography in absolute dollars and as a percentage of net sales for the periods indicated (in thousands):

	Fiscal Years Ended March 31,									2006 vs 2005 Change		2005 vs 2004 Change
	2006			2005			2004
United States	$	32,615		$	28,188		$	31,219		$	4,427	$	(3,031	)
Percentage of net sales		48.7	%		49.1	%		46.5	%
International	$	34,409		$	29,181		$	35,977		$	5,228	$	(6,796	)
Percentage of net sales		51.3	%		50.9	%		53.5	%

Fiscal Year 2006 versus Fiscal Year 2005

Domestic sales increased in fiscal year 2006 compared to fiscal year 2005 due to increased sales volume to a number of network and transmission and serial communications customers. International sales increased during the same period due to sales of acquired SONET product to Alcatel.

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Fiscal Year 2005 versus Fiscal Year 2004

Domestic sales decreased in fiscal year 2005 compared to fiscal year 2004 due to customers reducing their inventory stock and the end of life of customers’ older programs. International sales decreased during the same period due to reduced imaging product sales to Hewlett-Packard’s contract manufacturers located in Asia.

Gross Profit

The following table shows gross profit in absolute dollars and as a percentage of net sales for the periods indicated (in thousands):

	Fiscal Years Ended March 31,									2006 vs 2005 Change		2005 vs 2004 Change
	2006			2005			2004
Gross Profit	$	45,475		$	39,156		$	43,959		$	6,319	$	(4,803	)
Percentage of net sales		67.8	%		68.3	%		65.4	%

Gross profit represents net sales less cost of sales. Cost of sales includes:

• the cost of purchasing finished silicon wafers manufactured by independent foundries;

• the costs associated with assembly, packaging, test, quality assurance and product yields;

• the cost of personnel and equipment associated with manufacturing support and manufacturing engineering;

• the amortization of purchased intangible assets in connection with the ON acquisition; and

• provision for excess and obsolete inventory.

Included in gross profit for the fiscal years ended March 31, 2006, 2005 and 2004, respectively, is the recovery of $0.3 million, $0.4 million and $0.4 million, respectively, from inventory written-down in fiscal year 2003.

The Company anticipates that gross profit will continue to fluctuate as a percentage of net sales and in absolute dollars due to, among other factors, future fluctuations in: net sales, manufacturing costs, competitive pricing and product mix.

Fiscal Year 2006 versus Fiscal Year 2005

The increase in gross profit in absolute dollars was due to increased sales volume of existing products and sales from the acquired SONET product. The decrease in gross profit as a percentage of net sales in fiscal year 2006 compared to fiscal year 2005 was primarily due to the amortization of purchased intangible assets and sales of the acquired SONET product, which is sold at a lower gross margin than other communications products. The decrease was partially offset by the continued product mix shift from lower margin video, imaging and other products to higher margin communications products and manufacturing efficiencies due to increased production volumes.

Fiscal Year 2005 versus Fiscal Year 2004

The decrease in gross profit in absolute dollars was due to reduced sales volume. The increase in gross profit as a percentage of net sales in fiscal year 2005 compared to fiscal year 2004 was due in part to a product mix shift resulting from increased sales of communications products, which typically have higher margins than video and imaging products offset by manufacturing inefficiencies due to decreased production volumes.

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Research and Development (“R&D”)

The following table shows research and development expenses in absolute dollars and as a percentage of net sales for the periods indicated (in thousands):

	Fiscal Years Ended March 31,									2006 vs 2005 Change		2005 vs 2004 Change
	2006			2005			2004
Research and development	$	24,691		$	22,025		$	21,819		$	2,666	$	206
Percentage of net sales		36.8	%		38.4	%		32.5	%

Research and development costs consist primarily of:

• the salaries and related expenses of employees engaged in product research, design and development activities;

• costs related to design tools, license expenses related to intellectual property, mask tooling costs, supplies and services and use of in-house test equipment; and

• facilities expenses.

Fiscal Year 2006 versus Fiscal Year 2005

The increase in R&D expenses in fiscal year 2006 as compared to fiscal year 2005 resulted from an increase in labor-related expenses associated with the ON acquisition of approximately $1.4 million, depreciation and maintenance associated with the purchases of new engineering design software and upgrades to an advanced tester and other lab equipment, mask tooling costs, and legal fees associated with patent applications.

Fiscal Year 2005 versus Fiscal Year 2004

The increase in R&D expenses in fiscal year 2005 as compared to fiscal year 2004 resulted from an increase in labor-related expenses and depreciation associated with the addition of an advanced tester.

The Company believes that technological innovation is critical to its long-term success, and it intends to continue to invest in R&D to enhance its product offerings to meet the current and future technological requirements of its customers and markets. Some aspects of the Company’s R&D efforts require significant short-term expenditures, such as mask tooling for advanced technology products, the timing of which may cause significant fluctuations in the Company’s expenses.

Selling, General and Administrative (“SG&A”)

The following table shows selling, general and administrative expenses in absolute dollars and as a percentage of net sales for the periods indicated (in thousands):

	Fiscal Years Ended March 31,									2006 vs 2005 Change		2005 vs 2004 Change
	2006			2005			2004
Selling, general and administrative	$	21,291		$	20,660		$	19,393		$	631	$	1,267
Percentage of net sales		31.8	%		36.0	%		28.8	%

Selling, general and administrative expenses consist primarily of:

• salaries and related expenses;

• sales commissions;

• professional and legal fees;

• proxy costs; and

• facilities expenses.

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Fiscal Year 2006 versus Fiscal Year 2005

The increase in SG&A spending in absolute dollars for the fiscal year 2006 as compared to fiscal year 2005 was primarily due to the Company’s proxy expenses of $0.9 million and an accrual of $0.4 million for proxy expense reimbursement to GWA Investments, LLC and GWA Master Fund, L.P. partially offset by lower labor-related costs and insurance premiums. Additionally, SG&A expenses in fiscal year 2005 reflect the Company’s recovery of legal fees of $0.7 million in connection with a legal settlement.

Fiscal Year 2005 versus Fiscal Year 2004

The increase in SG&A spending in both absolute dollars and as a percentage of net sales for the fiscal year 2005 as compared to fiscal year 2004 was primarily due to increased labor-related expenses including a charge resulting from an international labor settlement and professional fees related to compliance with Sarbanes-Oxley regulations partially offset by a legal fee recovery of $0.7 million in connection with a legal settlement.

SG&A expenses may vary both in absolute dollars and as a percentage of net sales due to sales commissions, audit fees, litigation costs and costs of any corporate governance or other activity at the direction of the Board of Directors. In the short term, many of the SG&A expenses are fixed; however, the Company expects SG&A expense will continue to fluctuate.

Other Income, Net

The following table shows other income, net in absolute dollars and as a percentage of net sales for the periods indicated (in thousands):

	Fiscal Years Ended March 31,									2006 vs 2005 Change			2005 vs 2004 Change
	2006			2005			2004
Other income, net:
Interest income and other, net	$	12,304		$	8,593		$	6,833		$	3,711		$	1,760
Other-than-temporary loss on long-term investments		(1,215	)		—			(6,000	)		(1,215	)		6,000
Net realized gain (loss) on marketable securities		(7	)		(47	)		306			40			(353	)
Total other income, net	$	11,082		$	8,546		$	1,139		$	2,536		$	7,407
Percentage of net sales		16.5	%		14.9	%		1.7	%

Other income (loss), net primarily consists of:

• interest income;

• realized gains (losses) on marketable securities;

• gains or losses resulting from investments in non-marketable equity securities and venture funds;

• impairment charges; and

• gains or losses on the sale of equipment.

Fiscal Year 2006 versus Fiscal Year 2005

The increase in other income, net during fiscal year 2006 as compared to fiscal year 2005 resulted principally from higher interest income of $3.7 million partially offset by impairment charges of $1.2 million recorded on other long-term investments. Interest income increased to $12.3 million for fiscal year 2006 from $8.6 million for fiscal year 2005 as a result of higher market interest rates partially offset by lower invested cash and cash equivalents and short-term investments due to the $120.8 million required to complete the Company’s Modified “Dutch Auction” Self Tender Offer in the second quarter of fiscal year 2006. The Company expects that its interest income will continue to fluctuate due to changes in interest rates.

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Fiscal Year 2005 versus Fiscal Year 2004

The increase in other income, net during fiscal year 2005 as compared to fiscal year 2004 resulted principally from impairment charges of $6.0 million recorded on other long-term investments in fiscal year 2004 and an increase in interest income due to increasing market interest rates. As a result of higher interest rates on the Company’s interest-bearing investments, interest income, net increased to $8.6 million for fiscal year 2005 from $6.8 million for fiscal year 2004. Net realized losses on investments were $0.05 million for fiscal year 2005, as compared to net realized gains on investments of $0.3 million for fiscal year 2004. The decrease resulted from an increase in interest rates and fewer sales of marketable securities in fiscal year 2005 relative to fiscal year 2004.

Gain on Legal Settlement

During fiscal year 2005, the Company recorded a gain on a legal settlement of $1.2 million arising from its entry into a settlement agreement in connection with a commercial dispute.

Long-Term Investments

TechFarm Ventures L.P. (Q), L.P.(“TechFarm Fund”)

Exar became a limited partner in the TechFarm Fund in May 2001. This partnership is a venture capital fund, managed by TechFarm Ventures Management L.L.C., the general partner of the TechFarm Fund, a Delaware limited partnership, and focuses its investment activities on seed and early stage technology companies. Effective May 31, 2002, in connection with the amendment of the partnership agreement, the Company and TechFarm agreed to reduce the Company’s capital commitment in the TechFarm Fund to approximately $4.0 million, or approximately 5% of the TechFarm Fund’s total committed capital. Additionally, the Company and TechFarm Ventures Management L.L.C. agreed to change the Company’s status from a limited partner to that of an assignee having fewer rights and less status than a limited partner. Because of these modifications, the Company changed its method of accounting for this investment from the equity method to the cost basis method as of May 31, 2002. The Company has fulfilled its capital contribution commitment and, therefore, will not be required to fund additional amounts.

In September 2003, the Company became aware of significant changes in the business of certain portfolio companies within the TechFarm Fund. The Company believed that these changes permanently impaired a portion of the carrying value of its investment in the TechFarm Fund. As a result, Exar recorded an impairment charge against its earnings of $1.0 million, thereby reducing its carrying value in the TechFarm Fund to $1.8 million.

In December 2005, the Company assessed the value of certain discontinued companies and the remaining portfolio companies within the TechFarm Fund. The Company believed that these changes permanently impaired the carrying value of its investment in the TechFarm Fund. As a result, Exar recorded an impairment charge against its earnings of $1.2 million, thereby reducing its carrying value in the TechFarm Fund to $0.6 million.

Skypoint Telecom Fund II (US), L.P. (“Skypoint Fund”)

In July 2001, Exar became a limited partner in the Skypoint Fund, a venture capital fund focused on investments in communications infrastructure companies. The investment provides the Company with the opportunity to align itself with potential strategic partners in emerging technologies within the telecommunications and/or networking industry. Exar is obligated to contribute $5.0 million, which represents approximately 5% of the Skypoint Fund’s total capital commitments. Of the $5.0 million obligation, Exar has funded $2.8 million as of March 31, 2006 and is contractually obligated to contribute the remaining capital of $2.2 million as requested by the Skypoint Fund’s General Partner prior to June 18, 2007 for new portfolio companies. All subsequent capital contributions, up to the $5.0 million capital commitment, must be for portfolio companies invested in by the Skypoint Fund prior to June 18, 2007.

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During the fiscal year 2006, the Company funded $0.7 million to the Skypoint Fund. In September 2005, the Company recorded a $0.6 million distribution from the venture capital fund related to a sale of a company within the fund’s portfolio. In accordance with Financial Accounting Standards Board’s (“FASB”), Accounting Principles Bulletin 18 (“APB 18”), “The Equity Method of Accounting for Investments in Common Stock,” the Company recorded the distribution on the cost basis and reduced the carrying value of its investment in the Skypoint Fund. The $2.2 million carrying value of the Skypoint Fund investment as of March 31, 2006 reflects contributions to date of $2.8 million less the $0.6 million distribution.

Internet Machines Corporation (“IMC”)

In July 2001, Exar invested $40.3 million for a 16% equity interest in Internet Machines Corporation, which subsequently changed its name to IMC Semiconductor, Inc., a pre-revenue, privately-held company that was developing a family of highly-integrated communications ICs that provides protocol-independent network processing, switch fabric and traffic management solutions for high-speed optical, metro area network and Internet infrastructure equipment.

In September 2002, the Company became aware of a potential decline in the value of its 16% equity investment in IMC. Consequently, the Company recorded an impairment charge of $35.3 million against its earnings in that quarter, reducing its equity investment from $40.3 million to $5.0 million. During the three months ended September 30, 2003, the Company determined that the carrying value of its investment in IMC was further impaired and thus recorded a $5.0 million impairment charge to write-off the remainder of its investment carrying value in IMC. In May 2004, IMC ceased operations and liquidated its remaining assets.

Provision (Benefit) for Income Taxes

Fiscal Year 2006

The Company’s effective tax rate for the fiscal year 2006 was 26.4%. The provision for income taxes for fiscal year 2006 differs from the amount computed by applying the statutory federal rate of 35%. This difference is principally due to benefits claimed for research and development tax credits generated during the fiscal year, partially offset by state income taxes.

Fiscal Year 2005

The Company’s effective tax rate for the fiscal year 2005 was 14.6%. The provision for income taxes for fiscal year 2005 differs from the amount computed by applying the statutory federal rate of 35%. This difference is principally due to tax-exempt interest, the usage of research and development tax credits and the usage of net operating loss carryovers from acquired subsidiaries, partially offset by state income taxes.

Fiscal Year 2004

The Company’s effective tax rate for the year ended March 31, 2004 was a benefit of 19%. The Company’s effective income tax rate for fiscal year 2004, excluding the impact of the asset impairment charge of $6 million and a one-time tax benefit of $2.7 million associated with the extension and preservation of tax attributes related to research and development carryforward credits and certain excess tax accruals, was approximately 17%. The provision for income taxes for the fiscal year 2004 differs from the amount computed by applying the statutory federal rate of 35%. This difference is principally due to the Company’s decision not to recognize a tax benefit for the $6 million IMC and TechFarm Fund impairment charges. This decision resulted from the Company’s uncertainty regarding whether it would earn sufficient future capital gains to offset this capital loss after the loss is recognized for tax purposes. The other differences relate primarily to tax-exempt interest, the usage of research and development tax credits and the usage of net operating loss carryovers from acquired subsidiaries, partially offset by state income taxes.

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Liquidity and Capital Resources

The Company does not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, the Company is not a party to any derivative contracts, nor does it have any synthetic leases. At March 31, 2006, the Company had no foreign currency contracts outstanding.

The Company’s principal source of liquidity in fiscal years 2006, 2005 and 2004 was cash and cash equivalents and short-term securities, which decreased by $116.8 million to $329.5 million at March 31, 2006 from $446.3 million at March 31, 2005, which had increased by $9.3 million to $446.3 million at March 31, 2005 from $437.0 million at March 31, 2004.

Fiscal Year 2006

Cash and cash equivalents decreased by $70.8 million to $187.6 million at March 31, 2006 from $258.4 million at March 31, 2005. The decrease was due to net cash used in financing activities of $112.8 million offset by net cash provided by investing activities of $30.3 million and net cash provided by operating activities of $11.7 million.

The Company generated cash flows from operating activities of $11.7 million in the fiscal year 2006 as compared to $11.3 million in the fiscal year 2005. Net income, adjusted for non-cash related items, provided cash of $19.8 million during fiscal year 2006. The decrease for fiscal year 2006 in working capital sources of cash included increases in accounts receivable of $6.8 million and inventories of $1.9 million during fiscal year 2006. The increase in accounts receivable was primarily due to higher sales in the fourth quarter of fiscal year 2006 as compared to the fourth quarter of fiscal year 2005. Working capital sources of cash included increased accounts payable, accrued expenses and income taxes payable.

Net cash provided by investing activities totaled $30.3 million in the fiscal year 2006. During fiscal 2006, the Company’s investing activities included proceeds of $111.0 million from short-term marketable securities partially offset by purchases of $64.2 million in short-term marketable securities, $11.4 million for the ON acquisition, and purchases of property, plant and equipment of $5.0 million which consisted primarily of purchases for test equipment.

As of March 31, 2006, the Company had funded $2.8 million of its $5.0 million committed capital in the Skypoint Telecom Fund II (US), L.P. The Company is obligated to contribute its remaining committed capital of approximately $2.2 million as required by the Skypoint Fund’s General Partner and in accordance with the partnership agreement between Exar and the Skypoint Fund. To meet its capital commitment to the Skypoint Fund, the Company may need to use its existing cash, cash equivalents and marketable securities.

