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Form 10-K

Xicor, Inc.

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      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 and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      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.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes o          No þ

      As of June 28, 2002, the last business day of the Registrant’s most recently completed second fiscal quarter, there were 23,610,984 shares of the Registrant’s Common Stock outstanding and the aggregate market value of such shares held by non-affiliates of the Registrant, based on the closing sale price of such shares on the Nasdaq National Market on June 28, 2002, was approximately $67,652,000. Shares of Common Stock held by each executive officer and director and by each person who beneficially owns more than 5% of the outstanding Common Stock have been excluded in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.

      The aggregate number of outstanding shares of Common Stock, without par value, of the Registrant was 23,914,172 on March 26, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy Statement for the Registrant’s 2003 Annual Meeting of Shareholders is incorporated by reference in Part III of this Form 10-K.

Table of Contents

XICOR, INC.

FORM 10-K

TABLE OF CONTENTS

Table of Contents

PART I

      This report 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. Words such as “anticipate,” “believes,” “expects,” “future,” “intends,” “assuming,” “projected,” “plans” and similar expressions are used to identify forward-looking statements. Although we believe the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements, which in any case apply only as of the date of this report. Actual results could differ materially from those projected in the forward-looking statements for many reasons, including the risk factors listed in the “Factors Affecting Future Results” section of “Management’s Discussion & Analysis of Financial Conditions and Results of Operations” included in Part II, Item 7 of this report and the risk factors included in Item 1 below.

Overview

      Xicor was founded in 1978. For many years our primary focus was on the development of electrically erasable programmable read only memory devices, or EEPROMs. During 1998 we began to develop and implement a manufacturing strategy to leverage outside wafer fabrication technology and capacity. As a fabless semiconductor company we also began the process of transitioning our product development effort to the area of high performance analog mixed-signal integrated circuits. Today we have two major product areas, our core Analog Mixed-Signal Products and our legacy Memory Products.

      We design, develop and market high performance analog mixed-signal integrated circuits used in communications, computing, networking and industrial applications. We have three fundamental technology approaches to differentiate ourselves from competition and add value to our customer’s products. First we have the ability to utilize EEPROM technology as a feature in our integrated analog mixed-signal designs. This integration provides significant flexibility and increases performance in many applications. The second technology approach utilizes the proprietary non-volatile technology that we developed as an EEPROM supplier to implement precision analog mixed-signal integrated circuits with significantly less power consumption than traditional approaches. These products add significant value in battery powered precision applications where power consumption and heat dissipation are critical. The third technology approach utilizes an industry standard 0.18-micron logic process to implement high frequency analog mixed-signal designs for data conversion and signal processing applications.

      Our Mixed-Signal Products include data conversion products, power management integrated circuits, application specific standard products and interface devices. The increased complexity of system design and higher levels of analog content have created a greater need for programmability in the system. Our programmable analog mixed-signal components regulate, control, convert and manage various voltages and currents without manual adjustment. The growth in portable digital electronics has created a greater need for precision low-power analog mixed-signal products to perform a variety of critical analog tasks such as setting a voltage reference as a standard in the system or comparing signals to determine appropriate system response to a change in circumstances. The increased processing power available to system designers today has created a demand for more data. Incoming analog information must first be converted to a digital code before it can be processed. Commonly referred to as analog-to-digital conversion, this application requires very fast or high-frequency products that can convert millions of samples of analog information per second. We are focused on providing innovative, differentiated analog mixed-signal products that serve the needs of system designers for flexibility, low power consumption and data conversion to exploit the trends toward flexibility, portability and increased processing power.

      Our Memory Products are electrically erasable programmable read-only memories, or EEPROMs. Generally, EEPROMs are nonvolatile memory products that can be altered (reprogrammed) electrically while the device is still installed in a system. EEPROM products are divided into two broad categories: parallel EEPROMs and serial EEPROMs. Because of their performance characteristics, parallel EEPROMs tend to be used in non-consumer devices, such as communications infrastructure equipment, instrumentation

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      Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, through a hyperlink on our Internet website at http://www.xicor.com as soon as practicable after we file electronically such material with, or furnish it to, the United States Securities and Exchange Commission, or SEC.

Industry Background

      Integrated circuits may be divided into three broad categories: analog, digital and mixed-signal. Analog semiconductors condition and regulate “real-world” physical properties, such as temperature, pressure, weight, speed, sound and electrical current. This information can be detected, measured and controlled using analog integrated circuits that represent these real-world properties as continuously varying voltages and currents. Digital circuits, such as memory devices and microprocessors, use threshold voltages which function as on and off switches expressed in binary code as “1’s” and “0’s” where voltages at or above the threshold voltage represent “on” and voltages below the threshold voltage represent “off.” The digital components process and manipulate the data while the analog components condition the voltages or condition and regulate signals after the data has been processed. Mixed-signal devices incorporate both analog and digital functions into a single integrated circuit. In most cases, these devices can serve as either a bridge converting analog signals to digital signals or may be used to improve the performance of the specific analog application. Generally speaking, mixed-signal products are more difficult to design because they require designers to understand two fundamentally different design processes. In many cases products with a large amount of analog content in the mixed-signal market are referred to as analog mixed-signal.

      A growing opportunity in the analog mixed-signal market is for innovation in system sensing technology that is capable of automatically calibrating a system to adjust to predetermined performance constraints or measured changes in the environment. Traditionally, many analog devices, and systems that incorporated these devices, were limited by the need to make manual adjustments to tune or calibrate the analog functions. Analog mixed-signal components with embedded memory and a separate microcontroller are able to make the same adjustments through programming, eliminating the costly, time-consuming, and often inaccurate results associated with manual tuning. For the system manufacturer, programmable mixed-signal technology can: (1) mitigate the costly physical malfunction of expensive equipment by detecting and preventing failure before it occurs; (2) reduce system downtime preventing large potential revenue loss; (3) capture sensor-based data which may be analyzed; and (4) enable “smart” system functionality, where overall system utility is enhanced given performance and hardware parameters. There are increasingly important applications for system sensing technology within the power management requirements of electronic systems and bias and modulation current control within the signal path of communications systems.

      Another opportunity in the analog mixed-signal market is for low power technology. As portable digital electronics proliferate in communication, computing, and industrial environments, the need to extend the operating time between battery charging has become a crucial aspect of differentiation for equipment providers. Laptop and notebook computer users are particularly sensitive to the issue of battery-life. Industrial applications for point-of-sale (POS) terminals and test equipment are even more rigorous in their requirements for low power precision analog mixed-signal products. The availability of low power electronic components provides a vehicle for extended run-time on similar battery chemistry and configuration. As battery chemistry evolves, the requirements for programmability and low-power consumption tend to converge and drive a need for integrated solutions that are both flexible and require minimum supply current for operation.

      Additional growth opportunities for high performance analog mixed-signal products have been created by the advances in digital processing power. As microprocessor technology improves and processing power grows,

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Xicor’s Mixed-Signal Solutions, Products and Applications

      Our products leverage proprietary nonvolatile technology, industry standard EEPROM technology and industry standard fine-line CMOS processes to provide differentiated high performance analog mixed-signal products. We have three technology approaches that provide customers a variety of features and benefits. Many of our products leverage nonvolatile EEPROM memory to provide a design engineer the ability to design systems that are self-calibrating or that can be altered easily. Other products utilize our proprietary nonvolatile technology to provide very high precision and require extremely low power. We also are developing high frequency analog mixed-signal products utilizing an industry standard fine-line CMOS process to provide data conversion products with high resolution, high speed, low minimum operating voltage and low power for use in systems that have large amounts of analog information that must be processed digitally. By using our products, manufacturers and end-users can customize microcontroller and microprocessor-based products to address specific system sensing and signal processing applications with flexibility, accuracy and high frequency solutions that are cost effective while minimizing power supply needs.

