International Rectifier Corporation (“IR” or the “Company”) designs, manufactures and markets power management semiconductors. Power management semiconductors address the core challenges of power management, power performance and power conservation, by increasing system efficiency, allowing more compact end-products, improving features on electronic devices and prolonging battery life.

The Company’s products include power metal oxide semiconductor field effect transistors (“MOSFETs”), high voltage analog and mixed signal integrated circuits (“HVICs”), low voltage analog and mixed signal integrated circuits (“LVICs”), digital integrated circuits (“ICs”), radiation-resistant (“RAD-Hard”) power MOSFETs, insulated gate bipolar transistors (“IGBTs”), high reliability DC-DC converters, digital controllers and automotive products.

The condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), and therefore do not include all information and notes normally provided in audited financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, which are located in North America, Europe, and Asia. Intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation of the Company’s results of operations, financial position, and cash flows have been included. The results of operations for the interim periods presented are not necessarily comparable to the results of operations for any other interim period or indicative of the results that will be recorded for the full fiscal year ending June 24, 2012. These condensed consolidated financial statements and the accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 26, 2011 filed with the SEC on August 22, 2011 (the “2011 Annual Report”).

The Company has reclassified accrued employee benefits and severance liability from other accrued expenses to accrued salaries, wages and benefits. The reclassification has been made to the prior period consolidated balance sheet to conform to the current year presentation. As a result, the Company’s June 26, 2011 balance sheet herein reflects a $3.9 million reclassification of other accrued expenses to accrued salaries, wages, and benefits.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company evaluates events subsequent to the end of the fiscal quarter through the date the financial statements are filed with the SEC for recognition or disclosure in the consolidated financial statements. Events that provide additional evidence about material conditions that existed at the date of the balance sheet are evaluated for recognition in the consolidated financial statements. Events that provide evidence about conditions that did not exist at the date of the balance sheet but occurred after the balance sheet date are evaluated for disclosure in the notes to the consolidated financial statements.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of the financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels (with Level 3 being the lowest) defined as follows:

	March 25, 2012
Assets and Liabilities:	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	36,491		$	—		$	36,491		$	—
Short-term investments		126,134			53,617			72,517			—
Long-term investments		21,144			9,996			11,148			—
Other assets		29,066			25,979			291			2,796
Other long-term liabilities		(9,337	)		(8,342	)		(595	)		(400	)
Total	$	203,498		$	81,250		$	119,852		$	2,396
Fair value as a percentage of total		100.0	%		39.9	%		58.9	%		1.2	%
Level 3 as a percentage of total assets											0.1	%

	June 26, 2011
Assets and Liabilities:	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	15,996		$	—		$	15,996		$	—
Short-term investments		185,541			70,292			115,249			—
Long-term investments		13,325			9,530			3,014			781
Other assets		33,004			30,231			—			2,773
Other accrued expenses		(309	)		—			(309	)		—
Other long-term liabilities		(8,038	)		(7,638	)		—			(400	)
Total	$	239,519		$	102,415		$	133,950		$	3,154
Fair value as a percentage of total		100.0	%		42.8	%		55.9	%		1.3	%
Level 3 as a percentage of total assets											0.2	%

During the nine months ended March 25, 2012, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis. During the nine months ended March 27, 2011, the Company measured at fair value the assets and liabilities acquired in the acquisition of CHiL Semiconductor Corporation and the acquisition of tangible personal and intellectual property of a privately held domestic corporation on a nonrecurring basis using significant unobservable inputs or Level 3 inputs. In addition, the Company purchased the intellectual property, including patent and patent rights, as well as 25.0 million shares of preferred stock, from another privately held domestic company and measured the fair value of these assets on a nonrecurring basis using significant unobservable inputs, or Level 3 inputs.

During the nine months ended March 25, 2012, for each class of assets and liabilities, there were no transfers between those valued using quoted prices in active markets for identical assets (Level 1) and those valued using significant other observable inputs (Level 2). The Company determines at the end of the reporting period whether a given financial asset or liability is valued using Level 1, Level 2 or Level 3 inputs.