Net cash used in financing activities totaled $112.8 million in the fiscal year 2006. Net cash used in financing activities is primarily due to the repurchase of 7.5 million shares of the Company’s common stock for $120.0 million and associated costs of $0.8 million in connection with the Company’s tender offer. Additionally, the Company repurchased 270,000 shares of its common stock for $3.6 million under the stock repurchase program authorized in March 2001. This was partially offset by the proceeds of $11.6 million from the issuance of shares of common stock, representing proceeds from the exercise of stock options under the Company’s stock option plans and the purchase of shares of common stock under the Company’s employee stock participation plan.

Fiscal Year 2005

Cash and cash equivalents increased by $243.3 million to $258.4 million at March 31, 2005 from $15.1 million at March 31, 2004. The increase was due to net cash provided by operating activities of $11.3 million, net cash provided by investing activities of $227.8 million and net cash provided by financing activities of $4.3 million.

44

The Company generated cash flows from operating activities of $11.3 million in the fiscal year 2005 as compared to $12.5 million in the fiscal year 2004. Cash was provided by net income adjusted for non-cash related items of $16.2 million during fiscal year 2005. The increase for fiscal year 2005 in working capital sources of cash included decreases in accounts receivable of $0.8 million and inventories of $0.5 million. Accounts receivable decreased by $0.8 million over the March 31, 2004 level, primarily due to lower sales in the fourth quarter of fiscal year 2005 as compared to the fourth quarter of fiscal year 2004. Working capital uses of cash included increased prepaid expenses and decreased accounts payable, accrued expenses and income taxes payable.

Net cash provided by investing activities totaled $227.8 million in the fiscal year 2005. During fiscal 2005, the Company’s investing activities included a net transfer of $231.9 million from short-term marketable securities to cash and cash equivalents. Purchases of manufacturing test equipment, computer equipment, software and hardware used for product development amounted to $3.1 million for the fiscal year 2005.

Net cash provided by financing activities totaled $4.3 million in the fiscal year 2005. Net cash provided by financing activities is primarily from proceeds from the issuance of common stock upon the exercise of stock options under the Company’s stock option plans and the purchase of shares of common stock under the Company’s employee stock participation plan offset by the Company’s repurchase of common stock.

Fiscal Year 2004

Cash and cash equivalents decreased from $28.8 million at March 31, 2003 to $15.1 million at March 31, 2004. The decrease was due to net cash used in investing activities of $35.1 million offset by net cash provided by operating activities of $12.5 million, and net cash provided by financing activities of $8.8 million.

During the fiscal year 2004, the Company generated cash from operating activities of $12.5 million. Cash was provided by net income adjusted for non-cash related items of $15.4 million during fiscal year 2004. The increase for fiscal year 2004 in working capital uses of cash included increases in accounts receivable of $5.5 million and inventories of $1.3 million. Accounts receivable increased by $5.5 million, primarily due to higher sales in the fourth quarter of fiscal year 2004 as compared to the fourth quarter of fiscal year 2003. Inventory levels increased by $1.3 million at March 31, 2004 as compared to March 31, 2003 primarily due to additional wafers purchased to ensure continuity of supply during the transition to the Chartered eight-inch wafer fabrication facility. Working capital sources of cash included increased accounts payable, accrued expenses and income taxes payable.

Net cash used in investing activities totaled $35.1 million in the fiscal year 2004. During fiscal year 2004, the Company’s investing activities included net purchases of short-term marketable securities of $28.7 million. Purchases of manufacturing test equipment, computer equipment, software and hardware used for product development amounted to $5.8 million for the fiscal year 2004. Included in purchases of property and equipment was a refund of $0.9 million from the California Energy Commission related to the Company’s on-site power generation equipment installed in fiscal year 2003.

Net cash provided by financing activities totaled $8.8 million in the fiscal year 2004. Net cash provided by financing activities is primarily from proceeds from the issuance of common stock upon the exercise of stock options under the Company’s stock option plans and the purchase of shares of common stock under the Company’s employee stock participation plan.

In March 2001, the Board of Directors authorized a stock repurchase program to acquire outstanding common stock in the open market due to the decrease in market price and to partially offset some dilution from the Company’s stock option programs. Under this program, the Board of Directors authorized the acquisition of up to $40.0 million of Exar’s common stock. During the fiscal year ended March 31, 2006, the Company repurchased 270,000 shares for approximately $3.6 million. In the fiscal year ended March 31, 2005, the

45

Company repurchased 250,000 shares for approximately $3.7 million. Through the fiscal year ended March 31, 2004, the Company acquired 247,110 shares of its common stock for $4.6 million. In the future, the Company may utilize this stock repurchase program, which would reduce cash, cash equivalents and/or marketable securities available to fund future operations and meet other liquidity requirements.

To date, inflation has not had a significant impact on the Company’s operating results.

The Company anticipates that it will continue to finance its operations with cash flows from operations, existing cash and investment balances, and some combination of long-term debt and/or lease financing and additional sales of equity securities. The combination and sources of capital will be determined by management based on the Company’s needs and prevailing market conditions. The Company believes that its cash and cash equivalents, short-term marketable securities and cash flows from operations will be sufficient to satisfy working capital requirements and capital equipment needs for at least the next 12 months. However, should the demand for the Company’s products decrease in the future, the availability of cash flows from operations may be limited, thus possibly having a material adverse effect on the Company’s financial condition or results of operations. From time to time, the Company evaluates potential acquisitions, strategic arrangements and equity investments complementary to its design expertise and market strategy, which may include investments in wafer fabrication foundries. To the extent that the Company pursues or positions itself to pursue these transactions, the Company could consume a significant portion of its capital resources or choose to seek additional equity or debt financing. There can be no assurance that additional financing could be obtained on terms acceptable to the Company. The sale of additional equity or convertible debt could result in dilution to the Company’s stockholders.

The following table summarizes the Company’s contractual payment obligations and commitments as of March 31, 2006 (in thousands):

	Fiscal Years Ended March 31,
	2007		2008		2009		2010		2011		Thereafter		Total
Contractual Obligations
Purchase Obligations(1)	$	4,080	$	575	$	435	$	—	$		$	—	$	5,090
Venture Investment Commitments (Skypoint Fund)(2)		2,152		—		—		—		—		—		2,152
Remediation commitment(3)		53		53		53		53		19		—		231
Lease Obligations		81		19		19		5		—		—		124
Total	$	6,366	$	647	$	507	$	58	$	19	$	—	$	7,597

(1) The Company places purchase orders with wafer foundries and other vendors as part of its normal course of business. The Company expects to receive and pay for wafers, capital equipment and various service contracts over the next 12 months from its existing cash balances.

(2) The commitment related to the Skypoint Fund does not have a set payment schedule and thus will become payable upon the request from the Skypoint Fund’s General Partner.

(3) The commitment relates to the environmental clean-up at the former location of Micro Power Systems, Inc.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). This statement replaces SFAS 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board’s Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” SFAS 123R will require the Company to measure the cost of the Company’s employee stock-based compensation awards granted after the effective date based on the grant date fair value of those awards and to record that cost as compensation expense over the period, during which the employee is

46

required to perform services in exchange for the award (generally over the vesting period of the award). SFAS 123R addresses all forms of share-based payments awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. In addition, the Company will be required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. SFAS 123R is effective for annual fiscal periods beginning after June 15, 2005. The Company, therefore, is required to implement the standard as of April 1, 2006. In addition, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107 in March 2005. SAB 107 includes interpretive guidance for the initial implementation of SFAS 123R.

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using the intrinsic value method prescribed by APB 25 and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123R will have a significant impact on the Company’s result of operations, although it will have no negative impact on cash flow. However, the actual result of the adoption of SFAS 123R cannot be determined at this time because it will depend on levels of share-based payments granted in the future.

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, “Inventory Costs, an amendment to ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. In addition, SFAS 151 requires that the allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred for fiscal years beginning after June 15, 2005. Therefore, the Company is required to adopt the standard effective April 1, 2006. The Company is currently assessing the impact but does not expect the adoption of SFAS 151 to have a significant impact on its financial condition or results of operations.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Company does not expect the adoption of SFAS 154 to have a material impact on its consolidated financial position or results of operations.

47

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Fluctuations.    The Company is exposed to foreign currency fluctuations primarily through its foreign operations. This exposure is the result of foreign operating expenses being denominated in foreign currency. Operational currency requirements are typically forecasted for a three-month period. If there is a need to hedge this risk, the Company will enter into transactions to purchase currency in the open market or enter into forward currency exchange contracts. While it is expected that this method of hedging foreign currency risk will be utilized in the future, the hedging methodology and/or usage may be changed to manage exposure to foreign currency fluctuations.

If the Company’s foreign operations forecasts are overstated or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses. For the fiscal year ended March 31, 2006, the Company did not have significant foreign currency denominated net assets or net liabilities positions, and had no foreign currency contracts outstanding.

Interest Rate Sensitivity.    The Company maintains investment portfolio holdings of various issuers, types, and maturity dates with various banks and investment banking institutions. The market value of these investments on any given day during the investment term may vary as a result of market interest rate fluctuations. The Company’s investment portfolio consisted of fixed income securities of $328.3 million as of March 31, 2006, $443.9 million as of March 31, 2005 and $438.6 million as of March 31, 2004. These securities, like all fixed income instruments, are subject to interest rate risk and will vary in value as market interest rates fluctuate. If market interest rates were to increase or decline immediately and uniformly by less than 10% from levels as of March 31, 2006, the increase or decline in the fair value of the portfolio would not be material.

Both short-term and long-term investments are classified as “available-for-sale” securities and the cost of securities sold is based on the specific identification method. At March 31, 2006, short-term investments consisted of commercial paper, asset-backed securities, corporate bonds and government securities of $141.9 million. At March 31, 2006, the difference between the fair market value and the underlying cost of such investments was $1.0 million.

The Company’s net income is dependent on, among other things, interest income. If interest rates decrease, the Company’s net income may be negatively impacted.

48

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management conducted an assessment of the Company’s internal control over financial reporting as of March 31, 2006 based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on this assessment, management concluded that, as of March 31, 2006, the Company’s internal control over financial reporting was effective.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears below.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance, and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

49

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Exar Corporation:

We have completed an integrated audit of Exar Corporation’s 2006 consolidated financial statements and of its internal control over financial reporting as of March 31, 2006 and audits of its 2005 and 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under 15(a)(1) present fairly in all material respects, the financial position of Exar Corporation and its subsidiaries at March 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 8, that the Company maintained effective internal control over financial reporting as of March 31, 2006 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,

50

accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are 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.

/s/    PricewaterhouseCoopers LLP

San Jose, California

June 12, 2006

51

EXAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	March 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	187,610		$	258,378
Short-term marketable securities		141,918			187,907
Accounts receivable (net of allowances of $1,074 and $858)		7,429			3,899
Inventories		5,531			3,659
Interest receivable and prepaid expenses		4,599			3,645
Deferred income taxes, net		2,579			2,695
Total current assets		349,666			460,183
Property, plant and equipment, net		27,770			27,317
Long-term investments		2,828			3,978
Deferred income taxes, net		9,361			10,053
Goodwill and intangible assets, net		10,020			—
Other non-current assets		1,752			1,672
Total assets	$	401,397		$	503,203
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,631		$	2,199
Accrued compensation and related benefits		3,899			4,074
Accrued sales commissions		650			646
Other accrued expenses		1,895			1,360
Income taxes payable		4,695			4,612
Total current liabilities		13,770			12,891
Long-term obligations		222			265
Total liabilities		13,992			13,156
Commitments and contingencies (Note 12 and 13)
Stockholders’ equity:
Preferred stock, $.0001 par value; 2,250,000 shares authorized; no shares outstanding
Common stock, $.0001 par value; 100,000,000 shares authorized; 43,898,555 and 42,507,031 shares outstanding		430,384			417,077
Accumulated other comprehensive loss		(417	)		(1,070	)
Retained earnings		90,140			82,354
Treasury stock, 8,267,110 and 497,110 shares of common stock at cost		(132,702	)		(8,314	)
Total stockholders’ equity		387,405			490,047
Total liabilities and stockholders’ equity	$	401,397		$	503,203

See accompanying notes to consolidated financial statements.

52

EXAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Fiscal Years Ended March 31,
	2006			2005			2004
Net sales	$	67,024		$	57,369		$	67,196
Cost of sales:
Product cost of sales		20,629			18,213			23,237
Amortization of purchased intangible assets		920			—			—
		21,549			18,213			23,237
Gross profit		45,475			39,156			43,959
Operating expenses:
Research and development		24,691			22,025			21,819
Selling, general and administrative		21,291			20,660			19,393
Total operating expenses		45,982			42,685			41,212
Gain on legal settlement		—			1,208			—
Income (loss) from operations		(507	)		(2,321	)		2,747
Other income, net:
Interest income and other, net		12,304			8,593			6,833
Other-than-temporary loss on long-term investments		(1,215	)		—			(6,000	)
Net realized gain (loss) on marketable securities		(7	)		(47	)		306
Total other income, net		11,082			8,546			1,139
Income before income taxes		10,575			6,225			3,886
Provision (benefit) for income taxes		2,789			906			(750	)
Net income	$	7,786		$	5,319		$	4,636
Earnings per share:
Basic earnings per share	$	0.20		$	0.13		$	0.11
Diluted earnings per share	$	0.20		$	0.13		$	0.11
Shares used in the computation of earnings per share:
Basic		38,152			41,532			40,656
Diluted		38,510			42,423			42,510

See accompanying notes to consolidated financial statements.

53

EXAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(In thousands, except share amounts)

									Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity			Comprehensive Income
	Common Stock			Treasury Stock
	Shares	Amount		Shares		Amount
Balance, March 31, 2003	40,329,609		398,606	(245,000	)		(4,611	)		72,399		372			466,766
Comprehensive income:
Net income										4,636					4,636		$	4,636
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax expense of $50												66			66			66
Unrealized gains (losses) on marketable securities net of tax benefit of $59												(88	)		(88	)		(88	)
Comprehensive income																	$	4,614
Exercise of stock options	1,075,379		7,343												7,343
Stock issued under employee stock participation plan	120,042		1,490												1,490
Income tax benefit from stock option exercises			97												97
Acquisition of treasury stock				(2,110	)		(39	)							(39	)
Balance, March 31, 2004	41,525,030		407,536	(247,110	)		(4,650	)		77,035		350			480,271
Comprehensive income:
Net income										5,319					5,319		$	5,319
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax expense of $43												(64	)		(64	)		(64	)
Unrealized gains (losses) on marketable securities net of tax benefit of $547												(1,356	)		(1,356	)		(1,356	)
Comprehensive income																	$	3,899
Exercise of stock options	846,471		6,360												6,360
Stock issued under employee stock participation plan	135,530		1,614												1,614
Income tax benefit from stock option exercises			1,567												1,567
Acquisition of treasury stock				(250,000	)		(3,664	)							(3,664	)
Balance, March 31, 2005	42,507,031	$	417,077	(497,110	)	$	(8,314	)	$	82,354	$	(1,070	)	$	490,047
Comprehensive income:
Net income										7,786					7,786		$	7,786
Other comprehensive income:
Foreign currency translation adjustments, net of tax expense of $37												62			62			62
Unrealized gains (losses) on marketable securities net of tax benefit of $254												591			591			591
Comprehensive income																	$	8,439
Exercise of stock options	1,220,904		10,021												10,021
Stock issued under employee stock participation plan	140,620		1,559												1,559
Income tax benefit from stock option exercises			1,592												1,592
Issuance of common stock for services	30,000		—												—
Acquisition of treasury stock				(7,770,000	)		(124,388	)							(124,388	)
Amortization of deferred stock based compensation			135												135
Balance, March 31, 2006	43,898,555	$	430,384	(8,267,110	)	$	(132,702	)	$	90,140	$	(417	)	$	387,405

See accompanying notes to consolidated financial statements.