      Analog mixed-signal product sales were approximately 63% of total net sales in 2002, 50% in 2001, and 35% in 2000. Our Analog Mixed-Signal Products include the following products:

	Data Conversion Products: Digitally Controlled Potentiometers or XDCPs represent the most established product line in our Mixed-Signal Product group. XDCPs are digitally controlled solid-state electronic variable resistors that give a designer more flexibility and the system more accuracy. Applications for these devices include controlling the Liquid Crystal Display (LCD) brightness in cell phone handsets and laptop computers, power amplifier control for communications systems and wireless radio frequency power settings, and high-resolution data acquisition systems for industrial control, test instrumentation and medical equipment. We also are developing a family of high frequency analog-to-digital converters (ADC) using an industry-standard 0.18-micron logic process. The implementation of high performance analog circuit design in a fine-line logic process is relatively unique and provides advantages in cost to manufacture and performance relative to speed, lower minimum operating voltages and power consumption. We are developing a family of extremely low power precision voltage references based on proprietary Xicor process technology and design expertise. These devices address a wide range of applications in industrial test and measurement equipment, portable digital electronics as well as communications equipment. In addition to better overall accuracy than competing solutions, these products support the need for minimum power consumption in battery applications and low power dissipation where thermal regulation is important. Through the use of proprietary floating gate analog (FGA) technology we can achieve levels of performance that have been difficult to attain with traditional voltage reference products.
	Power Management Products: Our power management products include central processing unit (CPU) supervisory or voltage monitoring chips for microcontroller and microprocessor based systems, battery management circuits, programmable hot swap and programmable power sequencing chips as well as nonvolatile random access memories (NOVRAMs) that include CPU and voltage monitoring functions. Power management products such as our CPU supervisor, programmable hot swap and programmable power sequencing products are targeted for systems that require controlled power-up and orderly, predictable power-down and reliable recovery in the event of system failure. Typical applications for these products include devices such as routers, LAN switches and cellular base stations. Our battery management semiconductors are targeted at three and four cell lithium ion and lithium polymer

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	applications that require cell balancing for optimal performance such as laptop and notebook computers. Some of these products include EEPROM on the integrated circuit and enable the device to be reprogrammed to accommodate changing system design parameters.
	Application Specific Standard Products: We market products targeted at the fiber optic market that integrate several major control and monitoring functions for laser diode modules and fiber optic applications in Local Area Network (LAN) and Metropolitan Area Networks (MAN) as well as long-haul transmission applications. These products support the requirements for bias and modulation current control of the laser diode in gigabit-Ethernet, fiber channel, 10-gigabit Xenpak and dense wave division multiplexing (DWDM) applications. Other application specific products for communications applications serve the needs of wireless applications in base stations for adjusting the power in an RF power amplifier by controlling bias current. We are developing a family of high performance analog-front-ends (AFE) for the flat panel display (FPD) market. These products convert analog signals sent from a computer to a high resolution FPD. We are focused on supporting the needs of larger format displays and supplying a family of analog-front-ends that can digitize analog signals at speeds above 200 million samples per second (MSPS). We recently received successful first silicon from Taiwan Semiconductor Manufacturing Company, LTD. (TSMC) on this product and will be demonstrating this product to customers in the second quarter of 2003.
	Interface Products. We market real time clock products for timekeeping and date stamping in applications that require accuracy over time and temperature. Common applications are in utility meters, DVD players and recorders, set top boxes and cable modems.

Nonvolatile Memory Products and Applications

      Memory Product sales were approximately 37% of total net sales in 2002, 50% in 2001, and 65% of sales in 2000. Our Memory Products consist of parallel and serial EEPROMs.

      Nonvolatile Memory Products and Applications. Historically, we focused our efforts on EEPROM products which are nonvolatile memories that can be reprogrammed in-system hundreds of thousands of times and can be altered one byte or several bytes at a time. EEPROMs are termed serial or parallel depending on their connection to the system’s processor. Serial EEPROM devices transmit data through a single input-output port while parallel devices transmit data through multiple ports concurrently.

	•	Parallel EEPROMs. We supply a broad line of parallel interface EEPROMs with densities ranging from 64KB to 1MB. Parallel interface EEPROMs are generally used to contain frequently updated data in communications infrastructure equipment, instrumentation, transportation and other industrial applications.
	•	Serial EEPROMs. In March 2001, we announced our plan to exit the standalone low-density serial EEPROM market. We substantially completed our exit from the serial EEPROM business in 2002.

Marketing and Sales

      Our products are sold worldwide for a broad range of applications, including communications, computing, networking and industrial applications. We sell our products to OEM customers either directly or indirectly through distributors or contract manufacturers.

      In new applications, particularly for newly introduced devices, our products generally require long “design-in” cycles for customer applications and extensive support by our field application engineers. We consider close support of our customers’ design efforts to be an important aspect of our marketing strategy.

      We market our products directly from our headquarters in Milpitas, California and from regional domestic and foreign sales offices. Products are also marketed domestically through a national network of independent sales representatives, each of which has been granted an exclusive sales territory, and through non-exclusive national stocking distributors that also handle competitive products. Our products are also marketed internationally through a network of independent exclusive and non-exclusive sales representatives

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      Sales outside of North America constituted approximately 64% of total net sales in 2002, 54% in 2001, and 48% in 2000. Our international sales are generally denominated in U.S. dollars.

      One distributor accounted for 28% of total net sales in 2002, 23% in 2001 and 19% in 2000. Another distributor accounted for 15% of total net sales in 2002. Distributors are not themselves end users of our products, but rather serve as a channel of sale to many end users of our products.

Manufacturing

      Historically, we manufactured all silicon wafers used to provide the semiconductor devices for our products. However, the rapidly escalating capital investments necessary to keep pace with technological advances and the increasing need for larger factories in order to efficiently spread the high level of fixed costs associated with complex semiconductor manufacturing operations have led to the emergence of wafer fabrication foundries, enabling many semiconductor companies to outsource portions or all of their wafer requirements.

      During 1998 we announced and began to implement a restructuring plan to change our manufacturing and procurement strategies to significantly increase outsourcing of wafer fabrication and product testing to overseas subcontractors and to streamline operations. This change was in response to market conditions that made it more economical to outsource manufacturing. Yamaha Corporation of Japan was qualified as our initial outside foundry in the third quarter of 1998. In the second quarter of 1999 we entered into foundry agreements with Sanyo Electric Co., Ltd. of Japan and ZMD GmbH of Germany. In November 2000, we completed the sale of our wafer fabrication assets and inventory to Standard MEMS, Inc. (“Standard MEMS”). At the time of the sale, we also entered into a related foundry agreement with Standard MEMS. Effective November 2000, we became a fabless semiconductor company. Presently, Yamaha Corporation and ZMD GmbH provide substantially all of our wafers. We are in the process of qualifying two more foundries, TSMC and Chartered Semiconductor, Singapore. We have received first silicon from TSMC for our first high frequency analog-to-digital converter and an application specific solution for the high resolution flat panel display market. We also have launched our first design effort using a Chartered Semiconductor 0.6 micron analog mixed-signal and EEPROM process.

      Each device on the fabricated wafer is tested by one of our subcontractors. Subcontractors in various countries including Taiwan, Thailand, South Korea, the Philippines, China and Malaysia separate the wafers into individual units. Each functional chip is encapsulated in a plastic or ceramic package having external leads to which the unit is connected by extremely fine wires. The packaged units undergo comprehensive electrical testing offshore at one of our independent subcontractors located in various countries including Taiwan, Thailand, South Korea, the Philippines and China. A limited amount of testing is also performed in Milpitas. Chip-scale products are processed by subcontractors based in the United States and tested in Taiwan. In accordance with industry practice, we provide a limited warranty for our devices against defects in materials and workmanship for periods ranging from 90 days to one year.

      We rely on overseas wafer fabrication, sort, assembly and test contractors and maintenance of our inventories at contractors’ facilities and our business depends on an uninterrupted supply chain.

