Exar

To Our Shareholders

Fiscal 2009 was the first full year for laying the foundation for my strategic plan for the Company: attain profitability and growth through a leadership role in Connectivity and Power with products that enable the evolving connected world. Before reviewing the year in detail, I must first express my gratitude to the employees for their perseverance during these challenging economic times. We accomplished a great deal last year, but there are still opportunities for improvement. Going forward, we will continue to drive efficiencies throughout the organization, enhance our product portfolio, and expand our technology competencies.

While the market continues to find traction for a rebound, we have been actively preparing to take advantage of tomorrow’s opportunities. Looking at industry trends, technologies and customer requirements, we are developing new solutions to better serve the markets we are in today and positioning ourselves for the growth markets of tomorrow. We will offer significantly enhanced solutions at the system level with multi-chip combinations and at the board-level targeting emerging growth areas including wireless backhaul, enterprise storage, and home gateways. We will not only provide solutions at the device and board level, but across multiple system and application environments.

In early April 2009, we completed the acquisition of hi/fn, inc., a pioneering company with industry leading encryption, compression and data deduplication products that accelerate and optimize data flowing over networks and residing on storage systems. In June 2009, Exar acquired Galazar Networks Inc., a fabless semiconductor company based in Canada offering advanced solutions for the fast growing Carrier Ethernet market. Through these actions, we have also brought onboard engineering and technology expertise that immediately augments our capabilities. We now can assess current and future market opportunities from a new perspective, and in a more directed approach. We expect to increase product development and accelerate delivery of new solutions to the market. I am very excited about these complementary additions. They establish a new foundation for more sophisticated and dynamic products and expand Exar’s technology presence.

Product Highlights

During fiscal 2009, we introduced innovative solutions across all product groups, and won more than 500 new designs with existing and new customers. In our Interface products group composed of Universal Asynchronous Receiver Transmitters (UARTs) and serial transceivers, highlights include four-channel and eight-channel UART families, and the industry’s smallest and fastest single-channel UART. In addition, we added a series that supports the popular VLIO interface (used in portable consumer applications, plus industrial environments). From our Communications group, we added several new devices (Framer/Line Interface Combos, SONET/SDH Clocking). For the Power Management group, we introduced a series of Light Emitting Diode (LED) drivers for high power/brightness retail and architectural lighting.

Financials

For fiscal 2009, net sales were $115 million, up 28% from the previous fiscal year—this includes Power and Interface product revenues, acquired from Sipex, for the full year as compared to seven months the previous year. On a non-GAAP basis our gross margin for fiscal 2009 was 47% as compared to 54% for the prior year, and operating expenses were $63 million for fiscal 2009, which was approximately $3 million higher than the previous year. Although operating expense increased over the prior year, due to the addition of the Sipex organization, we steadily reduced our operating expenses each quarter as we gained synergies and responded to the economic downturn. We generated $3.3 million in cash from operations and repurchased 1.6 million shares of our common stock for $13.4 million in fiscal 2009 ending the fiscal year with approximately $256 million in cash, cash equivalents and marketable securities as compared to approximately $269 million at the end of fiscal 2008.

I want to thank our investors for your continued confidence. We have completed the integration of three companies (Sipex in fiscal 2008, and hi/fn and Galazar Networks in early fiscal 2010) and expect to continue evaluating growth opportunities—either organic or through acquisitions. I am excited about the opportunities before us to deliver more for our customers and to build value for you using our enhanced development expertise to expand our product offerings. I have every confidence that as we continue to follow our strategic plan, we will emerge stronger when the economy recovers.