54

EXAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Fiscal Years Ended March 31,
	2006			2005			2004
Cash flows from operating activities:
Net income	$	7,786		$	5,319		$	4,636
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization		5,745			5,309			4,904
Amortization of stock based compensation		135			—			—
Income tax benefit from stock option exercises		1,592			1,568			97
Provision for sales returns and allowances		3,231			2,417			2,540
Other-than-temporary loss on long-term investments		1,215			—			6,000
Deferred income taxes		112			1,551			(2,768	)
Changes in operating assets and liabilities:
Accounts receivable		(6,761	)		882			(5,463	)
Inventories		(1,872	)		524			(1,290	)
Prepaid expenses and other assets		(968	)		(3,585	)		687
Accounts payable		432			(405	)		310
Accrued compensation and related benefits		(175	)		250			556
Accrued sales commissions and other accrued expenses		496			(910	)		793
Income taxes payable		702			(1,620	)		1,505
Net cash provided by operating activities		11,670			11,300			12,507
Cash flows from investing activities:
Purchase of property, plant and equipment		(5,049	)		(3,097	)		(5,769	)
Purchase of short-term marketable securities		(64,169	)		(974,396	)		(1,082,148	)
Proceeds from sales and maturities of short-term marketable securities		111,044			1,205,881			1,053,448
Distribution of (contribution to) long-term investments, net		(129	)		(604	)		(615	)
Acquisition of ON business from Infineon		(11,420	)		—			—
Net cash provided by (used in) investing activities		30,277			227,784			(35,084	)
Cash flows from financing activities:
Proceeds from issuance of common stock		11,580			7,974			8,833
Repurchase of common stock		(124,388	)		(3,664	)		(39	)
Net cash provided by (used in) financing activities		(112,808	)		4,310			8,794
Effect of exchange rate changes on cash		93			(106	)		116
Net increase (decrease) in cash and cash equivalents		(70,768	)		243,288			(13,667	)
Cash and cash equivalents at the beginning of period		258,378			15,090			28,757
Cash and cash equivalents at the end of period	$	187,610		$	258,378		$	15,090
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	351		$	292		$	431

See accompanying notes to consolidated financial statements.

55

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

NOTE 1.    DESCRIPTION OF BUSINESS

Exar Corporation (“Exar” or the “Company”) designs, develops and markets high-performance, analog and mixed-signal silicon solutions for a variety of markets including networking, serial communications, clock and timing, and storage.

NOTE 2.    ACCOUNTING POLICIES

Basis of Presentation—The Company has a fiscal year that ends on March 31. The consolidated financial statements include the accounts of Exar and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated. Certain amounts previously reported have been reclassified to conform to the fiscal year 2006 presentation.

Use of Management Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and material effects on operating results and financial position may result.

Cash and Cash Equivalents—The Company considers all highly liquid debt securities and investments with an original maturity from the date of purchase of ninety days or less to be classified as cash and cash equivalents.

Inventories—Inventories are recorded at the lower of cost or market, determined on a first-in, first-out basis. Cost is computed using the standard cost, which approximates average actual cost. The Company generally provides inventory allowances on obsolete inventories and inventories in excess of six month demand for each specific part.

Inventories consisted of the following (in thousands):

	March 31,
	2006		2005
Work-in-process	$	3,616	$	1,909
Finished goods		1,915		1,750
Inventories	$	5,531	$	3,659

During the fiscal year ended March 31, 2003, the Company recorded a $2.3 million provision to write-down inventory the Company determined to be in excess of a six-month demand forecast for the Company’s communications products. The provision was included in the cost of sales for the fiscal year ended March 31, 2003. For the fiscal years ended March 31, 2006, 2005 and 2004, is a benefit to gross profit from the sale of previously written down inventory for which the original costs were $0.3 million, $0.4 million and $0.4 million, respectively.

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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

Property, Plant and Equipment—Property, plant and equipment is stated at cost less accumulated depreciation and amortization. Property, plant and equipment consist of the following (in thousands):

	March 31,
	2006			2005
Land	$	6,660		$	6,584
Building		14,209			13,743
Machinery and equipment		53,419			48,369
Construction-in-progress		—			307
		74,288			69,003
Accumulated depreciation and amortization		(46,518	)		(41,686	)
Total	$	27,770		$	27,317

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, in the following classifications:

Building	30 years
Machinery and equipment	3-10 years

Depreciation and amortization expense for the fiscal years ended March 31, 2006, 2005 and 2004 was $5.1 million, $4.7 million and $4.9 million, respectively.

Long-Lived Assets—Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates the recoverability of its property, plant, equipment and intangible assets in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company at least annually compares the carrying value of long-lived assets to its projection of future undiscounted cash flows attributable to such assets and, in the event that the carrying value exceeds the future undiscounted cash flows, it records an impairment charge against income equal to the excess of the carrying value over the asset’s fair value. Substantially all of the Company’s property, plant and equipment and other long-lived assets are located in the United States.

Non-Marketable Equity Securities—Non-marketable equity securities are accounted for at historical cost and are subject to a periodic impairment review. This impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. The indicators the Company uses to identify those events and circumstances include the investee’s revenue and earnings trends relative to predefined milestones and overall business prospects; the technological feasibility of the investee’s products and technologies; the general market conditions in the investee’s industry; and the investee’s liquidity, debt ratios and the rate at which the investee is using cash. Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily impaired, in which case the investment is written down to its impaired value. When an investee is not considered viable from a financial or technological point of view, the entire investment is written down, since the estimated fair value is considered to be nominal. Impairment of non-marketable equity securities is recorded in other-than-temporary loss on long-term investments in the Consolidated Statements of Operations.

Income Taxes—Income taxes are reported under Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes,” (“SFAS 109”) and, accordingly, deferred taxes are recognized using the asset

57

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequence attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base, and operating loss and tax credit carry-forwards. Valuation allowances are provided if it is more likely than not that some or all of the deferred tax assets will not be realized.

Revenue Recognition—The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and collection is reasonably assured. The Company’s delivery terms are primarily FOB shipping point, at which time, title and all transit risk transfer to the customer. The Company’s distributor agreements permit the return of up to 10% of a distributor’s purchases of a preceding quarter for purposes of stock rotation. Exar also provides discounts to distributors based on volume of product ordered for a specific product with a specific volume range for a given customer over a period not to exceed one year. The Company records an estimated allowance, at the time of shipment to the distributor, based on the Company’s historical patterns of returns and other authorized pricing allowances. See Note 12, “Commitments and Contingencies” for a discussion related to the Company’s warranty on its products.

Research and Development Expenses—All research and development expenses that have no alternative future use are expensed as incurred. Research and development expenses consist primarily of the salaries and related expenses of those employees engaged in research, design and development activities; costs related to design tools, license expenses related to intellectual property; mask costs; supplies and services; and facilities expenses.

Comprehensive Income—Comprehensive income includes charges or credits to equity as a result of foreign currency translation adjustments, net of taxes, and unrealized gains or losses on marketable securities, net of taxes. Comprehensive income for the fiscal years ended March 31, 2006, 2005 and 2004 has been disclosed within the Consolidated Statements of Stockholders’ Equity and Comprehensive Income.

Foreign Currency—The functional currency of each of the Company’s foreign subsidiaries is the local currency of that country. Accordingly, gains and losses from the translation of the financial statements of the foreign subsidiaries are included in stockholders’ equity. Gains and losses resulting from foreign currency transactions are included in other income, net. Foreign currency transaction losses were approximately $34,000, $0, and $48,000 for the fiscal years ended March 31, 2006, 2005 and 2004, respectively.

Financial Instruments, Concentration of Credit Risk and Other Risks—Financial instruments potentially subjecting the Company to concentrations of credit risk consist primarily of accounts receivable, cash, cash equivalents, short-term investments and long-term investments. The majority of the Company’s sales are derived from manufacturers in the communications, industrial and computer industries. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for sales on credit. The Company maintains allowances for potential credit losses, and such losses have been within management’s expectations. Charges to bad debt expense were insignificant for all three years. The Company’s policy is to place its cash, cash equivalents and short-term investments with high credit quality financial institutions and limit the amounts invested with any one financial institution or in any type of financial instrument. The Company does not hold or issue financial instruments for trading purposes.

The Company sells its products to distributors and OEMs throughout the world. For the year ended March 31, 2006, worldwide sales through primary distributors for subsequent resale to OEMs or their subcontract manufacturers accounted for 40.0% of net sales. Future Electronics (“Future”) continues to be the Company’s largest distributor. Future, on a worldwide basis, represented 24.1%, 20.4%, and 20.3% of net sales in fiscal years

58

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

ended March 31, 2006, 2005 and 2004, respectively. The Company’s second largest distributor, Nu Horizons Electronics Corp. (“Nu Horizons”), accounted for 15.9%, 16.4%, and 13.4% of net sales in fiscal years ended March 31, 2006, 2005 and 2004, respectively. Alcatel accounted for 10.5% of the Company’s net sales for the fiscal year ended March 31, 2006. For fiscal years ended March 31, 2005 and 2004, no OEM customer accounted for 10% or more of the Company’s net sales.

At March 31, 2006, two distributors, Future and Nu Horizons, accounted for 25.3% and 14.2% of total trade accounts receivable, respectively, before the allowances for sale returns, volume discounts and bad debts. At March 31, 2005, Future represented 22.1% of total trade accounts receivable, before the allowances for sale returns, volume discounts and bad debts.

The majority of the Company’s products are currently fabricated at Chartered Semiconductor Manufacturing Ltd. (“Chartered”) and assembled and tested by other third party sub-contractors located in Asia. The Company does not have long-term agreements with any of these sub-contractors. A significant disruption in the operations of one or more of these sub-contractors would impact the production of the Company’s products for a substantial period of time which could have a material adverse effect on the Company’s business, financial condition and results of operations.

Fair Value of Financial Instruments—The Company has estimated the fair value of its financial instruments by using available market information and valuation methodology considered to be appropriate. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies could have a material effect on estimated fair value amounts. The estimated fair value of the Company’s financial instruments at March 31, 2006 and 2005 was not materially different from the carrying values presented in the Consolidated Balance Sheets.

Stock-Based Compensation—The Company adopted SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FAS 123,” (“SFAS 148”) in fiscal year ended March 31, 2003. The Company accounts for stock-based employee compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”), and related interpretations and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”). SFAS 123 requires the disclosure of pro forma net income and earnings per share. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which can greatly affect the calculated values.

59

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

The Company’s pro forma information under SFAS 123 and SFAS 148 is as follows:

	Fiscal Years Ended March 31,
	2006			2005			2004
	(In thousands, except per share amounts)
Net income—as reported	$	7,786		$	5,319		$	4,636
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		82			—			—
Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects		(11,668	)		(13,120	)		(20,984	)
Net loss—Pro forma	$	(3,800	)	$	(7,801	)	$	(16,348	)
As reported:
Earnings per share—Basic	$	0.20		$	0.13		$	0.11
Earnings per share—Diluted		0.20			0.13			0.11
Pro forma:
Loss per share—Basic and diluted	$	(0.10	)	$	(0.19	)	$	(0.40	)

The fiscal years ended March 31, 2006, 2005 and 2004 pro forma amounts are not necessarily indicative of future period amounts.

The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R, which the Company is required to implement in the first quarter of its fiscal year 2007 beginning on April 1, 2006, will require that compensation cost related to share-based payment transactions, including stock options, be recognized in the consolidated statement of operations of the financial statements. Currently, the Company accounts for share-based payment transactions under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), which does not necessarily require the recognition of compensation cost in the statement of operations of the financial statements.

On March 22, 2006, in response to SFAS 123R, the Board of Directors approved the full acceleration of vesting of all employee stock options, including options held by the Company’s executive officers, with exercise prices in excess of $15.05. Such vesting acceleration does not apply to any options held by the Company’s non-employee directors. On March 22, 2006, the Company’s stock price closed at $13.67 per share. As a result of the Board of Director’s decision to fully accelerate the vesting of stock options, as described above, options to purchase approximately 1.1 million shares of the Company’s common stock became fully vested and immediately exercisable effective as of March 22, 2006. The weighted average exercise price per share of all of the accelerated options was $15.77.

Because the accelerated options have exercise prices in excess of the current market value of the Company’s common stock, the Company believes that the incentive value to the Company’s employees of the unvested options is outweighed by the benefit to the Company’s from the reduction of the potential compensation expense associated with the options under SFAS 123R. The acceleration eliminates future compensation expense the Company would otherwise recognize in its statement of operations with respect to these accelerated options under SFAS 123R. As a result of the Board of Director’s action, approximately $4.9 million of compensation expenses, net of taxes, are included in the above pro forma information for fiscal year 2006.

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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

NOTE 3.    CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Marketable securities include commercial paper, asset-backed securities, corporate bonds and government securities. The Company classifies investments as available-for-sale at the time of purchase and re-evaluates such designation as of each consolidated balance sheet date. The Company amortizes premiums and discounts against interest income over the life of the investment. The Company’s available-for-sale securities are classified as cash equivalents if the original maturity from the date of purchase is ninety days or less, and as short-term investments for those with original maturities, from the date of purchase, in excess of ninety days which the Company intends to sell as necessary to meet its liquidity requirements.

Such investments are stated at amortized cost with corresponding premiums or discounts, such premiums or discounts are amortized against interest income over the life of the investment. All marketable securities are reported at fair value based on the estimated or quoted market prices as of each consolidated balance sheet date, with unrealized gains or losses on short-term and long-term marketable securities recorded directly in stockholders’ equity except those unrealized losses that are deemed to be other than temporary are reflected in income. Realized gains or losses on the sale of marketable securities are determined on the specific identification method and are reflected in other income, net. Net realized losses on marketable securities for fiscal years ended March 31, 2006 and 2005 were $7,000 and $47,000, respectively. Net realized gains on marketable securities for fiscal year ended March 31, 2004 were $306,000.

The following table summarizes the Company’s investments in marketable securities as of March 31, 2006 and 2005:

	Original Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
	(In thousands)
Money market funds	$	4,299	$	—	$	—		$	4,299
Municipal securities		400		—		(6	)		394
Corporate bonds and commercial paper		193,964		—		(126	)		193,838
U.S. government and agency obligations		107,359		—		(673	)		106,686
Asset-backed and collateralized obligations		23,349		—		(232	)		23,117
Total at March 31, 2006	$	329,371	$	—	$	(1,037	)	$	328,334
As reported:
Cash equivalents								$	186,416
Short-term investment									141,918
Total at March 31, 2006								$	328,334

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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

	Original Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
	(In thousands)
Money market funds	$	2,577	$	—	$	—		$	2,577
Municipal securities		1,850		—		(3	)		1,847
Corporate bonds and commercial paper		268,749		—		(124	)		268,625
U.S. government and agency obligations		7,200		—		(26	)		7,174
Asset-backed and collateralized obligations		165,211		2		(1,523	)		163,690
Total at March 31, 2005	$	445,587	$	2	$	(1,676	)	$	443,913
As reported:
Cash equivalents								$	256,006
Short-term investment									187,907
Total at March 31, 2005								$	443,913

The amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for-sale at March 31, 2006 and 2005 by expected maturity are shown below:

	March 31, 2006				March 31, 2005
	Amortized Cost		Market Value		Amortized Cost		Market Value
	(In thousands)
Less than 1 year	$	308,310	$	307,479	$	340,841	$	340,408
Due in 1 to 5 years		21,061		20,855		104,746		103,505
Totals	$	329,371	$	328,334	$	445,587	$	443,913

In accordance with EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” the following table shows the gross unrealized losses and fair values of the Company’s investments in an unrealized loss position as of March 31, 2006, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands).

	Less than 12 months					12 months or greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Money market funds	$	4,299	$	—		$	—	$	—		$	4,299	$	—
Municipal securities		394		(6	)		—		—			394		(6	)
Corporate bonds and commercial paper		191,348		(86	)		2,490		(39	)		193,838		(126	)
U.S. government and agency obligations		23,538		(133	)		83,148		(540	)		106,686		(673	)
Asset-backed and collateralized obligations		16,799		(107	)		6,318		(126	)		23,117		(232	)
Total at March 31, 2006	$	236,378	$	(332	)	$	91,956	$	(705	)	$	328,334	$	(1,037	)

As of March 31, 2005, the Company’s gross unrealized losses of $1.7 million were in a loss position for less than a twelve-month period.

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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

The gross unrealized losses related to investments are primarily due to a decrease in the fair value of debt securities as a result of an increase in interest rates during fiscal years ended March 31, 2006 and 2005. The Company reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, credit quality and the Company’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Company determined that such amounts were not “other-than-temporary” as defined by SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.

NOTE 4.    ACQUISITION OF INFINEON’S OPTICAL NETWORKING BUSINESS

On April 6, 2005, Exar entered into a Purchase Agreement with Infineon Technologies North America Corp., a subsidiary of Infineon Technologies AG (“Infineon”), under which Exar agreed to purchase a significant part of Infineon’s Optical Networking Business Unit (“ON”). On April 14, 2005, Exar completed the purchase of such assets for $11,050,000 in cash. The acquisition included assets relating to multi-rate TDM framer products, Fiber Channel over SONET/SDH, and Resilient Packet Ring (RPR), as well as certain intellectual property for data over SONET products. The acquisition expanded Exar’s SONET/SDH product portfolio.

The acquisition has been accounted for as a business combination. Assets acquired were recorded at their fair values as of April 14, 2005. The total purchase price of $11.42 million includes cash paid to Infineon of $11.05 million and acquisition related transaction costs of $0.37 million. ON related transaction costs included legal and accounting fees, and other external costs directly related to the acquisition.