      The principal raw materials utilized in the production process are polished silicon wafers, ultra-pure metals, chemicals and gases. Encapsulation materials that enclose the chip and provide the external connecting leads are provided by the independent assembly contractors or are purchased by us and shipped to such contractors.

Research and Development

      Our focus is on providing integrated circuits with higher levels of analog mixed-signal integration. We differentiate our products by virtue of leveraging our expertise in nonvolatile technology and high frequency

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      Research and development expenditures were $13.1 million or 34% of sales in 2002, $13.6 million or 19% of sales in 2001, and $15.9 million or 13% of sales in 2000. Research and development activities require a high degree of complexity in design and manufacturing process, and consequently we must continuously invest a significant percentage of sales in research and development and in the pre-production engineering activity related to new products and technologies. Approximately 40% of our workforce is engaged in research and development activities, which is performed primarily in the Silicon Valley.

Patents and Licenses

      We hold a number of United States patents and foreign patents covering various circuit designs and device structures. Further, additional patent applications for products are pending in the United States and abroad. Similar to other semiconductor manufacturers, we have granted licenses under our patents and may continue to do so in the future. We believe that, due to the rapidly changing technology in the semiconductor industry, our future success will be dependent primarily upon the technical expertise and creative skills of our personnel rather than patent protection.

Acquisition

      In the second quarter of 2002 we established our Signal Processing Group, with the acquisition of Analog Integrated Partners, LLC (AIP), a privately held company. Founded in 1999, AIP was led by engineering veterans from Exar Corporation, Micropower Systems and Sage, Inc. Our Signal Processing Group designs and develops high performance analog mixed-signal products for signal processing and data conversion applications. Applications for this technology include high resolution flat panel displays (FPD), graphics and imaging processing, wired and wireless communication systems and test and measurement equipment.

Competition

      The semiconductor industry is highly competitive. Important elements determining success include product performance, quality and reliability, delivery capability, price, diversity of product line, application support, financial strength and the ability to respond rapidly to technological innovations. We compete with major semiconductor companies such as Analog Devices, Atmel Corporation, Linear Technology Corporation and Maxim Integrated Products. We pursue a strategy of innovation and differentiation in order to compete in the high performance analog mixed-signal market.

Insurance

      We presently carry various insurance coverage including property damage, business interruption and general liability including certain product liability coverage. We have been unable to obtain pollution and earthquake insurance at reasonable costs and limits.

Employees

      At December 31, 2002 we had 117 employees, approximately 40% of whom were engaged in research and development activities. None of our employees are represented by a labor organization and we consider our employee relations to be good. Many of our employees are highly skilled and we believe our success will depend upon our ability to hire and retain key, qualified human resources.

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Officers of the Registrant

      Information regarding each of our current officers is set forth below:

*	Denotes Executive Officer.

      Louis DiNardo, President and Chief Executive Officer. Mr. DiNardo joined Xicor as President and Chief Executive Officer in November 2000. He has been involved in sales, marketing and operations within the semiconductor industry for over 20 years. Mr. DiNardo came to Xicor from Linear Technology Corporation (LTC), where he was General Manager of Mixed-Signal Products. During his 13 years at LTC, Mr. DiNardo held positions as Vice President — Marketing, Director of North American Distribution, and Area Sales Manager. Prior to LTC, Mr. DiNardo worked for 8 years at Analog Devices, where he was involved primarily in Field Sales and Applications. Mr. DiNardo received his bachelor’s degree from Ursinus College.

      Geraldine N. Hench, Vice President, Finance and Administration and Chief Financial Officer. Ms. Hench, a certified public accountant, joined Xicor in November 1987 and became a Vice President in June 1993 and Xicor’s Chief Financial Officer in January 1998. Prior to Xicor, Ms. Hench was an Audit Manager at PricewaterhouseCoopers LLP. Ms. Hench received the degree of Bachelor of Science in Accounting from Santa Clara University and the degree of Master of Business Administration from St. Mary’s College.

      R. Todd Smathers, Senior Vice President, Operations. Mr. Smathers joined Xicor in October 2001 as Senior Vice President, Operations. Mr. Smathers has over 30 years of industry experience in engineering, operations and general management. During his eighteen years with Linear Technology Corporation (LTC) he held a variety of senior management positions including General Manager of the Mixed-Signal Business Unit and Director of Operations. Prior to his affiliation with LTC, Mr. Smathers served at National Semiconductor Corporation where he assumed increasing levels of responsibility in engineering management for the linear products group. He holds a BS degree in Electrical Engineering from Clemson University (SC).

      Steven R. Bakos, Vice President, Sales. Mr. Bakos joined Xicor in October 2002 as Vice President, Sales. Mr. Bakos brings fourteen years experience in the industry. He spent the last eleven years at Linear Technology Corporation, where he most recently served as Northwest Area Sales Manager. He also had other management positions in sales and marketing, including responsibility for North American Distribution Marketing. Prior to his affiliation with Linear, Mr. Bakos spent three years at National Semiconductor Corporation. He holds a B.S. degree in Engineering from Cornell University (New York).

      Carlos Laber, Vice President, Engineering, Linear Products. Mr. Laber joined Xicor in July 2002 as Vice President, Engineering, Linear Products. Mr. Laber has more than 24 years of design and management experience in mixed-signal analog circuit design and new product definition. Mr. Laber came to Xicor from Micrel Semiconductor where he was Vice President, Design Engineering since March 2000. Prior to Micrel, Micro Linear Corporation employed Mr. Laber from 1984 to 2000 where he held the positions of Vice President of Design Engineering, Director of Engineering, and Principal Engineer. Prior to 1984 National Semiconductor and Intel Corporation employed Mr. Laber in various design engineering positions. He holds a

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      John M. Caruso, Vice President, Engineering, Signal Processing Products. Mr. Caruso joined Xicor in April 2002 as Vice President, Technology in connection with our acquisition of Analog Integration Partners, LLC (AIP) and was appointed Vice President, Engineering, Signal Processing Products in February 2003. Mr. Caruso was one of the founders of AIP, where he was President and CEO from late 1998 through January 2002. Prior to founding AIP, Mr. Caruso was employed by Exar Corporation as Director of Strategic Planning, and prior to that as Director of the Video and Imaging business unit. Prior to Exar, he was an owner and the Vice President of Design for Micro Power Systems. Mr. Caruso has a BSEE from the University of Cincinnati.

      Davin Lee, Vice President, Marketing. Mr. Lee joined Xicor in December 2001 as Senior Director of Sales for North America and was appointed Vice President, Marketing in February 2003. Mr. Lee brings 12 years experience in the industry. From 2000 to 2001 Mr. Lee was at Altera Corporation as a Strategic Business Manager. From 1994 to 2000 he was employed by National Semiconductor in a variety of sales and marketing positions. He holds a B.S. degree in Electrical Engineering from The University of Texas (Austin) and an M.B.A. from Kellogg School of Management at Northwestern University (Illinois).

      James McCreary, Vice President, Technology. Mr. McCreary joined Xicor in October 1998 as Vice President, Engineering and was appointed Vice President, Technology in February 2003. From 1996 through 1998 Mr. McCreary was involved in private business ventures. In 1983 Mr. McCreary co-founded Micro Linear Corporation where he was Vice President of Engineering from 1983 through 1995. Mr. McCreary received the degrees of Master of Science in Electrical Engineering and Ph.D. from the University of California, Berkeley and is the inventor of several patents.

      Our executive offices are located in an approximately 62,000 square-foot building at 933 Murphy Ranch Rd., Milpitas, California. This facility, which houses our design, research and development and reliability operations and executive, marketing, and administrative offices, is leased. The lease expires in 2010 and provides for an annual base rental of $948,587 increasing 3.5% annually, and requires us to pay all real estate taxes, utilities and insurance and to maintain the building and premises. We believe our facility is adequate for our foreseeable needs.

      Information regarding legal proceedings is set forth in Note 12 of the Notes to Consolidated Financial Statements which information is hereby incorporated by reference.

      No matters were submitted to a vote of the security holders during the quarter ended December 31, 2002.