As of March 25, 2012, the Company’s investments fair valued using Level 2 inputs included commercial paper, corporate debt securities, and U.S. government agency obligations. These assets and liabilities were valued primarily using an independent valuation firm based on the market approach using various inputs such as trade data, broker/dealer quotes, observable market prices for similar securities and other available data. The Company also fair values its foreign currency forward contracts using Level 2 inputs based on readily observable market parameters for all substantial terms of derivatives.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Liabilities		Assets
	Contingent Consideration		Derivatives			Investments			Total
Beginning balance at December 25, 2011	$	400	$	3,028		$	266		$	3,294
Total gains or (losses) (realized or unrealized):
Included in earnings		―		(232	)		(14	)		(246	)
Included in other comprehensive income		―		―			―			―
Purchases, maturities, and sales:
Purchases/additions		―		―			―			―
Maturities/prepayments		―		―			(31	)		(31	)
Sales		―		―			(221	)		(221	)
Transfers into Level 3		―		―			―			―
Transfers out of Level 3		—		―			―			―
Ending balance at March 25, 2012	$	400	$	2,796		$	―		$	2,796

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Liabilities		Assets
	Contingent Consideration		Derivatives		Investments			Total
Beginning balance at December 26, 2010	$	―	$	1,845	$	14,232		$	16,077
Total gains or (losses) (realized or unrealized):
Included in earnings		―		320		2,230			2,550
Included in other comprehensive income		―		―		(1,534	)		(1,534	)
Purchases, maturities, and sales:
Purchases/additions		400		―		—			—
Maturities/prepayments		―		―		(705	)		(705	)
Sales		―		―		(4,875	)		(4,875	)
Transfers into level 3		―		―		―			―
Transfers out of level 3		—		—		—			—
Ending balance at March 27, 2011	$	400	$	2,165	$	9,348		$	11,513

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Liabilities		Assets
	Contingent Consideration		Derivatives		Investments			Total
Beginning balance at June 26, 2011	$	400	$	2,773	$	781		$	3,554
Total gains or (losses) (realized or unrealized):
Included in earnings		―		23		18			41
Included in other comprehensive income		―		―		(190	)		(190	)
Purchases, maturities, and sales:
Purchases/additions		―		―		―			―
Maturities/prepayments		―		―		(78	)		(78	)
Sales		―		―		(531	)		(531	)
Transfers into Level 3		―		―		―			―
Transfers out of Level 3		—		―		―			―
Ending balance at March 25, 2012	$	400	$	2,796	$	―		$	2,796

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Liabilities		Assets
	Contingent Consideration		Derivatives		Investments			Total
Beginning balance at June 27, 2010	$	―	$	2,121	$	23,337		$	25,458
Total gains or (losses) (realized or unrealized):
Included in earnings		―		44		6,251			6,295
Included in other comprehensive income		―		—		(2,574	)		(2,574	)
Purchases, maturities, and sales:
Purchases/additions		400		―		1,500			1,500
Maturities/prepayments		―		―		(3,280	)		(3,280	)
Sales		―		―		(14,382	)		(14,382	)
Transfers into level 3		―		―		―			―
Transfers out of level 3		—		—		(1,504	)		(1,504	)
Ending balance at March 27, 2011	$	400	$	2,165	$	9,348		$	11,513

When at least one significant valuation model assumption or input used to measure the fair value of financial assets or liabilities is unobservable in the market, they are deemed to be measured using Level 3 inputs. These Level 3 inputs may include pricing models, discounted cash flow methodologies or similar techniques where at least one significant model assumption or input is unobservable. The Company uses Level 3 inputs to value financial assets that include a non-transferable put option on a strategic investment (the “Put Option”) and a liability for an acquisition-related contingent consideration arrangement. Level 3 inputs are also used to value investment securities that included certain asset-backed securities for which there was decreased observability of market pricing for these investments.