Purchase price allocation

Under business combination accounting, the total purchase price was allocated to ON’s tangible and identifiable intangible assets based on their estimated fair values as of April 14, 2005 as set forth below. The excess of the purchase price over the tangible and identifiable intangible assets was recorded as goodwill. The purchase price allocation was as follows (in thousands):

Property acquired at fair value	$	480
Intangible assets—purchased technology		5,750
Goodwill		5,190
Total purchase price	$	11,420

Intangible assets

The intangible assets recognized, apart from goodwill, represented contractual or other legal rights of the acquisition and those intangible assets of the acquisition that could be clearly identified. These intangible assets were identified and valued through interviews and analysis of data provided by ON concerning development projects, their stage of development, the time and resources needed to complete them and, if applicable, their expected income generating ability. There were no other contractual or other legal rights of ON clearly identifiable by management, other than those discussed below.

Purchased technology of approximately $5.8 million consists of intellectual property related to the acquired technology as well as incremental value associated with existing customer relationships. At the date of

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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

acquisition, the developed SONET technology had reached technological feasibility. Any costs to be incurred in the future relating to the ongoing maintenance of the developed SONET technology will be expensed as incurred. To estimate the fair value of the developed SONET technology, an income approach was used, which included an analysis of future cash flows and the risks associated with achieving such cash flows.

The purchased SONET technology is amortized to cost of revenues on a straight-line basis over its estimated lives of six years. Amortization expense for this intangible asset for the fiscal year 2006 was $920,000. There was no amortization expense for this intangible asset for fiscal year 2005 and 2004. The balances of purchased technology and related amortization were as follows (in thousands):

	March 31,
	2006			2005
Purchased technology	$	5,750		$	—
Less accumulated amortization		(920	)		—
Purchased technology, net	$	4,830		$	—

The aggregate estimated future annual intangible amortization expense through fiscal year ending March 31, 2012, is as follows (in thousands):

Amortization Expense (by fiscal year)
2007		958
2008		958
2009		958
2010		958
2011		958
Thereafter		40
	$	4,830

Goodwill

Of the total purchase price, approximately $5.2 million was allocated to goodwill. Goodwill represents the excess of the purchase price over the estimated fair value of the underlying net tangible and identifiable intangible assets acquired. The Company believed that the acquisition would augment and compliment its SONET product offerings and strengthen its market position. Those factors contributed to a purchase price in excess of the fair market value of net tangible and intangible assets acquired in the ON acquisition and, as a result, the Company has recorded goodwill in connection with the transaction. The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Intangible Assets” (“SFAS 142”). In accordance with SFAS 142, goodwill will not be amortized, but instead will be tested for impairment at least annually and more frequently if certain indicators are present. As of March 31, 2006, the Company determined that no impairment existed.

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of Exar and ON, on a pro forma basis, as though the operations had been combined as of the beginning of each of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each of the periods presented. The pro forma financial information for periods presented includes the business combination accounting effect of adjustments to depreciation on acquired property, amortization charges from acquired intangible assets, adjustments to interest income for cash paid to Infineon in connection with the ON acquisition, and related tax effects.

The unaudited pro forma financial information for the fiscal year 2006 combines the historical results of the Company for the twelve months ended March 31, 2006 and the historical results for ON for the period from April 1, 2005 to April 14, 2005. The unaudited pro forma financial information for fiscal year 2005 combines the historical results of the Company with the historical results for ON for the twelve months ended March 31, 2005.

	Fiscal Years Ended March 31,
	2006		2005
	(in thousands, except per share amounts)
Net sales	$	67,080	$	60,504
Net income (loss)	$	7,513	$	(6,298	)
Net income (loss) per share:
Basic and diluted	$	0.20	$	(0.15	)

NOTE 5.    OTHER LONG-TERM INVESTMENTS

TechFarm Ventures L.P. (Q), L.P.(“TechFarm Fund”)

Exar became a limited partner in the TechFarm Fund in May 2001. This partnership is a venture capital fund, managed by TechFarm Ventures Management L.L.C., the general partner of the TechFarm Fund, a Delaware limited partnership, and focuses its investment activities on seed and early stage technology companies. Effective May 31, 2002, in connection with the amendment of the partnership agreement, the Company and TechFarm agreed to reduce the Company’s capital commitment in the TechFarm Fund to approximately $4.0 million, or approximately 5% of the TechFarm Fund’s total committed capital. Additionally, the Company and TechFarm Ventures Management L.L.C. agreed to change the Company’s status from a limited partner to that of an assignee having fewer rights and less status than a limited partner. Because of these modifications, the Company changed its method of accounting for this investment from the equity method to the cost basis method as of May 31, 2002. The Company has fulfilled its capital contribution commitment and, therefore, will not be required to fund additional amounts.

In September 2003, the Company became aware of significant changes in the business of certain portfolio companies within the TechFarm Fund. The Company believed that these changes permanently impaired a portion of the carrying value of its investment in the TechFarm Fund. As a result, Exar recorded an impairment charge against its earnings of $1.0 million, thereby reducing its carrying value in the TechFarm Fund to $1.8 million.

In December 2005, the Company assessed the value of certain discontinued companies and the remaining portfolio companies within the TechFarm Fund. The Company believed that these changes permanently impaired the carrying value of its investment in the TechFarm Fund. As a result, Exar recorded an impairment charge against its earnings of $1.2 million, thereby reducing its carrying value in the TechFarm Fund to $0.6 million.

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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

Skypoint Telecom Fund II (US), L.P. (“Skypoint Fund”)

In July 2001, Exar became a limited partner in the Skypoint Fund, a venture capital fund focused on investments in communications infrastructure companies. The investment provides the Company with the opportunity to align itself with potential strategic partners in emerging technologies within the telecommunications and/or networking industry. Exar is obligated to contribute $5.0 million, which represents approximately 5% of the Skypoint Fund’s total capital commitments. Of the $5.0 million obligation, Exar funded $2.8 million as of March 31, 2006 and is contractually obligated to contribute the remaining capital of $2.2 million as requested by the Skypoint Fund’s General Partner prior to June 18, 2007 for new portfolio companies. All subsequent capital contributions, up to the $5.0 million capital commitment, must be for portfolio companies invested in by the Skypoint Fund prior to June 18, 2007.

During the fiscal year 2006, the Company funded $0.7 million to the Skypoint Fund. In September 2005, the Company recorded a $0.6 million distribution from the venture capital fund related to a sale of a company within the fund’s portfolio. In accordance with Financial Accounting Standards Board’s (“FASB”), Accounting Principles Bulletin 18 (“APB 18”), “The Equity Method of Accounting for Investments in Common Stock,” the Company recorded the distribution on the cost basis and reduced the carrying value of its investment in the Skypoint Fund. The $2.2 million carrying value of the Skypoint Fund investment as of March 31, 2006 reflects contributions to date of $2.8 million less the $0.6 million distribution.

Internet Machines Corporation (“IMC”)

In July 2001, Exar invested $40.3 million for a 16% equity interest in Internet Machines Corporation, which subsequently changed its name to IMC Semiconductor, Inc., a pre-revenue, privately-held company that was developing a family of highly-integrated communications ICs that provides protocol-independent network processing, switch fabric and traffic management solutions for high-speed optical, metro area network and Internet infrastructure equipment.

In September 2002, the Company became aware of a potential decline in the value of its 16% equity investment in IMC. Consequently, the Company recorded an impairment charge of $35.3 million against its earnings in that quarter, reducing its equity investment from $40.3 million to $5.0 million. During the three months ended September 30, 2003, the Company determined that the carrying value of its investment in IMC was further impaired and thus recorded a $5.0 million impairment charge to write off the remainder of its investment carrying value in IMC. In May 2004, IMC ceased operations and liquidated its remaining assets.

NOTE 6.    INCOME TAXES

The components of the provision (benefit) for income taxes are as follows (in thousands):

	Fiscal Years Ended March 31,
	2006			2005			2004
Current:
Federal	$	1,993		$	599		$	1,817
State		148			366			129
Foreign		79			64			72
Total current		2,220			1,029			2,018
Deferred:
Federal		727			(206	)		(199	)
State		(158	)		83			(2,569	)
Total deferred		569			(123	)		(2,768	)
Total provision for income taxes	$	2,789		$	906		$	(750	)

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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

Consolidated pre-tax income includes foreign income of $229,000, $233,000 and $225,000 in fiscal years ended March 31, 2006, 2005 and 2004, respectively. Undistributed earnings of the Company’s foreign subsidiaries of $871,000 are considered to be indefinitely reinvested and, accordingly, no provisions for federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of a dividend or otherwise, the Company would be subject to both United States income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.

Significant components of the Company’s net deferred tax assets are as follows (in thousands):

	March 31,
	2006			2005			2004
Deferred tax assets:
Reserves and accruals not currently deductible	$	2,579		$	2,695		$	3,170
Net operating loss and tax credit carryforwards		2,132			3,314			3,151
Tax credits		11,123			9,653			10,123
Losses on investments		17,024			17,044			16,751
Capitalized R&D expenses		3,454			4,108			4,488
		36,312			36,814			37,683
Deferred tax liabilities:
Depreciation		(1,189	)		(1,077	)		(1,213	)
Valuation allowance		(23,183	)		(22,935	)		(22,987	)
Net deferred tax assets	$	11,940		$	12,802		$	13,483

Reconciliations of the income tax provision at the statutory rate to the Company’s provision for income tax are as follows (in thousands):

	March 31,
	2006			2005			2004
Income tax provision at statutory rate	$	3,701		$	2,179		$	1,360
State income taxes, net of federal income tax benefit		568			508			169
Deferred tax assets, not benefited/(benefited)		117			(456	)		1,944
Tax-exempt interest income		(4	)		(281	)		(138	)
Tax credits, net		(1,178	)		(802	)		(1,129	)
Tax accruals no longer required		—			—			(2,727	)
Other		(415	)		(242	)		(229	)
Total	$	2,789		$	906		$	(750	)

As of March 31, 2006, the Company’s federal and state net operating loss carryforwards for income tax purposes were approximately $6.0 million and $0.7 million, respectively. If not utilized, a portion of the federal net operating loss carryforwards will expire next year, while the state net operating losses will begin to expire in 2012. Additionally, the Company has capital loss carryforwards of approximately $39.8 million, which will expire in 2010 if not utilized.

As of March 31, 2006, the Company’s federal and state tax credit carryforwards were $6.8 million and $6.6 million, respectively. The federal and state credits will begin to expire in 2012 and 2007, respectively. Utilization

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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

of these federal and state net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions.

The Company has evaluated its deferred tax assets and concluded that a valuation allowance is required for that portion of the total deferred tax assets that are not considered more likely than not to be realized in future periods. To the extent that the deferred tax assets with a valuation allowance become realizable in future periods, the Company will have the ability, subject to carryforward limitations, to benefit from these amounts. Approximately $6.1 million of these deferred tax assets pertain to certain net operating loss and credit carryforwards resulting from the exercise of employee stock options. When recognized, the tax benefit of these carryforwards are accounted for as a credit to additional paid-in capital rather than a reduction of the income tax provision.

NOTE 7.    EARNINGS PER SHARE

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if outstanding securities or other contracts to issue common stock were exercised or converted into common stock.

A summary of the Company’s EPS for each of the fiscal years ended March 31, 2006, 2005 and 2004 is as follows:

	2006		2005		2004
	(In thousands, except per share amounts)
Net income	$	7,786	$	5,319	$	4,636
Shares used in computation:
Weighted average common shares outstanding used in computation of basic net income per share		38,152		41,532		40,656
Dilutive effect of stock options		358		891		1,854
Shares used in computation of diluted net income per share		38,510		42,423		42,510
Basic and diluted earnings per share	$	0.20	$	0.13	$	0.11

Options to purchase 5,224,414 shares of common stock at a price ranging from $13.12 to $59.31 were outstanding as of March 31, 2006. Options to purchase 5,464,463 shares of common stock at prices ranging from $13.77 to $59.31 were outstanding as of March 31, 2005. Options to purchase 3,247,256 shares of common stock at prices ranging from $19.29 to $59.31 were outstanding as of March 31, 2004. These options to purchase shares of common stock that were outstanding as of March 31, 2006, 2005 and 2004, respectively were not included in the computation of diluted net income per share because the options’ exercise prices were greater than the average market price of the common shares as of such dates and, therefore, would be anti-dilutive under the treasury stock method.

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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

NOTE 8.    EMPLOYEE BENEFIT PLANS

Exar Savings Plans—The Exar Savings Plan, as amended and restated, covers substantially all employees of the Company. The Exar Savings Plan provides for voluntary salary reduction contributions in accordance with Section 401(k) of the Internal Revenue Code as well as contributions from the Company based on the achievement of specified operating results. The Company recognized expenses of approximately $0.6 million, $0.3 million and $0.1 million for the fiscal years ended March 31, 2006, 2005, and 2004, respectively.

Executive and Key Employee Incentive Compensation Programs—The Company’s incentive compensation programs provide for incentive awards for substantially all employees of the Company based on the achievement of specified operating and performance results. For the fiscal years ended March 31, 2006 and 2005, the Company did not incur expense related to the Executive and Key Employee Incentive Compensation Programs. For fiscal year ended March 31, 2004, the Company’s Executive and Key Employee Incentive Compensation Programs consisted of the following two programs, the FY ‘04 Executive Special Stock Based Incentive Program (“Executive Program”) and the FY ‘04 Key Employee Special Stock Based Incentive Program (“Key Employee Program”). In lieu of cash awards for fiscal year 2004, participants in the Executive Program and Key Employee Program were granted stock options at fair market value commensurate with their respective level in the Company. For fiscal year ended March 31, 2004, a total of 200,876 options were granted with an exercise price equal to the fair market value of the Company’s common stock on the date of the grant under the terms of the Executive and Key Employee Programs, and accordingly, no compensation expense was recorded. The Company’s incentive compensation programs may be amended or discontinued at the discretion of the Board of Directors.

Deferred Compensation—The Company awarded 30,000 shares of restricted stock to its President and Chief Executive Officer on March 24, 2005 in connection with his employment agreement. The Company amortizes the deferred stock based compensation over the vesting period of three years. Amortization of the deferred stock based compensation in fiscal year 2006 was $135,000. There was no amortization in fiscal years 2005 and 2004.

NOTE 9.    VOLUNTARY STOCK OPTION EXCHANGE PROGRAM

On August 27, 2003, the Company offered eligible employees the opportunity to exchange certain outstanding options for new options. Eligible employees included regular, full-time, U.S. resident employees of the Company or its subsidiaries. Members of the Company’s Board of Directors, executive officers and employees of the Company subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, were not eligible to participate in the offer. The offer expired on September 25, 2003.

The offer was a voluntary exchange for eligible option holders under the Company’s 1997 Equity Incentive Plan and 2000 Equity Incentive Plan, to exchange all of their options, vested or unvested, with exercise prices equal to or greater than $26.00 per share and all options granted on or after February 27, 2003, regardless of the exercise price.

A total of 1,438,205 exchanged options were cancelled on September 26, 2003 and 544,130 new options were granted on March 29, 2004, which was at least six months and one day from the cancellation date, September 26, 2003. The number of new options granted to the participants was dependent on the original exercise price at which the exchanged options were granted. Exchanged options with an exercise price per share equal to or greater than $26.00 and less than or equal to $50.00 were replaced with new options at an exchange

69

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

ratio of one new option for every two exchanged options. Exchanged options with an exercise price per share greater than $50.00 were replaced with new options at an exchange ratio of one new option for every four exchanged options. Options with an exercise price per share less than $26.00 were not eligible for exchange under the offer, except for options granted on or after February 27, 2003, which were required to be exchanged as a condition to participate in the offer. Such options were replaced with new options at an exchange ratio of one new option for every one exchanged option. The new options were granted at the fair market value of $18.00 on the grant date of March 29, 2004.

Each new option granted to participants in the offer were subject to a new vesting schedule that commenced on March 29, 2004, the new option grant date. If any portion of the exchanged options were vested as of the date such options were cancelled, then the corresponding portion of the new options granted to such participants in exchange for the vested exchanged options were fully vested nine months from the new option grant date of March 29, 2004. If any portion of the exchanged options were unvested as of the date such options were cancelled, then 50% of the corresponding portion of the new options granted to such participants in exchange for the unvested exchanged options vested on the one year anniversary of the new option grant date and the remaining 50% of the corresponding portion of the new options shall vest on the two year anniversary of the new option grant date. For additional information about the offer, please refer to the Schedule TO-C filed with the SEC on August 21, 2003 and the Schedule TO-I filed with the SEC on August 27, 2003.