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PART II

      Our Common Stock trades on the Nasdaq National Market tier of the Nasdaq Stock Market^SM under the symbol XICO. The table below sets forth the high and low sales prices for our Common Stock as reported by Nasdaq for each calendar quarter.

      There were approximately 925 shareholders of record on December 31, 2002.

Dividend Policy

      We have never declared or paid any cash dividend on our capital stock and do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain future earnings, if any, for use in our business.

Equity Compensation Plan Information

      The following table summarizes the number of outstanding options granted to employees and directors, as well as the number of securities remaining available for future issuance, under the Company’s compensation plans as of December 31, 2002.

(1)	Included in this amount are 380,000 shares available for future issuance under Employee Stock Purchase Plan
(2)	Amounts correspond to the Company’s 1998 Plan, which is not subject to shareholder approval, described in Note 8 to the consolidated financial statements.

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Item 6.     Selected Financial Data

Financial Operating Information

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Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations that are forward-looking are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. See “Safe Harbor Statement” and “Factors Affecting Future Results” sections following.

      The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing on pages 27 to 48.

Results of Operations

      Our sales are derived from two product groups, mixed-signal products and memory products. Mixed-signal product sales represent our core market. Memory product sales comprise our legacy businesses of serial EEPROMs, which we have substantially exited, and parallel EEPROMs, which business we are retaining. Annual sales by product group were:

      Overall economic and industry-wide conditions were weak throughout 2001 and 2002 which negatively impacted our revenues in all product groups. In particular, the communications market segments that we sell our products into were adversely impacted by the severe economic downturn that was characterized by a significant drop in end user demand and exacerbated by excess inventory in global sales channels.

      Sales of mixed-signal products represented 63% of total net sales in 2002, compared to 50% of total net sales in 2001 and 35% of total net sales in 2000. Mixed-signal product sales decreased 31% from 2001 to 2002 and decreased 19% from 2000 to 2001. The decreases were primarily due to lower demand in the communications market as well as an overall decrease in the general economy. Mixed-signal sales were level sequentially in the first two quarters of 2001 and then declined in the second half of the year on lower unit sales. In the first quarter of 2002, mixed-signal sales remained relatively stable compared to the fourth quarter of 2001. Mixed-signal sales increased 27% sequentially in the second quarter of 2002 on higher unit sales, increased 8% sequentially in the third quarter of 2002 on higher unit sales and then remained relatively stable sequentially in the fourth quarter of 2002.

      As shown in the table below, memory product sales declined 60% in 2002 and 56% in 2001 compared to the immediately preceding year:

      Parallel EEPROM product sales decreased 49% from 2001 to 2002 and decreased 32% from 2000 to 2001 principally due to lower unit shipments as the overall market for these products contracted and weak economic conditions persisted. Serial EEPROM product sales declined in 2002 as we continued to exit this business. Serial sales decreased 73% from 2001 to 2002 and decreased 69% from 2000 to 2001. The serial EEPROM

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      Gross profit as a percentage of sales was 50% in 2002, 36% in 2001, and 42% in 2000. As discussed below, cost of sales for the first quarter of 2001 included an $8.2 million charge to write down inventories. Excluding the inventory write-down, 2001 gross profit as a percentage of sales was 47%. The gross profit percentage in 2002 benefited from a shift in the product mix to a larger percentage of higher margin mixed-signal and parallel EEPROM sales and a smaller percentage of lower margin serial EEPROM sales, the amortization of $1.9 million of the deferred gain on the sale of the fab assets over a lower sales level and lower manufacturing costs due to spending controls. These benefits were partially offset by lower absorption of fixed costs as manufacturing volumes were reduced in 2002 due to the weak industry-wide economic conditions. Compared to 2000, the 2001 gross profit percentage excluding the inventory write-down benefited from a shift in the product mix to a larger percentage of higher margin mixed-signal and parallel EEPROM sales and a smaller percentage of lower margin serial EEPROM sales, the amortization of $2.5 million of the deferred gain on the sale of the fab assets and lower costs associated with our shift to fully outsourced manufacturing completed in the second quarter of 2001. Cost of sales in 2000 included a $0.4 million credit related to the amortization of the deferred gain on the fab sale. The net benefit to gross margin resulting from the sale of products that had been previously written down was less than $0.5 million in each of the years ended December 31, 2002 and 2001. The gross profit percentage is expected to fluctuate from quarter to quarter as a result in changes in product mix, product costs and average selling prices.

      Research and development expenses amounted to $13.1 million or 34% of sales in 2002, $13.6 million or 19% of sales in 2001; and $15.9 million or 13% of sales in 2000. The absolute dollar amount of research and development expenses in 2002 was relatively consistent with the 2001 expense level as the benefits from spending controls were largely offset by the increased personnel costs resulting from the second quarter 2002 acquisition of our Signal Processing Group, formerly Analog Integration Partners LLC (AIP). While research and development expenses increased as a percentage of sales in 2001 compared to 2000 due to the lower sales level, the dollar amount of research and development expenses decreased in 2001 compared to 2000 primarily due to lower personnel costs and spending controls. We intend to continue to invest in research and development in 2003, although at a lower absolute dollar level than in 2002 as we continue to monitor product development expenses and pare back ancillary engineering projects.

      Selling, general and administrative expenses amounted to $11.0 million or 29% of sales in 2002, $18.2 million or 26% of sales in 2001; and $26.1 million or 21% of sales in 2000. The decrease in the dollar amount of selling, general and administrative expenses in 2002 compared to 2001 is primarily due to reduced personnel expenses of $2.5 million related to headcount reductions and $1.6 million lower commission expenses related primarily to the decreased sales in 2002 and to a lesser extent overall spending controls. The decrease in the dollar amount of selling, general and administrative expenses in 2001 compared to 2000 is due primarily to headcount reductions and lower commission expenses related to the decreased sales in 2001, partially offset by increased legal costs associated with protecting our intellectual property rights.

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      At the beginning of 2000, we had restructuring accruals of $8.3 million primarily related to the expected costs to close our Milpitas in-house wafer fabrication facility. In November 2000, we completed the sale of the wafer fabrication assets and inventory to Standard MEMS, Inc. (“Standard MEMS”) for a gross purchase price of $12.8 million. During 2000 we utilized $1.9 million of restructuring reserves. Related reductions in workforce of approximately 200 employees, primarily in manufacturing and related support groups, occurred primarily in the fourth quarter of 2000. As a result of the sale of the fab, we incurred restructuring charges at levels significantly below amounts previously estimated and accrued. The net restructuring credit of $3.8 million recorded in 2000 consists of a reversal of $6.1 million of costs originally included in the restructuring accrual not utilized due primarily to the sale of the fab to Standard MEMS, partially offset by $2.3 million principally related to additional workforce reductions that we identified and committed to in the fourth quarter of 2000 to streamline operations and further implement our outsourced manufacturing strategy.

      At the time of the sale of the wafer fabrication assets and inventory, Xicor and Standard MEMS also entered into a related foundry agreement for Standard MEMS to become a Xicor foundry. The sale of the wafer fabrication assets and inventory resulted in a net gain of $5.0 million, which was recorded as a deferred gain on sale of fab assets. We established the amortization period of the gain at two years, which was the minimum term of the foundry agreement. Cost of sales for 2002, 2001 and 2000 included a $1.9 million, $2.5 million and $0.4 million credit, respectively, related to the amortization of the deferred gain on the sale of the fab assets. The benefit from the amortization of the deferred gain ended in the third quarter of 2002 due to the early termination of the foundry agreement, and the remaining unamortized balance of $0.2 million was included in other income in the third quarter of 2002.

      In the first quarter of 2001, we announced our plan to exit from offering stand alone low-density serial EEPROM memory products and complete the move to fully outsourced test and assembly operations. Accordingly, our first quarter 2001 results included an $8.2 million charge to cost of sales to write down inventories to their net realizable value and a $3.2 million restructuring charge. The $3.2 million restructuring charge consisted of $1.5 million of severance-related costs for an additional reduction in our workforce of approximately 95 employees, $1.2 million of fixed asset write-offs principally related to leasehold improvements in the facility that housed our test operation and $0.5 million of other restructuring-related costs.