The Company accounts for the Put Option as a derivative instrument not designated as an accounting hedge, and determined the fair value using the Black-Scholes option pricing model based on the income approach. The model uses inputs such as exercise price, fair market value of the underlying common stock, expected life (years), expected volatility, risk-free rate equivalent, and dividend yield. The expected life is the remaining life of the Put Option. Expected volatility is based on historical volatility of the underlying common stock. Additionally, the model relies on the assumption the issuer of the put option will uphold its financial obligation should the Company exercise the Company’s right to put the associated number of common shares back to the issuer at a fixed price in local currency. As of March 25, 2012, the Company determined that significant changes in the above assumptions would not materially affect the fair value of the Put Option.

The acquisition-related contingent consideration arrangement requires the Company to pay additional consideration to the shareholders of the seller of that business based on a percentage of cumulative pro forma earnings, net of cumulative losses. The fair value of the contingent consideration was estimated using a probability weighted discounted cash flow model. The key assumptions in applying the income approach were a discount rate of 46 percent and estimated cash flows from operations. As of March 25, 2012, there were no significant changes in the semi-annual payments or in the range of outcomes for the contingent consideration recognized as a result of the acquisition-related contingent consideration arrangement.

Gains and losses attributable to financial assets whose fair value is determined by using Level 3 inputs and included in earnings consist of mark-to-market adjustments for derivatives and other-than-temporary impairments on investments. These gains and losses are included in other expense, net. Realized gains or losses on the sale of securities are included in interest income, net.

In December 2010, the FASB issued ASC update No. 2010-28, “Intangibles-Goodwill and Other (Topic 350), when to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, a consensus of the FASB Emerging Issues Task Force.” This amendment modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The qualitative factors that an entity should consider when evaluating whether it is more likely than not that a goodwill impairment exists are consistent with the existing guidance for determining whether an impairment exists between annual tests. The adoption of this update did not have a material impact on the Company’s financial statements.

In September 2011, the FASB issued ASC update No. 2011-08, “Intangibles-Goodwill and Other (Topic 350), Testing Goodwill for Impairment”. Under the amendments in this update, a company is not required to calculate the fair value of a reporting unit unless the company determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this update allow an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If after assessing the qualitative factors, a company determines it does not meet the more-likely-than-not threshold, a company is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 (early adoption permitted). The Company early adopted this update in the first quarter of fiscal year 2012. The adoption of this update did not have a material impact on the Company’s financial statements.

In May 2011, the FASB issued ASC update No. 2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The amendments in this update result in common fair value measurement and disclosure requirements in US generally accepted accounting principles ("U.S. GAAP") and International Financial Reporting Standards ("IFRS"). Consequently, the amendments converge the fair value measurement guidance in U.S. GAAP and IFRS. Some of the amendments clarify the application of existing fair value measurement requirements, while other amendments change a particular principle in ASC 820. The amendments in this update that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements include the following: 1) measuring the fair value of financial instruments that are managed within a portfolio, 2) application of premiums and discounts in a fair value measurement, and 3) additional disclosures about fair value measurements. The adoption of this update did not have a material impact on the Company’s financial statements.

In June 2011, the FASB issued ASC update No. 2011-05, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income” (“ASC 2011-05”). The FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this update. The amendments require that all non-owner changes in stockholder’s equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, a company is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and total for other comprehensive income, along with a total for comprehensive income. A company is also required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of comprehensive income are presented. The amendments in this update should be applied retrospectively and will have financial statement presentation changes only, and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

In December 2011, the FASB issued ASC update No. 2011-12, “Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”. This update defers the requirement in ASC 2011-05 that companies’ present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements. A company will continue to be required to present amounts reclassified out of accumulated other comprehensive income on the face of the financial statements or disclose those amounts in the notes to the financial statements. During the deferral period, there is no requirement to separately present or disclose the reclassification adjustments into net income. All other requirements in ASC 2011-05 are not affected by this update, including the requirement to report items of net income, other comprehensive income and total comprehensive income in a single continuous or two consecutive statements. The amendments in this update will have financial statement presentation changes only and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.