NOTE 10.    STOCKHOLDERS’ EQUITY

Preferred Share Purchase Rights Plan—In December 1995, the Company’s Board of Directors adopted a Preferred Share Purchase Rights Plan under which the Board of Directors declared a dividend of one purchase right for each outstanding share of common stock of Exar held as of January 10, 1996. Each right entitles the registered holder to purchase one one-hundredth of a share of Exar’s Series A Junior Participating Preferred Stock. The rights become exercisable ten days after the announcement that an entity or person has commenced a tender offer to acquire or has acquired 15% or more of the outstanding Exar common stock (the “Distribution Date”).

After the Distribution Date, the Board of Directors may exchange the rights at an exchange ratio of one common share or one one-hundredth of a preferred share per right. Otherwise, each holder of a right, other than rights beneficially owned by the acquiring entity or person (which will thereafter be void), will have the right to receive upon exercise that number of common shares having a market value of two times the exercise price of the right. The Preferred Share Purchase Rights Plan was cancelled by the Board of Directors on July 22, 2005.

Employee Stock Participation Plan—Exar is authorized to issue 4,500,000 shares of common stock under its Employee Stock Participation Plan (“ESPP”). The ESPP permits employees to purchase common stock through payroll deductions. The purchase price is the lower of 85% of the fair market value of the common stock at the beginning or end of each three-month offering period. Shares purchased by and distributed to participating employees were 140,620 in fiscal year ended March 31, 2006, 135,530 in fiscal year ended March 31, 2005 and 120,042 in fiscal year ended March 31, 2004 at weighted average prices of $11.09, $11.91 and $12.42, respectively.

At March 31, 2006, the Company has reserved 1,733,851 shares of common stock for future issuance under its Employee Stock Participation Plan.

70

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

Effective April 1, 2006, the Company amended its ESPP to permit Exar employees to purchase common stock through payroll deductions at a purchase price that is 95% of the fair market value of the common stock on the last day of each three-month offering period.

Stock Option Plans—Exar has a 2000 Equity Incentive Plan, as amended and restated (the “2000 Plan”), that only permits the granting of non-statutory stock options to executive officers and employees. A maximum of 40% of the total number of shares reserved under the 2000 Plan may be granted to executive officers of the Company. The Board of Directors adopted the 2000 Plan in September 2000, and was subsequently amended. The Company also has a 1997 Equity Incentive Plan (the “1997 Plan”), also subsequently amended and restated, which permits the granting of both incentive and non-statutory stock options to executive officers of the Company and its employees, and the granting of non-statutory stock options to the Company’s directors and consultants. Exar also has a 1996 Non-Employee Director’s Stock Option Plan (the “Non-Employee Director’s Plan”), also amended and restated, that permits the granting of non-statutory stock options to non-employee directors of the Company. Generally, options under the three plans are granted with an exercise price of 100% of the fair value of the underlying stock on the date of grant and have a term of seven years, although the plans provide that options may be granted with a term of up to ten years. Options generally vest over four years.

Under the plans, certain employees, including executive officers, directors, senior management and technical personnel of the Company, were allowed the opportunity to defer a portion of his or her base salary and apply such deferred salary to options to purchase shares of the Company’s common stock with exercise prices set at a discount to market with the aggregate of such discounts equal to the aggregate amount of the base salary so deferred. On June 13, 2005, the Board of Directors approved the amendment of the Plans to eliminate the compensation deferral provision in each Plan, effective June 13, 2005. At the same time, as permitted by Internal Revenue Code Section 409A, the Board of Directors approved the cancellation of deferral elections for the 2005 calendar year for four (4) participants and also the cancellation of the stock options granted with respect to those deferrals.

In fiscal year ended March 31, 2004, the Company cancelled options to purchase 618,000 shares of common stock held by certain executive officers in exchange for $0.05 per share. In connection with these cancellations, the Company recorded compensation expense of $0.03 million.

In the fiscal years ended March 31, 2006, 2005, and 2004, the Company granted 1,282,812, 1,803,526 and 1,390,789 shares of common stock, respectively, on a combined basis under the 2000 Plan, the 1997 Plan and the 1996 Non-employee Director’s Plan.

As of March 31, 2006, up to 5,318,841, 5,100,351, and 947,630 shares of common stock, were available for grant by the Company under the 2000 Plan, the 1997 Plan and the 1996 Non-employee Director’s Plan, respectively.

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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

Option activity under the option plans was as follows:

	Fiscal Years Ended March 31,
	2006				2005				2004
	Number of Shares		Weighted Average Exercise Price per Share		Number of Shares		Weighted Average Exercise Price per Share		Number of Shares		Weighted Average Exercise Price per Share
Outstanding at beginning of period	9,221,732		$	18.13	8,678,790		$	17.99	10,483,967		$	22.47
Granted	1,282,812			12.73	1,803,526			14.69	1,390,789			16.33
Exercised	(1,220,904	)		8.48	(846,471	)		7.51	(1,075,379	)		6.82
Cancelled	(1,774,742	)		24.63	(414,113	)		21.90	(2,120,587	)		44.70
Outstanding at end of period	7,508,898			17.34	9,221,732			18.13	8,678,790			17.99
Exercisable at end of period	6,320,416		$	18.17	6,477,210		$	19.16	6,061,439		$	17.49

The following table summarizes information concerning options outstanding and exercisable for the combined option plans at March 31, 2006:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Life (Yrs)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$  0.00—$12.45	2,106,484	3.40	$	12.10	1,427,503	$	12.04
12.49—  15.09	1,502,333	4.54		13.52	1,010,833		13.50
15.12—  16.38	1,501,905	5.23		15.50	1,501,905		15.50
16.99—  27.15	1,911,576	2.66		22.11	1,893,575		22.12
30.56—  59.31	486,600	1.16		38.77	486,600		38.77
$  0.00—$59.31	7,508,898	3.66	$	17.34	6,320,416	$	18.17

Stock Repurchase Program—In March 2001, the Board of Directors authorized a stock repurchase program to acquire outstanding common stock in the open market due to the decrease in market price and to partially offset some dilution from the Company’s stock option programs. Under this program, the Board of Directors authorized the acquisition of up to $40.0 million of Exar’s common stock. During the fiscal year ended March 31, 2006, the Company repurchased 270,000 shares for approximately $3.6 million. During fiscal year ended March 31, 2005, the Company repurchased 250,000 shares for approximately $3.7 million. From March 2001 through the fiscal year ended March 31, 2004, the Company repurchased 247,110 shares for $4.6 million. In the future, the Company may utilize this stock repurchase program, which would reduce cash, cash equivalents and/or marketable securities available to fund future operations and meet other liquidity requirements. Under this program, $28.1 million remains available to repurchase Exar’s common stock as of March 31, 2006.

Modified “Dutch Auction” Self Tender Offer—In addition to the above, on July 25, 2005, Exar commenced a Modified “Dutch Auction” Self Tender Offer (“tender offer”) to acquire up to 7,058,823 shares of its common stock at a purchase price of not greater than $17.00 nor less than $15.00 per share. During the three months ended September 30, 2005, the Company completed the tender offer and repurchased 7,500,000 shares of its common stock at a purchase price of $16.00 per share, resulting in aggregate payments of $120.0 million plus costs of approximately $0.8 million.

72

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

Fair Value Disclosures

Information regarding net income and net income per share, as adjusted, is required by SFAS 123, which also requires that the information be determined as if the Company had accounted for its employee stock options granted under the fair value method. The fair value for these options was estimated using the Black-Scholes option pricing model. The per share weighted average estimated fair value for employee options granted was $5.18, $7.83 and $10.17 for the three fiscal years ended March 31, 2006, 2005 and 2004, respectively. The per share weighted average fair value of shares purchased under the employee stock participation plan was $2.57, $2.86 and $3.57 for the three fiscal years ended March 31, 2006, 2005 and 2004, respectively. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a freely traded market. The Black-Scholes model does not consider the employment, transfer or vesting restrictions that are inherent in the Company’s employee options. The usage of an option valuation model, as required by SFAS 123, includes highly subjective assumptions based on long-term predictions, including the expected stock price volatility and average life of each option grant that greatly affect the fair value of the option. However, the Black-Scholes model has been widely adopted by many companies for valuation under SFAS 123.

The Company’s calculations in accordance with SFAS 123 were made using the Black-Scholes option pricing model with the following weighted average assumptions for options granted:

	Fiscal Years Ended March 31,
	2006		2005		2004
Risk-free interest rate	4.9	%	3.9	%	2.9	%
Expected term of options (years)	4.3		4.0		5.6
Expected volatility	38.4	%	68.3	%	71.8	%
Expected dividend yield	0.0	%	0.0	%	0.0	%

Under SFAS 123, pro forma compensation cost is calculated for the fair market value of the options granted under the Employee Stock Participation Plan (“ESPP”). The fair value of each stock purchase right granted under the ESPP is estimated using the Black-Scholes option pricing model with the following weighted average assumptions by fiscal year:

	Fiscal Years Ended March 31,
	2006		2005		2004
Risk-free interest rate	4.7	%	2.8	%	1.0	%
Expected term of options (years)	0.25		0.25		0.25
Expected volatility	21.7	%	26.3	%	48.0	%
Expected dividend yield	0.0	%	0.0	%	0.0	%

NOTE 11.    RELATED PARTY TRANSACTION

In the fourth quarter of fiscal 2006, GWA Investments, LLC and GWA Master Fund, L.P. (“GWA”), requested that the Company reimburse its costs of $0.4 million in connection with its proxy solicitation in October 2005 in support of their director candidates, all of whom were elected to the Board of Directors at the 2005 annual shareholder meeting. GWA is a hedge fund managed by a director of the Company, Guy W. Adams. These costs have been accrued by the Company and are included in selling, general and administrative costs in the Company’s Consolidated Statements of Operations for the fiscal period ended March 31, 2006.

73

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

NOTE 12.    COMMITMENTS AND CONTINGENCIES

In 1986, Micro Power Systems Inc. (“MPSI”), one of the Company’s subsidiaries that the Company had acquired in June 1994, identified low-level groundwater contamination at its principal manufacturing site. Although the area and extent of the contamination appear to have been defined, the source of the contamination has not been identified. MPSI previously reached an agreement with another entity to participate in the cost of ongoing site investigations and the operation of remedial systems to remove subsurface chemicals, which is expected to continue for an additional 4 to 5 years from the fiscal year ended March 31, 2006. The Company believes that its site closure costs pertaining to the capping of wells and removal of the filtering system will be immaterial. Management estimates that the accrual of $0.2 million as of March 31, 2006 is sufficient to cover the estimated remaining 4 to 5 years of continued remediation activities and post-remediation site closure activities. If further investigation reveals that additional remediation need to be employed or related closure costs exceed original estimations, the Company would be required to accrue an additional provision for such remediation costs.

The Company warrants all of its products against defects in materials and workmanship for a period of ninety days from the delivery date. The Company’s sole liability is limited to either replacing, repairing or issuing credit, at its option, for the product if it has been paid for. The warranty does not cover damage which results from accident, misuse, abuse, improper line voltage, fire, flood, lightning or other damage resulting from modifications, repairs or alterations performed other than by the Company, or resulting from failure to comply with the Company’s written operating and maintenance instructions. Warranty expense has historically been immaterial.

Additionally, the Company’s sales agreements indemnify its customers for any expenses or liability resulting from alleged or claimed infringements of any United States letter patents of third parties. However, the Company is not liable for any collateral, incidental or consequential damages arising out of patent infringement. The terms of these indemnification agreements are generally perpetual commencing after execution of the agreement or the date indicated on the Company’s order acknowledgement. The maximum amount of potential future indemnification is unlimited. However, to date, the Company has not paid any claims or been required to defend any lawsuits with respect to any such indemnity claim.

The following table summarizes the Company’s contractual payment obligations and commitments as of March 31, 2006 (in thousands):

	Fiscal Years Ended March 31,
	2007		2008		2009		2010		2011		Thereafter		Total
Contractual Obligations
Purchase Obligations(1)	$	4,080	$	575	$	435	$	—	$		$	—	$	5,090
Venture Investment Commitments (Skypoint Fund)(2)		2,152		—		—		—		—		—		2,152
Remediation commitment(3)		53		53		53		53		19		—		231
Lease Obligations		81		19		19		5		—		—		124
Total	$	6,366	$	647	$	507	$	58	$	19	$	—	$	7,597

(1) The Company places purchase orders with wafer foundries and other vendors as part of its normal course of business. The Company expects to receive and pay for wafers, capital equipment and various service contracts over the next 12 months from its existing cash balances.

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EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

(2) The commitment related to the Skypoint Fund does not have a set payment schedule and thus will become payable upon the request from the Skypoint Fund’s General Partner.

(3) The commitment relates to the environmental clean-up at the former location of Micro Power Systems, Inc.

NOTE 13.    LITIGATION

On November 16, 2004, Ericsson Wireless Communications, Inc. initiated a lawsuit against Exar Corporation in San Diego Superior Court. In its third amended complaint, Ericsson asserts causes of action for negligence, strict product liability, and unfair competition against Exar. Through its complaint, Ericsson seeks unspecified monetary damages and unspecified injunctive relief. The case is based on Ericsson’s purchase of allegedly defective products from Vicor Corporation, a former customer of Exar to whom Exar sold untested semi-custom wafers. The Court granted Ericsson to file its third amended complaint on April 28, 2006. Exar’s response to the Third Amended Complaint is due on or before May 30, 2006. The Court recently continued the trial from September 29, 2006 to March 29, 2007 and discovery is continuing. Exar disputes the allegations in Ericsson’s third amended complaint, believes it has meritorious defenses, and intends to defend the lawsuit vigorously. At this stage of the litigation and without additional information, Exar is unable to determine the probability that the claim asserted by Ericsson will result in liability. As of the date of this Report, Exar does not believe that the litigation will have a material impact on its financial condition, results of operations, or liquidity.

On April 15, 2005, Vicor filed a cross-complaint against Exar in San Diego Superior Court. In the cross-complaint, Vicor alleged, among other things, that Exar sold it integrated circuits that were defective, that failed to meet agreed-upon specifications, and that Exar intentionally concealed material facts regarding the specifications of the integrated circuits that Vicor alleges it bought from Exar. In its cross-complaint, Vicor alleges that it is entitled to indemnification from Exar for any damages that Vicor must pay to Ericsson as a result of the causes of action asserted by Ericsson against Vicor. Vicor asserted causes of action against Exar for breach of contract, breach of express contract warranty, breach of implied warranties of merchantability and fitness, breach of the covenant of good faith and fair dealing, fraud, negligence, strict liability, implied contractual indemnity, and equitable indemnity. On May 9, 2005, Exar filed a demurrer to all but one of the indemnity causes of action in Vicor’s Cross-Complaint. On June 17, 2005, the San Diego Superior Court sustained Exar’s demurrer to all of Vicor’s causes of action except the claims for implied contractual indemnity and equitable indemnity without leave to amend. Exar answered the two remaining causes of action on July 5, 2005. Trial on the cross-complaint asserted by Vicor is scheduled for September 29, 2006. Exar disputes the allegations in Vicor’s cross-complaint, believes it has meritorious defenses, and intends to defend the lawsuit vigorously. At this stage of the litigation and without additional information, Exar is unable to determine the probability that the claim asserted by Vicor will result in liability. As of the date of this Report, Exar does not believe that the litigation will have a material impact on its financial condition, results of operations, or liquidity.

On March 4, 2005, Exar filed a complaint in Santa Clara Superior Court against Vicor. In the complaint, Exar sought a declaration regarding the respective rights and obligations, including warranty and indemnity rights and obligations, under the written contracts between Exar and Vicor for the sale of untested, semi-custom wafers. In addition, Exar sought a declaration that it was not responsible for any damages that Vicor must pay to Ericsson or any other customer of Vicor arising from claims that Vicor sold allegedly defective products.

On March 17, 2005, Vicor filed a cross-complaint against Exar and Rohm Device USA, LLC and Rohm Co., Ltd, the owners and operators of the foundry which supplied the untested, semi-custom wafers that Exar sold to Vicor. In the cross-complaint, Vicor alleged, among other things, that Exar sold it integrated circuits that were defective, that failed to meet agreed-upon specifications, and that Exar intentionally concealed material facts

75

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

regarding the specifications of the integrated circuits that Vicor alleges it bought from Exar. In its cross-complaint, Vicor also alleges that it is entitled to indemnification from Exar for any damages that Vicor must pay to Ericsson and other Vicor customers as a result of the causes of action asserted by Ericsson in the San Diego case discussed above and any other claims that may be made against Vicor. In the cross-complaint, Vicor asserted causes of action against Exar for breach of contract, breach of express contract warranty, breach of implied warranties of merchantability and fitness, breach of covenant of good faith and fair dealing, fraud, negligence, strict liability, implied contractual indemnity, and equitable indemnity. On May 23, 2005, Exar filed a demurrer to each cause of action in Vicor’s cross-complaint in Santa Clara County. On July 15, 2005, the Santa Clara Superior Court sustained Exar’s demurrer to each of the causes of action asserted by Vicor. The Court granted Vicor leave to amend the cross-complaint to assert a cause of action for declaratory relief only. On August 1, 2005, Vicor filed its amended cross-complaint seeking a declaration of the parties respective rights and obligations, including warranty and indemnity rights, under the alleged contracts between Exar and Vicor for the sale of untested, semi-custom wafers. In addition, Vicor sought a declaration that Exar was obligated to indemnify it for any damages resulting from claims brought against Vicor by its customers. No trial date has been set in the matter, although a motion is currently pending to coordinate the San Diego action with the action in Santa Clara. Exar disputes the allegations in Vicor’s cross-complaint, believes it has meritorious defenses, and intends to defend the lawsuit vigorously. At this stage of the litigation and without additional information, Exar is unable to determine the probability that the claim asserted by Vicor will result in liability. As of the date of this Report, Exar does not believe that the litigation will have a material impact on its financial condition, results of operations, or liquidity.