      During 2001, we reduced our workforce by approximately 140 employees and utilized $3.1 million of the restructuring reserve for related severance costs and $0.7 million for other restructuring related costs. At December 31, 2001, the restructuring accrual of $0.7 million consisted of $0.4 million of severance costs (including costs to reduce the workforce by approximately 10 employees primarily in sales and administrative groups) and $0.3 million of other costs associated with vacated sales offices.

      In 2002, due to the ongoing weak industry conditions, we implemented two additional reductions in force that affected employees in all areas of the company. In the second quarter of 2002 we reduced our workforce by 33 employees, which resulted in a $0.8 million restructuring charge for severance-related costs. Quarterly cost reductions of approximately $0.7 million associated with the second quarter 2002 reduction in workforce were partially offset by increased research and development expenses. In the fourth quarter of 2002, we notified 16 employees that their employment would cease on various dates in the fourth quarter of 2002 and first quarter of 2003, which resulted in a $0.2 million restructuring charge for severance-related costs. A significant portion of the $0.4 million of quarterly cost reductions resulting from the fourth quarter 2002 reduction in workforce are expected to be realized in the first quarter of 2003.

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      In the fourth quarter of 2002 we entered into a lease agreement for a facility to be used as our corporate headquarters. We vacated our prior headquarters facility in the fourth quarter of 2002, and a third party assumed the related lease in the first quarter of 2003. In the fourth quarter of 2002 we also vacated our leased Bay Area sales office facility and the leased facility that we assumed as part of the AIP acquisition and relocated the employees from both facilities to our corporate headquarters.

      Terminating our prior facility lease and entering into the new facility lease allowed us to consolidate our operations in a more efficient facility and reduce our future minimum lease commitments, exclusive of restructuring related lease payments, by approximately $0.3 million per year in 2003 through 2009. Our minimum lease commitment increased by $1.2 million in 2010 as the new facility lease term is one year longer than the prior facility lease term. The facilities abandonments resulted in a fourth quarter 2002 facilities related restructuring charge of $0.9 million consisting of $0.5 million for the non-cash abandonment of leasehold improvements, equipment and furniture and $0.4 million of exit costs consisting primarily of rent after abandonment of the facilities.

      Rent expense in 2003 is expected to approximate our 2002 net rent expense as the gross rent for the prior facility was reduced by an 18-month sublease that was due to expire in 2003.

      During 2002, we reduced our workforce by approximately 50 employees and utilized $1.1 million of the restructuring reserve for related severance costs and $0.3 million for other restructuring related costs. At December 31, 2002, the restructuring accrual of $0.7 million consisted of $0.2 million of severance costs payable to terminated employees and $0.5 million of costs associated with vacated facilities.

      On April 16, 2002, we acquired Analog Integration Partners LLC (AIP), a privately held company that designs and develops high-performance analog signal processing and data conversion circuits, for total consideration of $15.5 million, consisting of $10.2 million of stock (1,012,758 shares of Xicor common stock valued at $10.05 per share, the average closing price for the three consecutive days ended April 16, 2002), $5.0 million in cash, and direct acquisition costs of $0.3 million for legal, appraisal and accounting fees. The $2.7 million of the purchase price allocated to current technology and $0.1 million allocated to customer contracts for professional services are being amortized using the straight-line method over their useful lives of 3 years and 8 months, respectively. The $10.8 million of the purchase price allocated to goodwill is not expected to be deductible for tax purposes, and in accordance with SFAS No. 142 will not be amortized but instead evaluated periodically to determine whether events or circumstances have occurred indicating that goodwill might be impaired.

      The $1.8 million of the purchase price allocated to in-process research and development expense in the second quarter of 2002 relates to AIP’s current engineering effort that is focused on developing the analog front-end for the high-end flat panel display market using a standard digital 0.18 micron CMOS process. Management determined the value of the in-process research and development based upon various factors, including an independent appraisal. The appraisal used a discounted cash flow method and several factors including projected financial results, relative risk of successful development, time value of money and level of completion. Projected financial results were based on a number of estimates including market growth rates, the company’s competitive position, the product roadmap, the company’s cost structure, development timelines, resource requirements and the long-term effective tax rate. The risk-adjusted discount rate used for projected cash flows was 50%. As of the acquisition date, the project was estimated to be approximately 5% complete and the estimated cost to complete the project was approximately $3 million. Revenues related to products developed under this project are planned to begin toward the end of 2003. Uncertainties and risks associated with completing development in a reasonable period of time include the remaining effort to achieve technological feasibility, rapidly changing customer markets and competition. Failure to bring these products to market in a timely manner could adversely impact our sales and profitability in the future and potentially impair the $10.8 million assigned to goodwill.

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      Interest expense increased in 2002 compared to 2001 due to interest expense and amortization resulting from our November 2001 issuance of $35 million of 5.5% convertible subordinated notes and warrants. Interest expense decreased in 2001 compared to 2000 due to the sale of the Milpitas wafer fabrication assets and payoff of related equipment lease debt in November 2000, partially offset by increased interest expense and amortization due to our November 2001 issuance of $35 million of 5.5% convertible subordinated notes and warrants.

      Interest income decreased in 2002 compared to 2001 primarily as a result of lower interest rates, partially offset by an increase in the average balance invested. The average cash and investments balance was higher in 2002 than in 2001 primarily due to funds generated from the November 2001 issuance of convertible subordinated notes and warrants, partially offset by funds used in 2002 operating activities and for the second quarter 2002 acquisition of AIP. Interest income decreased in 2001 compared to 2000 primarily as a result of lower interest rates. Interest income is expected to decrease in 2003 compared to 2002 due to the lower average cash and investments balance and, to a lesser extent, lower interest rates.

      Other expense for the year ended December 31, 2002 includes a non-cash impairment charge of $2.5 million to write-off an investment held in a private company. Other income for the year ended December 31, 2002 includes $700,000 from a favorable sales tax audit, a $400,000 benefit associated with the sale of our wafer fabrication facility in 2000 and $194,000 from the early termination of a wafer foundry agreement with Standard MEMS.

      No taxes were provided in 2002 due to the net loss. The provision for income taxes for 2001 and 2000 consisted primarily of federal and state minimum taxes, which resulted from limitations on the use of net operating loss carryforwards, and foreign taxes. Net deferred tax assets of $58.4 million at the end of 2002 remain fully reserved because of the uncertainty regarding the ultimate realization of these assets.

      At December 31, 2002, we had $37.3 million in cash, cash equivalents and short-term investments. Corresponding balances at the end of 2001 and 2000 were $56.4 million and $29.1 million, respectively.

      In 2002 we used $12.6 million of cash in operating activities (including $1.4 million associated with restructuring activities). Cash used in investing activities was $11.7 million in 2002, consisting of net investments in cash-based, available-for-sale securities of $5.7 million, the $5.0 cash portion of the consideration paid to acquire AIP and $0.9 million of equipment purchases. We generated $0.6 million of net cash from financing activities in 2002, consisting of $1.3 million of cash generated from the issuance of common stock under employee stock plans, partially offset by $0.7 million of cash used to repay long-term capital lease obligations.

      In 2001 we used $4.0 million of cash in operating activities (including $3.8 million associated with restructuring activities). Cash used in investing activities was $2.8 million in 2001, consisting of $2.5 million invested in Standard MEMS, and $0.3 million for equipment purchases ($1.3 million of equipment purchases, net of $1.0 million of equipment financing). We generated $34.0 million of net cash from financing activities in 2001, principally due to our November 2001 issuance of $35.0 million of 5.5% convertible notes and warrants due November 2006, with semiannual interest payments on May 19 and November 19 of each year. The notes are convertible, at the option of the holder, into our common stock at any time unless previously redeemed or repurchased, at a conversion price of $11.22 per share, subject to adjustment in certain events. The net proceeds of the offering after payment of the underwriting discount and expenses of the offering of $2.8 million were $32.2 million. We also generated $2.6 million of cash from the issuance of stock under employee stock plans and used $0.9 million to repay long-term capital lease obligations in 2001.