The Company is not currently a party to any other material legal proceedings.

From time to time, the Company is involved in various claims, legal actions and complaints arising in the normal course of business. Although the ultimate outcome of the matters discussed above and other matters is not presently determinable, management currently believes that the resolution of all such pending matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

NOTE 14.    INDUSTRY AND SEGMENT INFORMATION

The Company operates in one reportable segment and designs, develops and markets high-performance, analog and mixed-signal silicon solutions for a variety of markets including networking, serial communications, clock and timing, and storage. The nature of the Company’s products and production processes as well as type of customers and distribution methods is consistent among all of the Company’s products. Net sales by product line are as follows (in thousands):

	Fiscal Years Ended March 31,
	2006		2005		2004
Net sales:
Communications	$	63,995	$	52,720	$	54,489
Video, Imaging and Other		3,029		4,649		12,707
Total	$	67,024	$	57,369	$	67,196

The Company’s foreign operations are conducted primarily through its wholly-owned subsidiaries in Japan, United Kingdom, France and China. The Company’s principal markets include North America, Asia/Japan and Europe. Net sales by geographic area represent sales to unaffiliated customers.

76

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

All information on sales by geographic area is based upon the location to which the products were shipped. The following table sets forth revenue by geographic area for fiscal years ended March 31 (in thousands):

	Fiscal Years Ended March 31,
	2006		2005		2004
Net sales:
United States	$	32,615	$	28,188	$	31,219
Other		355		612		2,092
Total North America sales		32,970		28,800		33,311
China		9,335		7,490		8,068
Asia (excludes China)		10,314		10,813		14,053
Italy		7,867		3,835		3,259
Europe (excludes Italy)		6,538		6,431		8,505
Total export sales		34,054		28,569		33,885
Total net sales	$	67,024	$	57,369	$	67,196

Substantially all of the Company’s long-lived assets at March 31, 2006 and 2005 were located in the United States.

NOTE 15.    RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). This statement replaces SFAS 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board’s Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”. SFAS 123R will require the Company to measure the cost of the Company’s employee stock-based compensation awards granted after the effective date based on the grant date fair value of those awards and to record that cost as compensation expense over the period, during which the employee is required to perform services in exchange for the award (generally over the vesting period of the award). SFAS 123R addresses all forms of share-based payments awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. In addition, the Company will be required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. SFAS 123R is effective for annual fiscal periods beginning after June 15, 2005. The Company, therefore, is required to implement the standard as of April 1, 2006. In addition, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107 in March 2005. SAB 107 includes interpretive guidance for the initial implementation of SFAS 123R.

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using the intrinsic value method prescribed by APB 25 and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123R will have a significant impact on the Company’s result of operations, although it will have no negative impact on cash flow. However, the actual result of the adoption of SFAS 123R cannot be determined at this time because it will depend on levels of share-based payments granted in the future.

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, “Inventory Costs, an amendment to ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends ARB No. 43, Chapter 4, to

77

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. In addition, SFAS 151 requires that the allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred for fiscal years beginning after June 15, 2005. Therefore, the Company is required to adopt the standard effective April 1, 2006. The Company is currently assessing the impact but does not expect the adoption of SFAS 151 to have a significant impact on its financial condition or results of operations.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Company does not expect the adoption of SFAS 154 to have a material impact on its consolidated financial position or results of operations.

78

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004

SUPPLEMENTARY DATA

Quarterly Results (Unaudited)

The following table contains selected unaudited quarterly financial data for the eight quarters ended March 31, 2006, both in absolute dollars as well as in terms of percentage of net sales. In the opinion of management, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments, consisting only of normal and recurring adjustments necessary to state fairly the information set forth therein. Results for a given quarter are not necessarily indicative of results for any subsequent quarter.

	Quarter Ended
	Mar. 31, 2006			Dec. 31, 2005			Sept. 30, 2005			Jun. 30, 2005			Mar. 31, 2005			Dec. 31, 2004			Sept. 30, 2004			Jun. 30, 2004
	(In thousands, except per share amounts)
Net sales	$	17,574		$	17,009		$	16,528		$	15,912		$	13,656		$	13,245		$	14,181		$	16,287
Cost of sales		5,234			5,520			5,543			5,251			3,994			4,441			4,522			5,256
Gross profit		12,340			11,489			10,985			10,661			9,662			8,804			9,659			11,031
Operating expense:
Research and development		6,259			6,178			6,022			6,232			5,691			5,304			5,371			5,659
Selling, general and administrative		5,475			5,187			5,443			5,186			5,136			4,962			5,231			5,331
Total operating expenses		11,734			11,365			11,465			11,418			10,827			10,266			10,602			10,990
Gain on legal settlement		—			—			—			—			—			—			1,208			—
Income (loss) from operations		606			124			(480	)		(757	)		(1,165	)		(1,462	)		265			41
Other income, net		3,161			1,687			3,234			3,000			2,711			2,296			1,951			1,588
Income before income taxes		3,767			1,811			2,754			2,243			1,546			834			2,216			1,629
Provision for income taxes		904			702			690			493			233			—			347			326
Net income	$	2,863		$	1,109		$	2,064		$	1,750		$	1,313		$	834		$	1,869		$	1,303
Net income per share:
Basic	$	0.08		$	0.03		$	0.05		$	0.04		$	0.03		$	0.02		$	0.05		$	0.03
Diluted	$	0.08		$	0.03		$	0.05		$	0.04		$	0.03		$	0.02		$	0.04		$	0.03
Shares used in the computation of net income per share:
Basic		35,472			35,202			39,711			42,222			41,829			41,639			41,400			41,261
Diluted		35,639			35,347			40,365			42,687			42,537			42,539			42,198			42,419
	Quarter Ended
	Mar. 31, 2006			Dec. 31, 2005			Sept. 30, 2005			Jun. 30, 2005			Mar. 31, 2005			Dec. 31, 2004			Sept. 30, 2004			Jun. 30, 2004
	(As a percentage of net sales)
Net sales		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		29.8	%		32.5	%		33.5	%		33.0	%		29.2	%		33.5	%		31.9	%		32.3	%
Gross margin		70.2	%		67.5	%		66.5	%		67.0	%		70.8	%		66.5	%		68.1	%		67.7	%
Operating expense:
Research and development		35.6	%		36.3	%		36.4	%		39.2	%		41.7	%		40.0	%		37.9	%		34.7	%
Selling, general and administrative		31.2	%		30.5	%		32.9	%		32.6	%		37.6	%		37.5	%		36.9	%		32.7	%
Total operating expenses		66.8	%		66.8	%		69.3	%		71.8	%		79.3	%		77.5	%		74.8	%		67.4	%
Gain on legal settlement		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		8.5	%		0.0	%
Income (loss) from operations		3.4	%		0.7	%		-2.9	%		-4.8	%		-8.5	%		-11.0	%		1.8	%		0.3	%
Other income, net		18.0	%		9.9	%		19.6	%		18.9	%		19.9	%		17.3	%		13.8	%		9.8	%
Income before income taxes		21.4	%		10.6	%		16.7	%		14.1	%		11.4	%		6.3	%		15.6	%		10.1	%
Provision for income taxes		5.1	%		4.1	%		4.2	%		3.1	%		1.7	%		0.0	%		2.4	%		2.0	%
Net income		16.3	%		6.5	%		12.5	%		11.0	%		9.7	%		6.3	%		13.2	%		8.1	%

79

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

Evaluation of Disclosure Controls and Procedures (“Disclosure Controls”).    The Company evaluated the effectiveness of the design and operation of its Disclosure Controls, as defined by the rules and regulations of the SEC (the “Evaluation”), as of the end of the period covered by this Report. This Evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”).

CEO and CFO Certifications.    Attached as Exhibits 31.1 and 31.2 of this Report are the certifications of the CEO and the CFO in compliance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Certifications”). This section of the Report provides information concerning the Evaluation referred to in the Certifications and should be read in conjunction with the Certifications.

Disclosure Controls.    Disclosure Controls are controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods as specified in the SEC’s rules and forms. In addition, Disclosure Controls are designed to allow for the accumulation and communications of information to the Company’s management, including the CEO and CFO, to allow timely decisions regarding required disclosures.

Conclusion.    Based on the Evaluation, the CEO and CFO have concluded that the Company’s Disclosure Controls are effective as of the end of fiscal year 2006.

Changes in Internal Control Over Financial Reporting.

There was no change in the Company’s internal control over financial reporting that occurred during the fourth quarter of fiscal year 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Inherent Limitations on the Effectiveness of Disclosure Controls.

The Company’s management, including the CEO and CFO, does not expect that the Disclosure Controls will prevent all errors and all fraud. Disclosure Controls, no matter how well conceived, managed, utilized and monitored, can provide only reasonable assurance that the objectives of such controls are met. Therefore, because of the inherent limitation of Disclosure Controls, no evaluation of such controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Management’s Annual Report on Internal Control Over Financial Reporting.

See Part II, Item 8. “Financial Statements and Supplemental Data” for Management’s Annual Report on Internal Control over Financial Reporting and the audit report of PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm.

ITEM 9B. OTHER INFORMATION

None.

80

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

For a listing of Executive Officers of the Company and certain information about them, see Part I, “Executive Officers of the Registrant.”

The information required by this Item is incorporated by reference from the Company’s 2006 definitive proxy statement to be filed not later than 120 days following the close of the 2006 fiscal year (“2006 Definitive Proxy Statement”).

ITEM 11. EXECUTIVE COMPENSATION

The information required under this Item is hereby incorporated by reference from the Company’s 2006 Definitive Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is hereby incorporated by reference from the Company’s 2006 Definitive Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is hereby incorporated by reference from the Company’s 2006 Definitive Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item is hereby incorporated by reference from the Company’s 2006 Definitive Proxy Statement.

81

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this Form 10-K:

(1) Index to Consolidated Financial Statements. The following Consolidated Financial Statements of Exar Corporation and its subsidiaries are filed as part of this Form 10-K:

	Form 10-K Page No.
Report of Independent Registered Public Accounting Firm	50
Consolidated Balance Sheets	52
Consolidated Statements of Operations	53
Consolidated Statements of Stockholders’ Equity and Comprehensive Income	54
Consolidated Statements of Cash Flows	55
Notes to Consolidated Financial Statements	56

(2) Index to Financial Statement Schedules. The following Consolidated Financial Statement Schedule of Exar Corporation and its subsidiaries for each of the years ended March 31, 2006, 2005 and 2004 are filed as part of this Form 10-K:

	Form 10-K Page No.
II    Valuation and Qualifying Accounts and Reserves	85

Schedules not listed above have been omitted because they are not applicable or required, or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.

(3) Exhibits.

See Exhibit Index on page 86 of this Form 10-K.

82

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

EXAR CORPORATION
By:	/s/    ROUBIK GREGORIAN
	Roubik Gregorian
	Chief Executive Officer, President and Director

Date: June 12, 2006

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Roubik Gregorian and Ronald W. Guire, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause to be done by virtue hereof.

83

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/    ROUBIK GREGORIAN         (Roubik Gregorian)	Chief Executive Officer, President and Director (Principal Executive Officer)	June 12, 2006
/s/    RONALD W. GUIRE         (Ronald W. Guire)	Executive Vice President, Chief Financial Officer, Assistant Secretary and Director (Principal Financial and Accounting Officer)	June 12, 2006
/s/    FRANK P. CARRUBBA         (Frank P. Carrubba)	Chairman of the Board	June 12, 2006
/s/    GUY W. ADAMS         (Guy W. Adams)	Director	June 12, 2006
/s/    RICHARD L. LEZA, SR.         (Richard L. Leza, Sr.)	Director	June 12, 2006
/s/    JOHN MCFARLANE         (John McFarlane)	Director	June 12, 2006
/s/    OSCAR RODRIGUEZ       (Oscar Rodriguez)	Director	June 12, 2006
/s/    PETE RODRIGUEZ         (Pete Rodriguez)	Director	June 12, 2006

84

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(In thousands)

Classification	Balance at Beginning of Year		Addition			Write-offs and Recoveries(1)		Balance at End of Year
Allowance for sales return:
Year ended March 31, 2006	$	787	$	3,193		$	3,015	$	965
Year ended March 31, 2005	$	856	$	2,428		$	2,497	$	787
Year ended March 31, 2004	$	942	$	2,509		$	2,595	$	856
Allowance for doubtful accounts:
Year ended March 31, 2006	$	71	$	38		$	—	$	109
Year ended March 31, 2005	$	231	$	(11	)	$	149	$	71
Year ended March 31, 2004	$	200	$	31		$	—	$	231

(1) Write-offs and recoveries reflect credits issued to distributors for stock rotations and volume discounts, and write-offs of uncollectible accounts receivable.

85

EXHIBIT INDEX

Exhibit Footnote		Exhibit Number		Description
(m	)	2.1	++	Purchase Agreement between Exar Corporation and Infineon Technologies North America Corp., dated April 6, 2005.
(a	)	3.1		Amended and Restated Certificate of Incorporation of Exar Corporation.
(d	)	3.2		Certificate of Amendment of Amended and Restated Certificate of Incorporation.
(h	)	3.3		Amended and Restated Bylaws of the Company.
(g	)	4.1		Rights Agreement dated December 15, 1995, between the Company and the First National Bank of Boston.
(e	)	4.2		Amendment of Rights Agreement dated May 1, 2000, between the Company and Fleet National Bank (f/k/a BankBoston, N.A., f/k/a The First National Bank of Boston).
(c	)	4.3		Second Amendment to Rights Agreement dated December 5, 2001 between the Company and Fleet National Bank f/k/a BankBoston, N.A.
(j	)	4.4		Third Amendment of Rights Agreement dated September 9, 2004 between the Company and Equi Serve Trust Company, N.A.
(o	)	4.5		Amendment and Termination of Rights Agreement dated July 22, 2005 between Registrant and EquiServe Trust Company, N.A.
(q	)	10.1	*	1989 Employee Stock Participation Plan and related Offering documents.
(a	)	10.2	*	1991 Stock Option Plan and related forms of stock option grant and exercise.
(a	)	10.3	*	1991 Non-Employee Directors’ Stock Option Plan and related forms of stock option grant and exercise.
(f	)	10.4	*	Fiscal 2001 Key Employee Incentive Compensation Program.
(f	)	10.5	*	Fiscal 2001 Executive Incentive Compensation Program.
(q	)	10.6	*	1996 Non-Employee Directors’ Stock Option Plan and related forms of stock option grant and exercise.
(m	)	10.7	*	1997 Equity Incentive Plan and related forms of stock option grant and exercise.
(e	)	10.8	*	Executive Officers’ Change of Control Severance Benefit Plan.
(m	)	10.9	*	2000 Equity Incentive Plan and related forms of stock option grant and exercise.
(k	)	10.10	*	Executive Employment Agreement between Exar Corporation and Donald L. Ciffone, Jr., dated December 6, 2000, as amended and restated on June 21, 2001, March 28, 2003, June 12, 2003, December 3, 2003 and October 28, 2004.
(f	)	10.11	*	Form of Letter Agreement Regarding Change of Control for each of the following: Frank P. Carrubba, Raimon L. Conlisk, James E. Dykes, Richard Previte, Donald L. Ciffone, Jr., Michael J. Class, Roubik Gregorian, Ronald W. Guire, Susan J. Hardman, Thomas R. Melendrez, Stephen W. Michael.
(c	)	10.12	*	Fiscal 2003 Key Employee Incentive Compensation Program.
(c	)	10.13	*	Fiscal 2003 Executive Incentive Compensation Program.
(i	)	10.14	*	Fiscal 2004 Key Employee Incentive Compensation Program.
(i	)	10.15	*	Fiscal 2004 Executive Incentive Compensation Program.
(p	)	10.16	*+	Fiscal 2005 Executive Incentive Compensation Program.
(p	)	10.17	*+	Fiscal 2005 Key Employee Incentive Compensation Program.
(b	)	10.18		Indemnity Agreement between the Company and John S. McFarlane, member of the Company’s Board of Directors.
(k	)	10.19		Agreement Regarding Ongoing Services as Chairman of the Board between Exar Corporation and Donald L. Ciffone, Jr., dated October 29, 2004.
(l	)	10.20	*	Grant of Restricted Stock Purchase Right between Exar Corporation and Roubik Gregorian dated March 24, 2005.