      In 2000 we generated $11.4 million of cash from operating activities, $12.8 million of proceeds from the sale of the wafer fabrication assets and inventory to Standard MEMS and $2.3 million from the issuance of

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      During 2003, we expect to use cash in operating activities (including interest payments on the convertible note and costs associated with restructuring activities), to repay long-term obligations and purchase equipment. Capital expenditures for 2003 are currently planned at approximately $3.6 million and are primarily related to test and product design equipment. At December 31, 2002, we had entered into commitments for equipment purchases aggregating less than $0.5 million. At December 31, 2002, our principal source of liquidity was $37.3 million of cash, cash equivalents and short-term investments. Management believes that our existing sources of liquidity will be adequate to support our activities for the next twelve months.

      Below is a summary of fixed payments related to certain contractual obligations. Payment timing may be subject to change.

(1)	Represents open purchase orders at December 31, 2002 for which goods and services have not been received, of which less than $0.5 million relates to capital commitments.

Critical Accounting Policies

      The preparation of financial statements requires us to make estimates and assumptions that affect amounts reported therein. We use a combination of historical results and anticipated future events to estimate and make assumptions relating to our financial statements. Actual results could differ from our estimates. The Securities and Exchange Commission defines critical accounting policies as those that are, in management’s view, most important to the portrayal of the company’s financial condition and results of operations and most demanding in their calls on judgment. We believe our most critical accounting policies relate to:

	Our customers include original equipment manufacturers, distributors and contract manufacturers. We recognize revenue from sales when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been shipped, the price is fixed or determinable and collection of the resulting receivable is reasonably assured. Sales are reduced for estimated returns and adjustments. We base these estimates on historical data and other known factors. Actual results could be different from our estimates resulting in future charges or credits to earnings.
	Certain of our sales to distributors are contractually subject to rights of return and price concessions on unsold merchandise. Because of frequent sales price reductions on standard products, the distributors’ return rights and rapid technological obsolescence in the industry, we defer recognition of such sales until the distributors sell the merchandise. From time to time we terminate distributors, contractually eliminate their rights of return and price concessions or obsolete parts in the distribution channel. In such cases, we recognize revenue after the distributors’ return rights lapse and the price is fixed.
	Amounts billed to the distributors, net of estimated price concessions, are included as accounts receivable and the related gross profit is deferred and reflected as a current liability until the revenue is

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	recognized. The amount of gross profit recognized by us in future periods could differ from the deferred income on shipments to distributors due to the distributors’ contractual rights of return and price concessions on unsold merchandise.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Accounts receivable at December 31, 2002 and 2001 are presented net of an allowance for doubtful accounts of $0.5 million. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories are stated at the lower of cost or market. Each quarter we evaluate our inventories for excess quantities and obsolescence. Inventories on hand in excess of forecasted demand are not valued and we write off inventories that are considered obsolete. Remaining inventory balances are adjusted to approximate the lower of cost or market value. Product and technology transitions announced by us or our competitors, changes in the purchasing patterns of our customers and distribution partners, or adverse global economic conditions may materially affect estimates of our inventory reserve requirements resulting in additional inventory write downs. During 2001, we recorded an $8.2 million charge to cost of sales to write down inventories to their net realizable value in connection with our plan to exit from offering stand alone low-density serial EEPROM memory products.

Long-lived assets are principally comprised of investments, fixed assets and goodwill and purchased intangible assets from acquisitions accounted for under the purchase method. The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price paid to the fair value of the net tangible and intangible assets acquired, including in-process research and development. The amounts and useful lives assigned to intangible assets impact future amortization. The amount assigned to in-process research and development is expensed immediately. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors impacting the impairment review include significant negative industry trends, significant underutilization of the assets, significant changes in how we use the assets or our plans for their use, underperformance relative to historical or projected future operating results, changes in market demand and competition and significant changes in company strategy. If our review determines the future undiscounted cash flows related to these assets will not be sufficient to recover their carrying value, we will reduce the carrying values of these assets down to our estimate of fair market value and continue depreciating them over their remaining useful lives. Our estimates of fair market value are generally based on discounted cash flow analyses or outside appraisals.

In connection with restructuring plans, we are required to make estimates about the effects of matters, or future events, that are inherently uncertain. Among other items, we estimate the salvage value of assets impaired, which requires judgments concerning such factors as fluctuating equipment markets and timing and method of disposal and the cost and timing of closing leased facilities, which requires judgments concerning such factors as fluctuating real estate markets and timing of disposal. In 2000, we recorded a net restructuring credit of $3.8 million consisting of $6.1 million of costs originally included in the restructuring accrual not utilized primarily due to the unanticipated sale of the fabrication facility, partially offset by $2.3 million related principally to additional workforce reductions to streamline operations and further implement our outsourced manufacturing strategy. In 2001, we recorded a $3.2 million restructuring charge associated with the move to fully outsourced test and assembly operations and the exit from offering stand alone low-density serial EEPROM memory products. In 2002,

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	we recorded $1.9 million of restructuring and facilities charges associated with workforce reductions and the relocation of our corporate headquarters.

Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. Our net deferred tax assets of $58.4 million at December 31, 2002 remain fully reserved because of the uncertainty regarding the ultimate realization of these assets. In the event we determine that we will be able to realize our deferred tax assets in the future, an adjustment to the deferred tax assets will be recorded as a credit to income in the period the determination is made.

From time to time, we are a defendant or plaintiff in various legal actions, which arise in the normal course of business. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required for these contingencies, if any, which would be charged to earnings, is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in circumstances. Changes in required reserves could increase or decrease our earnings in the period the changes are made.

Recent Accounting Pronouncements

      In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 25, 2002. We believe that the adoption of this standard will have no material impact on our financial statements.

      In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS No. 145). Among other things, SFAS No. 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of APB Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. This statement is effective for fiscal years beginning after May 2002 for the provisions related to the rescission of Statements 4 and 64, and for all transactions entered into beginning May 2002 for the provision related to the amendment of Statement 13. This standard would require any gain or loss from the early extinguishment of debt to be included in the “Other income and (expense), net” line of our consolidated statement of operations.

      In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities” (SFAS 146). SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The scope of SFAS 146 includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. We plan to adopt SFAS 146 for our fiscal year beginning January 1, 2003. The effect on adoption of SFAS No. 146 will change on a

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      In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We believe that the adoption of this standard will have no material impact on our financial statements.

      In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We believe that the adoption of this standard will have no material impact on our financial statements.

      In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure” (SFAS No. 148). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. We believe that the adoption of this standard will have no material impact on our financial statements.

      In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We believe that the adoption of this standard will have no material impact on our financial statements.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

      This Annual Report 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, including statements regarding the belief that 2003 will be a challenging year as the overall weak economic and industry conditions experienced in 2002 continue in 2003; the expectation that there will be little contribution to revenue from the sales of serial EEPROM products in 2003; our plan to grow our revenue in high performance mixed-signal products in 2003 compared to 2002; the expectation that the gross profit percentage will fluctuate from quarter to quarter as a result of changes in product mix, product costs and average selling prices; the plan to continue to invest in research and development in 2003, although at a lower absolute dollar level than in 2002 as we continue to monitor product development expenses and pare back ancillary engineering projects; the plan to begin generating revenues from products developed using the in-process research and development acquired from AIP toward the end of 2003; the expectation that interest income will decrease in 2003 compared to 2002 due to lower average cash and investment balances and, to a lesser extent, lower interest rates; the

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      Except for historical information, the matters discussed in this Annual Report on Form 10-K are forward-looking statements that are subject to certain risks and uncertainties that could cause the actual results to differ materially from those projected. Factors that could cause actual results to differ materially include the following: general economic conditions and conditions specific to the semiconductor industry; fluctuations in customer demand, including loss of key customers, order cancellations or reduced bookings; product mix; competitive factors such as pricing pressures on existing products and the timing and market acceptance of new product introductions (both by us and our competitors); our ability to have available an appropriate amount of low cost foundry production capacity in a timely manner; our foundry partners’ timely ability to successfully manufacture products for us using our proprietary technology; any disruptions of our foundry relationships; manufacturing efficiencies; the ability to continue effective cost reductions; currency fluctuations; the successful and timely development and introduction of new products and submicron processes; and the risk factors listed from time to time in our SEC reports, including but not limited to the “Factors Affecting Future Results” section following and Part I, Item 1. of this Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release or otherwise disclose the result of any revision to these forward-looking statements that may be made as a result of events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Factors Affecting Future Results

The risks described below are not the only ones facing our Company. Additional risks not presently known to us or that we currently believe are not material may also impair our business operations.

Our operating results fluctuate significantly, and an unanticipated decline in revenue may disappoint securities analysts or investors and result in a decline in our stock price.

      You should not use our past financial performance to predict future operating results. We have incurred net losses in three of the last four years. Our recent quarterly and annual operating results have fluctuated, and will continue to fluctuate, due to the following factors, all of which are difficult to forecast and many of which are out of our control: the cyclical nature of both the semiconductor industry and the markets addressed by our products, including the current severe business down cycle; competitive pricing pressures and related changes in selling prices; new product announcements and introductions of competing products by us or our competitors; market acceptance and subsequent design-in of new products; the near and long-term impact of terrorist attacks and incidents and any military response to those attacks, or a war with Iraq or other countries perceived as a threat by the United States government; unpredictability of changes in demand for, or in the mix of, our products; the timing of significant orders including the fact that the sales level in any specific quarter depends significantly on orders received during that quarter; the gain or loss of significant customers; the availability, timely deliverability and cost of products manufactured on our behalf by third-party suppliers; product obsolescence; lower of cost or market inventory adjustments; changes in the channels through which our products are distributed; exchange rate fluctuations; general economic, political and environmental-related conditions, such as natural disasters; difficulties in forecasting, planning and managing of inventory levels; and unanticipated research and development expenses associated with new product introductions.

The exit from a portion of our memory business has changed our business model and caused a reduction in our revenues.

      In the first quarter of 2001, we announced our plan to exit from offering stand-alone low-density serial EEPROM memory products. We were unable to secure a buyer for the business, particularly in light of the current weak economic conditions, and substantially completed our exit from that business in 2002.

      The transition out of the serial EEPROM memory business has reduced our revenues and we have become a smaller company with limited resources and a reduced workforce. We may not be able to effectively

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The selling prices for our products are volatile and have historically declined over the life of a product. In addition, the cyclical nature of the semiconductor industry produces fluctuations in our operating results.

      The semiconductor industry has historically been cyclical, characterized by wide fluctuations in product supply and demand. From time to time, the industry has also experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. Downturns are generally characterized by diminished product demand, production over-capacity and accelerated decline of average selling prices, and in some cases have lasted for more than one year. We are presently experiencing an economic downturn that is harming our business. Our success depends on a better supply and demand balance within the industry and the various electronics industries that use semiconductors, including networking, communications and industrial companies, returning to more normal buying patterns.

We do not typically enter into long-term contracts with our customers and we cannot be certain as to future order levels from our customers.

      The composition of our major customer base changes as the market demand for our customers’ products change. A small number of customers have accounted for a substantial portion of our sales. A reduction, delay, or cancellation of orders from a large customer could harm our business. The loss of, or reduced orders by, any of our key customers could result in a significant decline in our sales.

We depend on distributors and manufacturers’ representatives to generate a majority of our sales.

      Distributors serve as a channel of sale to many end users of our products. Our distributors and manufacturers’ representatives could discontinue selling our products at any time. The loss of any significant distributor or manufacturers’ representative could seriously harm our operating results by impairing our ability to sell our products.

Our backlog may not result in future revenue, which would seriously harm our business.

      Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. A reduction of backlog during any particular period, or the failure of our backlog to result in future revenue, could harm our business.

Our markets are subject to rapid technological change and, therefore, our success depends on our ability to develop and introduce new products.

      The markets for our products are characterized by rapidly changing technologies; evolving and competing industry standards; changing customer needs; frequent new product introductions and enhancements; increased integration with other functions; and rapid product obsolescence.

      To develop new products for our target markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to expand our technical and design expertise. In addition, we must have our products designed into our customers’ future products and maintain close working relationships with key customers in order to develop new products that meet their rapidly changing needs.

      We cannot assure you that we will be able to identify new product opportunities successfully, develop and bring to market new products at competitive costs, achieve design wins or respond effectively to new technological changes or product announcements by our competitors. Furthermore, we may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense. Failure in any of these areas could harm our business, operating results and financial condition.

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Our future success depends in part on the continued services of our key design, engineering, sales, marketing and executive personnel and our ability to identify, recruit and retain qualified personnel.

      There is significant competition for qualified personnel in the semiconductor industry, in particular for the highly skilled engineers involved in the design and development of our mixed-signal products. At times competition has been especially intense in Silicon Valley, where our design, research and development, and corporate headquarters are located. The failure to recruit and retain key design engineers or other technical and management personnel would likely harm our business.

Our dependence on third-party foundries to manufacture our products and on subcontractors to sort, assemble and test our products and ship our products to customers subjects us to a number of risks.

      We out-source all manufacturing operations. Our reliance on third-party foundries and subcontractors to manufacture, sort, assemble and test our products and to ship our products to customers involves the following significant risks:

	•	reduced control over delivery schedules and quality;
	•	the potential lack of adequate capacity during periods of strong demand;
	•	difficulties selecting and integrating new foundries and subcontractors;
	•	limited warranties by third-party manufacturers on products supplied to us; and
	•	potential increases in product costs due to capacity shortages and other factors.

      These risks may lead to a possible loss of sales, increased costs, delayed product delivery or loss of competitive advantage, which would harm our profitability and customer relationships. Additionally, as we shift manufacturing of existing products between foundries and third-party subcontractors, certain customers require requalification of such products prior to accepting delivery. Delays in customer qualification schedules or lack of qualification of such products could result in the loss of sales, which could seriously harm our operating results.

Our operating expenses are relatively fixed, and we order materials in advance of anticipated customer demand. Therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls.

      Our operating expenses are relatively fixed, and we therefore have limited ability to reduce expenses quickly in response to any revenue shortfalls. Consequently, our operating results will be harmed if our sales do not meet our revenue projections. Revenue shortfalls can occur for any of the following reasons: economic slowdowns in the markets we serve; significant pricing pressures that occur because of declines in selling prices over the life of a product; the reduction, rescheduling or cancellation of customer orders; and sudden shortages of raw materials or fabrication, sort, test or assembly capacity constraints that lead our suppliers to allocate available supplies or capacity to other customers which, in turn, harms our ability to meet our sales obligations.

      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 order materials and produce finished products in advance of anticipated customer demand. This advance ordering and production has resulted in, and may continue to result in, excess inventory levels or inventory write-downs if expected orders fail to materialize or prices decrease substantially.

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We presently have minimum wafer purchase commitments with a foundry that were made in exchange for a capacity commitment from them. Should demand for our products be less than the capacity commitment, we may be required to make payments for unused capacity which would cause our costs to increase.

Because our products typically have lengthy sales cycles, we may experience substantial delays between incurring expenses related to research and development and the generation of sales.

      Due to the length of the product design-in cycle, we usually require more than nine months to realize volume shipments after a customer first samples our product. We first work with customers to achieve a design win, which may take three 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 six months or longer. 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 products by our customers.

We face intense competition from companies with significantly greater financial, technical and marketing resources that could adversely affect our ability to increase sales of our products.