86

Exhibit Footnote		Exhibit Number		Description
(m	)	10.21		Compensation Deferral and Option Cancellation Agreement between the Company and John S. McFarlane dated June 13, 2005.
(m	)	10.22		Compensation Deferral and Option Cancellation Agreement between the Company and Raimon L. Conlisk dated June 13, 2005.
(n	)	10.23	*+	Fiscal 2006 Executive Incentive Compensation Program.
(n	)	10.24	*	Executive Employment Agreement between Exar Corporation and Roubik Gregorian.
(q	)	21.1		Subsidiaries of the Company.
(q	)	23.1		Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP.
(q	)	24.1		Power of Attorney. Reference is made to the signature page 83.
(q	)	31.1		Chief Executive Officer Certification.
(q	)	31.2		Chief Financial Officer Certification.
(q	)	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.
(q	)	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.

(a) Filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1992 and incorporated herein by reference.

(b) Filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2004 and incorporated herein by reference.

(c) Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended December 31, 2001, and incorporated herein by reference.

(d) Filed as an exhibit to the Company’s Current Report on Form 8-K, filed on June 23, 2000, and incorporated herein by reference.

(e) Filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2000 and incorporated herein by reference.

(f) Filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2001 and incorporated herein by reference.

(g) Filed as an exhibit to the Company’s Current Report on Form 8-K filed January 9, 1996, and incorporated herein by reference.

(h) Filed as an exhibit to the Company’s Current Report on Form 8-K filed on November 2, 2005, and incorporated herein by reference.

(i) Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended December 31, 2002, and incorporated herein by reference.

(j) Filed as an exhibit to the Company’s Current Report on Form 8-K, filed on September 15, 2004, and incorporated herein by reference.

(k) Filed as an exhibit to the Company’s Current Report on Form 8-K, filed on November 1, 2004, and incorporated herein by reference.

(l) Filed as an exhibit to the Company’s Current Report on Form 8-K, filed on March 30, 2005 and incorporated herein by reference.

(m) Filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005, and incorporated herein by reference.

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(n) Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2005, and incorporated herein by reference.

(o) Filed as an exhibit to the Company’s Current Report on Form 8-K, filed on July 25, 2005, and incorporated herein by reference.

(p) Filed as an exhibit to the Company’s Amendment to a Previously Filed Form 10-K on Form 10-K/A, filed on May 2, 2006, and incorporated herein by reference.

(q) Filed herewith.

* Indicates management contracts or compensatory plans and arrangements filed pursuant for Item 601(B)(10) of Regulation S-K.

+ Portions of this agreement have been omitted pursuant to a request for confidential treatment and the omitted portions have been filed separately with the Securities and Exchange Commission.

++ Portions of this agreement have been omitted pursuant to a request for confidential treatment and the omitted portions have been filed separately with the Securities and Exchange Commission. Schedules, exhibits and similar attachments have also been excluded, copies of which will be furnished supplementally to the Securities and Exchange Commission upon request.

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EX-10.1

Exhibit 10.1

EXAR CORPORATION

EMPLOYEE STOCK PARTICIPATION PLAN

Adopted August 1, 1989

Effective January 1, 1990

Amended through August 2, 1991

Amended through June 24, 1999

Amended through October 1, 2002

Amended through April 1, 2006

1. PURPOSE.

(a) The purpose of the Plan is to provide a means by which employees of Exar Corporation, a Delaware corporation (the “Company”), and its Affiliates, as defined in subparagraph 1(b), which are designated as provided in subparagraph 2(b), may be given an opportunity to purchase stock of the Company.

(b) The word “Affiliate” as used in the Plan means any parent corporation or subsidiary corporation of the Company, as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended (the “Code”).

(c) The Company, by means of the Plan, seeks to retain the services of its employees, to secure and retain the services of new employees, and to provide incentives for such persons to exert maximum efforts for the success of the Company.

(d) The Company intends that the rights to purchase stock of the Company granted under the Plan be considered options issued under an “employee stock purchase plan” as that term is defined in Section 423(b) of the Code.

2. ADMINISTRATION.

(a) The Plan shall be administered by the Board of Directors (the “Board”) of the Company unless and until the Board delegates administration to a Committee, as provided in subparagraph 2(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan.

(b) The Board shall have the power, subject to, and within the limitations of, the Plan: (i) to determine when and how rights to purchase stock

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of the Company shall be granted and the provisions of each offering of such rights (which need not be identical); (ii) to designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan; (iii) to construe and interpret the Plan and rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correction any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective; (iv) to amend the Plan as provided in paragraph 13; and (v) generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company.

(c) The Board may delegate administration of the Plan to a Committee composed of not fewer than two (2) members of the Board (the “Committee”). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.

3. SHARES SUBJECT TO THE PLAN.

Subject to the provisions of paragraph 12 relating to adjustments upon changes in stock, the stock that may be sold pursuant to rights granted under the Plan shall not exceed in the aggregate one million (1,000,000) shares of the Company’s common stock (the “Common Stock”). If any right granted under the Plan shall for any reason terminate without having been exercised, the Common Stock not purchased under such right shall again become available for the Plan.

4. GRANT OF RIGHTS; OFFERING.

The Board or the Committee may from time to time grant or provide for the grant of rights to purchase Common Stock of the Company under the Plan to eligible employees (an “Offering”) on a date or dates (the “Offering Date(s)”) selected by the Board or the Committee. Each Offering shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. If an employee has more than one right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (1) each agreement or notice delivered by that employee will be deemed to apply to all of his or her rights under the Plan, and (2) a right with a lower exercise price (or an earlier-granted right, if two rights have identical exercise prices), will be exercised to the fullest possible extent before a right with a higher exercise price (or a later-granted right, if two rights have identical exercise prices) will be exercised. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the Offering or otherwise) the substance of the provisions contained in paragraphs 5 through 8, inclusive.

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5. ELIGIBILITY.

(a) Rights may be granted only to employees of the Company or, as the Board or the Committee may designate as provided in subparagraph 2(b), to employees of any Affiliate of the Company. Except as provided in subparagraph 5(b), an employee of the Company or any Affiliate shall not be eligible to be granted rights under the Plan, unless, on the Offering Date, such employee has been in the employ of the Company or any Affiliate for such continuous period preceding such grant as the Board or the Committee may require, but in no event shall the required period of continuous employment be equal to or greater than two (2) years. In addition, unless otherwise determined by the Board or the Committee, no employee of the Company or any Affiliate shall be eligible to be granted rights under the Plan, unless, on the Offering Date, such employee’s customary employment with the Company or such Affiliate is at least twenty (20) hours per week.

(b) The Board or the Committee may provide that, each person who, during the course of an Offering, first becomes an eligible employee of the Company or designated Affiliate will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an eligible employee or occurs thereafter, receive a right under that Offering, which right shall thereafter be deemed to be a part of that Offering. Such right shall have the same characteristics as any rights originally granted under that Offering, as described herein, except that: (i) the date on which such right is granted shall be the “Offering Date” of such right for all purposes; (ii) the Purchase Period (as defined below) for such right shall begin on its Offering Date and end coincident with the end of such offering; and (iii) the Board or the Committee may provide that if such person first becomes an eligible employee within a specified period of time before the end of the Purchase Period (as defined below) for such Offering, he or she will not receive any right under that Offering.

(c) No employees shall be eligible for the grant of any rights under the Plan if, immediately after any such rights are granted, such employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subparagraph 5(d), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any employee, and stock which such employee may purchase under all outstanding rights and options shall be treated as stock owned by such employee.

(d) An eligible employee may be granted rights under the Plan only if such rights, together with any other rights granted under “employee stock purchase plans” of the Company and any Affiliates, as specified by Section 423 (b) (8)

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of the Code, do not permit such employee’s rights to purchase stock of the Company or any affiliate to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of fair market value of such stock (determined at the time such rights are granted) for each calendar year in which such rights are outstanding at any time.

6. RIGHTS; PURCHASE PRICE.

(a) On each Offering Date, each eligible employee, pursuant to an offering made under the Plan, shall be granted the right to purchase the number of shares of Common Stock of the Company purchasable with up to fifteen percent (15%) of such employee’s Base Compensation (as defined in Section 7(a)) during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no more than twenty-seven (27) months after the Offering Date (the “Purchase Period”). In connection with each Offering made under this Plan, the Board or the Committee shall specify a maximum number of shares which may be purchased by any employee as well as a maximum aggregate number of shares which may be purchased by all eligible employees pursuant to such Offering. In addition, in connection with each such Offering, the Board or the Committee may specify a maximum aggregate number of shares which may be purchased by all eligible employees on any given Exercise Date (as defined in the Offering) under the Offering. If the aggregate purchase of shares upon exercise of rights granted under the Offering would exceed any such maximum aggregate number, the Board or the Committee shall make a pro rata allocation of the shares available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable.

(b) The purchase price of stock acquired pursuant to rights granted under the Plan shall be equal to ninety-five percent (95%) of the fair market value of the stock on the last trading day within the Purchase Period.

7. PARTICIPATION; WITHDRAWAL; TERMINATION.

(a) An eligible employee may become a participant in an Offering by delivering an agreement to the Company within the time specified in the Offering, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to fifteen percent (15%) of such employee’s Base Compensation during the Purchase Period. Base Compensation is defined as total cash compensation exclusive of commissions (other than that of selected sales personnel), bonuses, overtime, allowances, loans, educational assistance and premium pay such as shift differential, but including amounts elected to be deferred by the employee (that would otherwise have been paid) under the Company’s 401(k) Plan. The payroll deductions made for each participant shall be credited to an account for such participant under the Plan and shall be deposited with the general funds of the Company. At any time during the

4

Purchase Period a participant may terminate his or her payroll deductions. A participant may reduce, increase or begin such payroll deductions after the beginning of any Purchase Period only as provided for in the Offering. A participant may not make any additional payments into his or her account unless expressly provided for in the Offering.

(b) If a participant terminates his or her payroll deductions, such participant may withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any time prior to the end of the Purchase Period. Upon such withdrawal from the offering by a participant, the Company shall distribute to such participant all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the participant) under the Offering without interest, and such participant’s interest in that Offering shall be automatically terminated. A participant’s withdrawal from an Offering will have no effect upon such participant’s eligibility to participate in any other Offerings under the Plan but such participant will be required to deliver a new participation agreement in order to participate in other Offerings under the Plan.

(c) Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of any participating employee’s employment with the Company or an Affiliate, for any reason, and the Company shall distribute to such terminated employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the terminated employee), without interest; provided, however, that subject to the right of the terminated employee to withdraw from the Offering and receive a distribution of his or her accumulated payroll deductions (as described in paragraph 7(b), in the event that a participating employee’s employment ceases within three (3) months of the next Exercise Date, the balance in such employee’s account shall be held and used to purchase Common Stock for the terminated employee on such Exercise Date pursuant to the terms of the ongoing Offering.

(d) Rights granted under the Plan shall not be transferable, and shall be exercisable only by the person to whom such rights are granted.

8. EXERCISE.

(a) On each exercise date, as defined in the relevant Offering (an “Exercise Date”), each participant’s accumulated payroll deductions (without any increase for interest) will be applied to the purchase of whole shares of stock of the Company, up to the maximum number of shares permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional shares shall be issued upon the exercise of rights granted under the Plan. The amount, if any, of accumulated payroll deductions

5

remaining in each participant’s account after the purchase of shares which is less than the amount required to purchase one share of stock on the final Exercise Date of an Offering shall be held in each such participant’s account for the purchase of shares under the next Offering under the Plan, unless such participant withdraws from such next Offering, as provided in subparagraph 7(b), or is no longer eligible to be granted rights under the Plan, as provided in paragraph 5, in which case such amount shall be distributed to such participant after such Exercise Date, without interest. The amount, if any, of accumulated payroll deductions remaining in any participant’s account after the purchase of shares which is equal to the amount required to purchase whole shares of stock on the final Exercise Date of an Offering shall be distributed in full to such participant after such Exercise Date, without interest.

(b) No rights granted under the Plan may be exercised to any extent unless the Plan (including rights granted thereunder) is covered by an effective registration statement pursuant to the Securities Act of 1933, as amended (the “Securities Act”). If, on an Exercise Date of any Offering hereunder, the Plan is not so registered, no rights granted under the Plan or any Offering shall be exercised and all payroll deductions accumulated during the purchase period shall be distributed to the participants, without interest.

9. COVENANTS OF THE COMPANY.

(a) During the terms of the rights granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such rights.

(b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the rights granted under the Plan. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieve from any liability for failure to issue and sell stock upon exercise of such rights unless and until such authority is obtained.

10. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of stock pursuant to rights granted under the Plan shall constitute general funds of the Company.

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11. RIGHTS AS A STOCKHOLDER.

A participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to rights granted under the Plan unless and until certificates representing such shares shall have been issued.

12. ADJUSTMENTS UPON CHANGES IN STOCK.

(a) If any change is made in the stock subject to the Plan, or subject to any rights granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Board shall make appropriate adjustments in the maximum number of shares subject to the Plan and the number of shares and price per share of stock subject to outstanding rights.

(b) In the event of: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company’s Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, then, as determined by the Board in its sole discretion, any surviving corporation shall assume outstanding rights or substitute similar rights for those under the Plan, such rights shall continue in full force and effect, or such rights shall be exercised immediately prior to such event.

13. AMENDMENT OF THE PLAN.

(a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in paragraph 12 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the shareholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (i) increase the number of shares reserved for rights under the Plan; or (ii) modify the provisions as to eligibility for participation in the Plan or modify the Plan in any other way to the extent such modification requires shareholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to employee stock purchase plans and/or to bring the Plan and/or rights granted under it into compliance therewith.

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(b) Rights and obligations under any rights granted before amendment of the Plan shall not be altered or impaired by any amendment of the Plan, except with the consent of the person to whom such rights were granted.

14. TERMINATION OR SUSPENSION OF THE PLAN.

(a) The Board may suspend or terminate the Plan at any time. No rights may be granted under the Plan while the Plan is suspended or after it is terminated.

(b) Rights and obligations under any rights granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the person to whom such rights were granted.

15. EFFECTIVE DATE OF PLAN.

The Plan shall become effective as determined by the Board, but no rights granted under the Plan shall be exercised unless and until the Plan has been approved by the vote of the shareholders of the Company, and, if required, an appropriate permit has been issued by the Commissioner of Corporations of the State of California.

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EXAR CORPORATION

EMPLOYEE STOCK PARTICIPATION PLAN OFFERING

Adopted August 1, 1989

Effective January 1, 1990

Amended through August 2, 1991

Amended through June 24, 1999

Amended through October 1, 2002

Amended through April 1, 2006

1. GRANT; OFFERING DATE.

The Board of Directors of Exar Corporation, a Delaware corporation (the “Company”), pursuant to the Company’s Employee Stock Participation Plan (the “Plan”), hereby authorizes the grant of rights to purchase shares of the common stock of the Company (“Common Stock”) to all Eligible Employees effective on January 1^st, April 1^st, July 1^st and October 1^st of each year beginning with the calendar year 1990 (the “Offering Dates”). Rights granted under this Offering are intended to qualify as options issued under an “employee stock purchase plan” as that term is defined in Section 423(b) of the Internal Revenue Code of 1986, as amended (the “Code”). The granting of rights pursuant to each Offering hereunder shall occur on each respective Offering Date unless, prior to such date (a) the Board of Directors determines that such Offering shall not occur, or (b) no shares remain available for issuance under the Plan in connection with the Offering, or (c) if required, an appropriate permit has not been issued by the Commissioner of Corporations of the State of California covering the rights to be granted and the shares to be issued in connection with the Offering.

2. ELIGIBLE EMPLOYEES.

All Eligible Employees of the Company shall be granted rights to purchase Common Stock under each Offering on the Offering Date of such Offering. “Eligible Employees” are employees of the Company whose customary employment with the Company is at least twenty (20) hours per week; provided that no employee who is disqualified by subparagraph 5(c) or 5(d) of the Plan shall be an Eligible Employee.

3. RIGHTS.

Subject to the limitations contained in the Plan, on each Offering Date each Eligible Employee shall be granted the right to purchase the number of shares of Common Stock purchasable with up to ten percent (10%) of such employee’s Base Compensation (as defined in the Plan) paid during the purchase period for such Offering. The purchase period for each Offering shall

1

commence on the Offering Date and end on the next to occur of March 31^st, June 30^th, September 30^th or December 31^st (the “Purchase Period”). However, no employee may purchase under any given Offering more than two thousand (2,000) shares of Common Stock, and the maximum aggregate number of shares available to be purchased by all Eligible Employees under any given Offering is sixty thousand (60,000) shares. If the aggregate purchase of shares of Common Stock upon exercise of rights granted under the offering would exceed the maximum aggregate number of shares available, the Board shall make a pro rata allocation of the shares available in a uniform and equitable manner.

4. PURCHASE PRICE.

The purchase price of the Common Stock shall be the equal to ninety-five percent (95%) of the fair market value of the stock, determined, respectively, based on the average of the low and the high price of the Common Stock on the last trading day within the Purchase Period.

5. PARTICIPATION.

An Eligible Employee shall become a participant in an Offering by delivering an agreement authorizing payroll deductions of up to ten (10%) of such employee’s Base Compensation during the period for which such authorization is effective. Such deductions may be in whole percentages or fixed dollar amounts only, and a participant may not make additional payments into his or her account. The agreement shall be in such form as the Company provides, and must be delivered to the Company at least two weeks prior to the issuance of the first payroll check for the Purchase Period. A participant may increase or decrease his or her participation percentage during a Purchase Period by delivering notice to the Company, in such form as the Company provides, at least two weeks prior to the issuance of the payroll check for which it is to be effective. A participant may withdraw from an Offering and receive his or her accumulated payroll deductions (reduced to the extent such deductions have been used to acquire stock for the participant) by delivering a withdrawal notice to the Company in such form as the Company provides. Upon receipt of such notice, the Company will distribute to the participant as soon as practicable such participant’s accumulated payroll deductions (reduced to the extent such deductions have been used to acquire stock for the participant), without interest.

6. TERMINATION.

Rights granted under the Offering shall terminate immediately upon cessation of any participating employee’s employment with the Company for any reason prior to end of the Purchase Period of the Offering and the Company will distribute as soon as practicable such terminated employee’s accumulated payroll deductions (reduced to the extent such deductions have been used to acquire stock for the participant) to him or her, without interest.

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7. EXERCISE.

On each Exercise Date, each participant’s accumulated payroll deductions (without any increase for interest) shall be applied to the purchase of whole shares of Common Stock, up to the maximum number of shares permitted under the Plan and the Offering. “Exercise Date” shall be defined as each March 31^st, June 30^th, September 30^th and December 31^st or the immediately preceding business day if any such date is not a business day. The amount of accumulated payroll deductions remaining in each participant’s account at the end of a Purchase Period (after the purchase of shares) which is less than the amount required to purchase one share of stock on the Exercise Date of such Purchase Period shall be held in each such participant’s account for the purchase of shares under the next Offering under the Plan, unless such participant withdraws from such next Offering or is no longer eligible to be granted rights under the Plan, in which case such amount shall be distributed as soon as practicable to such participant after the end of the Purchase Period, without interest. The amount, if any, of accumulated payroll deductions remaining in any participant’s account (after the purchase of shares) which is equal to the amount required to purchase whole shares of stock on the Exercise Date shall be distributed as soon as practicable in full to such participant after the end of each Purchase Period, without interest.

8. TRANSFER.

Rights granted under each Offering shall not be transferable, and shall be exercisable only by the person to whom such rights are granted.

9. NOTICES AND AGREEMENTS.

Any notices or agreements provided for in an Offering or the Plan shall be given in writing, in a form provided by the Company, and unless specifically provided for in the Plan or this Offering shall be deemed effectively given upon receipt or, in the case of notices and agreements delivered by the Company, five (5) days after deposit in the United States mail, postage prepaid.

10. EXERCISE CONTINGENT ON REGISTRATION OF PLAN AND SHAREHOLDER APPROVAL.

No rights granted under an offering may be exercised to any extent unless the Plan (including rights granted thereunder) is covered by an effective registration statement pursuant to the Securities Act of 1933, as amended. If on an Exercise Date the Plan is not so registered, no rights granted under the Offering shall be exercised on such date and all payroll deductions accumulated

3

during the Purchase Period (reduced to the extent such deductions have been used to acquire stock under the Offering) will be distributed to the participants, without interest.

11. OFFERING SUBJECT TO PLAN.

Each Offering is subject to all the provisions of the Plan, and its provisions are hereby made a part of the Offering, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of an Offering and those of the Plan (including interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan), the provisions of the Plan shall control.

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EX-10.6

Exhibit 10.6

EXAR CORPORATION

1996 NON-EMPLOYEE DIRECTORS’ STOCK OPTION PLAN

Adopted July 23, 1996

Approved by Stockholders August 29, 1996

Amended and Restated March 20, 1997

Amended and Restated June 12, 1997

Amended and Restated September 18, 1997

Amended and Restated September 10, 1998

Amended and Restated September 11, 1998

Amended and Restated April 13, 2000

Amended and Restated September 4, 2003

Amended and Restated June 13, 2005

Amended and Restated March 22, 2006

1. PURPOSE.

(a) The purpose of the Exar Corporation 1996 Non-Employee Directors’ Stock Option Plan (the “Plan”) is to provide a means by which each director of Exar Corporation, a Delaware corporation (the “Company”) who is not otherwise an employee of the Company or of any Affiliate of the Company (each such person being hereafter referred to as a “Non-Employee Director”) will be given an opportunity to purchase stock of the Company.

(b) The word “Affiliate” as used in the Plan means any parent corporation or subsidiary corporation of the Company as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended from time to time (the “Code”).

(c) The Company, by means of the Plan, seeks to retain the services of persons now serving as Non-Employee Directors of the Company, to secure and retain the services of persons capable of serving in such capacity, and to provide incentives for such persons to exert maximum efforts for the success of the Company.

2. ADMINISTRATION.

(a) The Plan shall be administered by the Board of Directors of the Company (the “Board”) unless and until the Board delegates administration to a committee, as provided in subparagraph 2(b).

(b) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members of the Board (the “Committee”). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.

3. SHARES SUBJECT TO THE PLAN.

(a) Subject to the provisions of paragraph 11 relating to adjustments upon changes in stock, the stock that may be sold pursuant to options granted under the Plan shall not exceed in the aggregate one million two hundred fifty thousand (1,250,000) shares of the Company’s common stock. If any option granted under the Plan shall for any reason expire or otherwise terminate without having been exercised in full, the stock not purchased under such option shall again become available for the Plan.

(b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.

4. ELIGIBILITY.

Options shall be granted only to Non-Employee Directors of the Company.

5. NON-DISCRETIONARY GRANTS.

(a) Each person who is elected for the first time to be a Non-Employee Director after the effective date of the Plan shall, on the date of initial election as a Non-Employee Director by the Board or shareholders of the Company, automatically be granted an option to purchase fifty four thousand (54,000) shares of the Company’s common stock (subject to adjustment as provided in paragraph 10 hereof) on such date upon the terms and conditions set forth herein (the “Initial Grant”).

(b) On the date of each Annual Meeting of the Stockholders of the Company (or the next day that the Company’s stock is traded should the stock not trade on such date), an option to purchase twenty two thousand five hundred (22,500) shares of the Company’s common stock (subject to adjustment as provided in paragraph 11 hereof) shall automatically be granted to such person provided that such person (i) is at that time a Non-Employee Director, and (ii) has served continuously as a Non-Employee Director since the date of the previous Annual Meeting of the Stockholders of the Company (the “Annual Grant”); PROVIDED, HOWEVER, that the Annual Grant for 1998 shall be made on September 11, 1998, and the number of shares of the Company’s Common Stock subject to such Annual Grant shall equal seven thousand five hundred (7,500) minus the number of shares for which an option to purchase was granted to such person under this Section 5(b) on or after September 11, 1997, that had not vested as of September 11, 1998. Notwithstanding the foregoing, with respect to the Chairman of the Board (non-employee), the Annual Grant shall be for twice the number of shares as are granted to other Non-Employee Directors, or forty five thousand (45,000) shares of the Company’s common stock (subject to adjustment as provided in paragraph 10 hereof).

(c) In addition, the Chairman of the Board shall be granted an option to purchase eleven thousand two hundred fifty (11,250) shares of the Company’s common stock (subject to adjustments as provided in paragraph 11 hereof) on April 13, 2000 upon the terms and conditions set forth in

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paragraph 6 with the exception that the option will become exercisable and fully vested in six months from the date of grant, namely October 13, 2000; provided that the Chairman of the Board remain in the service of the Company from April 13, 2000 continuously until October 13, 2000.

6. OPTION PROVISIONS.

Each option shall be subject to the following terms and conditions:

(a) The term of each option commences on the date it is granted and, unless sooner terminated as set forth herein, expires on the date (“Expiration Date”) seven (7) years from the date of grant. If the optionee’s service as a Non-Employee Director terminates for any reason or for no reason, the option shall terminate on the earlier of the Expiration Date or the date twelve (12) months following the date of termination of such service; PROVIDED, HOWEVER, that if a Non-Employee Director becomes an employee or consultant of the Company while holding an option issued under the Plan, the option shall terminate on the earlier of the Expiration Date or the date twelve (12) months after the date on which both the directorship and the employment or consulting relationship of the optionee with the Company terminate. Notwithstanding the foregoing, if such termination is due to the optionee’s death or permanent and total disability, within the meaning of Section 422(c)(6) of the Code, the option shall terminate on the earlier of the Expiration Date or twelve (12) months following termination of such directorship or service. In any and all circumstances, an option may be exercised following termination of the optionee’s service as a Non-Employee Director or employee of or consultant to the Company or any Affiliate only as to that number of shares as to which it was exercisable on the date of termination of such service under the provisions of subparagraph 6(e).

(b) The exercise price of each option shall be one hundred percent (100%) of the fair market value of the stock subject to such option on the date such option is granted.

(c) Payment of the exercise price of each option is due in full in cash at the time of exercise.

(d) An option shall not be transferable except by will or by the laws of descent and distribution, or pursuant to a domestic relations order satisfying the requirements of Rule 16(a)-12 under the Securities Exchange Act of 1934 and shall be exercisable during the lifetime of the person to whom the option is granted only by such person (or by his guardian or legal representative) or transferee pursuant to such an order. Notwithstanding the foregoing, the optionee may, by delivering written notice to the Company in a form satisfactory to the Company, designate a third party who, in the event of the death of the optionee, shall thereafter be entitled to exercise the option.

(e) An option granted in an Initial Grant shall become exercisable in annual installments over a period of three (3) years from the date of grant, with thirty-three and one third percent (33 ¹/3%) becoming exercisable on the date of each annual meeting of stockholders following the date of grant, provided that the optionee has, during the entire period prior to such vesting date, continuously served as a Non-Employee Director or employee of or consultant to the Company or any Affiliate of the Company, whereupon such option shall become fully exercisable in accordance with its terms with respect to that portion of the shares represented by that installment.

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(f) An option granted in an Annual Grant shall become exercisable in monthly installments over a period of twelve (12) months from the date of grant, with eight and one-third percent (8 ¹/3%) becoming exercisable at the end of each full month following the date of grant, provided that the optionee has, during the entire period prior to such vesting date, continuously served as a Non-Employee Director or employee of or consultant to the Company or any Affiliate of the Company, whereupon such option shall become fully exercisable in accordance with its terms with respect to that portion of the shares represented by that installment.

(g) If a Non-Employee Director’s term as a Director of the Company expires and the Non-Employee Director is not elected or appointed to an immediate subsequent term as a Director of the Company, any option then held by such Non-Employee Director shall become fully vested and exercisable in accordance with its terms.

(h) The Company may require any optionee, or any person to whom an option is transferred under subparagraph 6(d), as a condition of exercising any such option: (i) to give written assurances satisfactory to the Company as to the optionee’s knowledge and experience in financial and business matters; and (ii) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the option for such person’s own account and not with any present intention of selling or otherwise distributing the stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the option has been registered under a then-currently-effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), or (ii), as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then-applicable securities laws.

(i) Notwithstanding anything to the contrary contained herein, an option may not be exercised unless the shares issuable upon exercise of such option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act.

7. COVENANTS OF THE COMPANY.

(a) During the terms of the options granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such options.

(b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the options granted under the Plan; PROVIDED, HOWEVER, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any option granted under the Plan, or any stock issued or issuable pursuant to any such option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such options.

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8. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of stock pursuant to options granted under the Plan shall constitute general funds of the Company.

9. MISCELLANEOUS.

(a) Neither an optionee nor any person to whom an option is transferred under subparagraph 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option unless and until such person has satisfied all requirements for exercise of the option pursuant to its terms.

(b) Nothing in the Plan or in any instrument executed pursuant thereto shall confer upon any Non-Employee Director any right to continue in the service of the Company or any Affiliate or shall affect any right of the Company, its Board or shareholders or any Affiliate to terminate the service of any Non-Employee Director with or without cause.

(c) No Non-Employee Director, individually or as a member of a group, and no beneficiary or other person claiming under or through him, shall have any right, title or interest in or to any option reserved for the purposes of the Plan except as to such shares of common stock, if any, as shall have been reserved for him pursuant to an option granted to him.

(d) In connection with each option made pursuant to the Plan, it shall be a condition precedent to the Company’s obligation to issue or transfer shares to a Non-Employee Director, or to evidence the removal of any restrictions on transfer, that such Non-Employee Director make arrangements satisfactory to the Company to insure that the amount of any federal or other withholding tax that may be required to be withheld with respect to such sale or transfer, or such removal or lapse, is made available to the Company for timely payment of such tax.

10. ADJUSTMENTS UPON CHANGES IN STOCK.

(a) If any change is made in the stock subject to the Plan, or subject to any option granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan and outstanding options will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding options.

(b) In the event of: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company’s common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, excluding in each case a capital reorganization in which the sole purpose is to change the state of incorporation of the Company, then all outstanding options shall become exercisable in full for a period of at least ten (10) days prior to such event. Outstanding options which have not been exercised prior to such event shall terminate on the date of such event unless assumed by a successor corporation.

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11. AMENDMENT OF THE PLAN.

(a) The Board at any time, and from time to time, may amend the Plan. Except as provided in paragraph 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company where stockholder approval is necessary for the Plan to comply with the requirements of Rule 16b-3 or Nasdaq or securities exchange listing requirements.

(b) Rights and obligations under any option granted before any amendment of the Plan shall not be impaired by such amendment unless (i) the Company requests the consent of the person to whom the option was granted and (ii) such person consents in writing.

12. TERMINATION OR SUSPENSION OF THE PLAN.

(a) The Board may suspend or terminate the Plan at any time. No options may be granted under the Plan while the Plan is suspended or after it is terminated.

(b) Rights and obligations under any option granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the option was granted.

13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.

The Plan shall become effective or the date approved by the Board, provided that no options may be exercised unless and until the Plan is approved by the stockholders of the Company.

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EX-21.1

EXHIBIT 21.1

EXAR CORPORATION

LIST OF SUBSIDIARIES

1. Exar Japan Corporation (a Japan corporation).

2. Micro Power Systems, Inc. (a California corporation).

3. Exar Ltd. (a United Kingdom Limited Liability corporation).

4. Exar SARL (a French Limited Liability corporation).

5. Exar (Delaware) Corporation Shanghai Representative Office.

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-96967, No. 333-55082, No. 333-48226, No. 333-31120, No. 333-69381, No. 333-37371, No. 333-37369 and No. 33-58991) of Exar Corporation of our report dated June 12, 2006 relating to the financial statements, financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/    PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

San Jose, California

June 12, 2006

EX-31.1

EXHIBIT 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Roubik Gregorian, certify that:

1. I have reviewed this Annual Report on Form 10-K of Exar Corporation;

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

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

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

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

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

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

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

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

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

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

Date: June 12, 2006

/s/    ROUBIK GREGORIAN        

Roubik Gregorian

Chief Executive Officer, President and Director

(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Ronald W. Guire, certify that:

1. I have reviewed this Annual Report on Form 10-K of Exar Corporation;

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

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

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

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

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

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

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

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

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

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

Date: June 12, 2006

/s/    RONALD W. GUIRE        

Ronald W. Guire

Executive Vice President, Chief Financial Officer,

Assistant Secretary and Director

(Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Roubik Gregorian certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, the Annual Report of Exar Corporation on Form 10-K for the period ended March 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Exar Corporation.

/s/    ROUBIK GREGORIAN        

Roubik Gregorian

Chief Executive Officer, President and Director

(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Ronald W. Guire, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, the Annual Report of Exar Corporation on Form 10-K for the period ended March 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Exar Corporation.

/s/    RONALD W. GUIRE        

Ronald W. Guire

Executive Vice President, Chief Financial Officer,

Assistant Secretary and Director

(Principal Financial and Accounting Officer)