      We compete with major semiconductor companies such as Analog Devices, Atmel Corporation, Linear Technology Corporation and Maxim Integrated Products, that have substantially greater financial, technical, marketing, distribution, and other resources than we do and have their own facilities for the production of semiconductor components. In addition, our foundry partners have the right to develop and fabricate products based on our process technology.

From time to time, we may have to defend lawsuits in connection with the operation of our business.

      We are subject to litigation in the ordinary course of our business. If we do not prevail in any lawsuit which may occur we could be subject to significant liability for damages, our patents and other proprietary rights could be invalidated, and we could be subject to injunctions preventing us from taking certain actions. If any of the above occur, our business and financial position could be harmed.

Our cost of sales may increase if we are required to purchase additional manufacturing capacity in the future.

      To obtain additional manufacturing capacity in the future, we may be required to make deposits, equipment purchases and loans and enter into joint ventures, equity investments or technology licenses in or with wafer fabrication companies. These transactions could involve a commitment of substantial amounts of our capital and technology licenses in return for production capacity. We may be required to seek additional debt or equity financing in order to secure this capacity and we may not be able to obtain such financing.

Our ability to compete successfully will depend, in part, on our ability to protect our intellectual property rights, which we may not be able to do successfully.

      We rely on a combination of patents, trade secrets, copyright and mask work production laws and rights, nondisclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights. Our business, operating results and financial condition could be seriously harmed by the failure to be able to protect our intellectual property. Policing unauthorized use of our intellectual property, however, is difficult, especially in foreign countries. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation of this type can result in substantial costs and diversion of resources and can harm our business, operating results and financial condition regardless of the outcome of the litigation.

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If we or any of our foundries or third-party subcontractors is accused of infringing the intellectual property rights of other parties, we may become subject to time-consuming and costly litigation. If we lose or settle claims, we could suffer a significant negative impact on our business and be forced to pay royalties and damages.

      Third parties have and may continue to assert that our products infringe their proprietary rights, or may assert claims for indemnification resulting from infringement claims against us. Any such claims may cause us to delay or cancel shipment of our products or pay royalties and damages that could seriously harm our business, financial condition and results of operations. In addition, irrespective of the validity or the successful assertion of such claims, we could incur significant costs in defending against such claims.

      We have received notices claiming infringement of patents from third parties with respect to certain aspects of our processes and devices, and these matters are under investigation and review. Although patent holders typically offer licenses and we have entered into such license agreements in the past, we may not be able to obtain licenses on acceptable terms, and disputes may not be resolved without costly litigation.

Our business may suffer due to risks associated with international sales and operations.

      Sales outside of North America, based upon the location to which the product was shipped, accounted for approximately 64% of total net sales in 2002. Our international business activities are subject to a number of risks, any of which could impose unexpected costs on us that would have an adverse effect on our operating results. These risks include difficulties in complying with regulatory requirements and standards; tariffs and other trade barriers; costs and risks of localizing products for foreign countries; severe currency fluctuations and economic deflation; reliance on third parties to distribute our products; longer accounts receivable payment cycles; potentially adverse tax consequences; adverse economic impact of terrorist attacks and incidents and any military response to those attacks, or a war with Iraq or other countries perceived as a threat by the United States government and burdens of complying with a wide variety of foreign laws.

We may face interruption of production and services due to increased security measures in response to recent and potential future terrorist activities.

      Our business depends on the free flow of products and services through the channels of commerce. In response to terrorists’ activities and threats aimed at the United States, transportation, mail, financial and other services have at times been slowed or stopped altogether. Further delays or stoppages in transportation, mail, financial or other services, particularly any such delays or stoppages which harm our ability to obtain an adequate supply of wafers and products from our foreign foundries or contractors, could harm our business, results of operations and financial condition. Furthermore, we may experience an increase in operating costs, such as costs for transportation, insurance and security as a result of the activities and potential activities. We may also experience delays in receiving payments from customers that have been affected by the terrorist activities and potential activities. The United States economy in general is being adversely affected by terrorist activities and potential terrorist activities. The economic downturn we are currently experiencing is adversely impacting our results of operations, and may impair our ability to raise capital or otherwise adversely affect our ability to grow our business. Moreover, we cannot determine whether other attacks may occur in the future and the effects of such attacks on our business could be severe.

Our November 2001 debt financing substantially increased our indebtedness which may make it more difficult to obtain financing in the future and cause our business to suffer.

      As a result of our November 2001 sale of notes and warrants, we incurred $35 million of additional indebtedness. The level of our indebtedness, among other things, could make it difficult for us to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes; limit our flexibility in planning for, or reacting to changes in, our business; and make us more vulnerable in the event of a downturn in our business. If any of these risks materialize, we may be unable to successfully execute our business plan.

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Our business could be harmed if the net proceeds from the November 2001 debt financing are used ineffectively.

      We have flexibility in applying the net proceeds of the debt financing. We intend to use the proceeds of this offering for working capital and general corporate purposes. We may also use the proceeds for acquisitions, including acquisitions of intellectual property and design teams, such as our April 2002 acquisition of AIP. In addition, we may also use proceeds from the debt financing for research, development, sales and marketing and capital expenditures. The failure to apply these net proceeds effectively could harm our business, results of operations and financial condition.

The conversion of our outstanding convertible debt and exercise of warrants issued in connection with our convertible debt may result in dilution to holders of our common stock and a reduction in the price of our common stock.

      In November 2001 we issued $35 million in convertible notes and related warrants. The convertible notes enable the holders to convert principal amounts owed under the notes into an aggregate of approximately 3.1 million shares of common stock at a conversion price of $11.22 per share. In connection with the issuance of the convertible notes we also issued warrants for the purchase of approximately one million shares of common stock that are exercisable at a price of $12.24 per share. If the price of our common stock exceeds the conversion price of the notes and exercise price of the warrants, holders of the notes and warrants may convert the debt and exercise the warrants. We may force the conversion of all or a portion of the notes and warrants in certain circumstances. Our issuance of common stock at prices of $11.22 per share upon conversion of the debt and $12.24 per share upon exercise of the warrants may result in dilution to other holders of common stock and may cause the price of our common stock to fall. In addition, if note and warrant holders elect to sell the common stock issued upon the conversion of the debt and exercise of the warrants, the price of our common stock may fall.

We may require additional capital in order to bring new products to market, and the issuance of new equity securities will dilute your investment in our common stock.

      To implement our strategy of diversified product offerings, we need to bring new products to market. Bringing new products to market and ramping up production requires significant working capital. We may sell additional shares of our stock or seek additional borrowings or outside capital infusions. We cannot assure you that such financing options will be available on terms acceptable to us, if at all. In addition, if we issue shares of our common stock, our shareholders will experience dilution of their investment.

Changes in stock option accounting rules may adversely impact our operating results prepared in accordance with generally accepted accounting principles.

      Technology companies like ours have a history of using broad based employee stock option programs to hire, incentivize and retain our workforce in a competitive marketplace. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, allows companies the choice of either using a fair value method of accounting for options which would result in expense recognition for all options granted, or use an intrinsic value method, as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method. We have elected to apply APB 25 and accordingly we generally do not recognize any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant.

      On March 12, 2003, the Financial Accounting Standards Board (FASB) announced its plans to re-deliberate the appropriate accounting for employee stock options with a goal to have one standard applicable to all companies. The FASB announced its goal to have the new standard become effective sometime in 2004. If the FASB were to require expensing of employee stock options by all companies, our results of operations prepared in accordance with generally accepted accounting principles would be adversely impacted.

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Business interruptions could harm our business.

      Our operations and those of our foundries and other manufacturing subcontractors are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. Our facility in the State of California may be subject to electrical blackouts due to a shortage of available electrical power. If these blackouts were to occur, they could disrupt our operations. Business interruption insurance may not provide protection due to the deductible periods or be enough to compensate us for losses that may occur. Additionally, we have been unable to obtain earthquake insurance of reasonable costs and limits.

      We do not use derivative financial instruments in our investment portfolio. We have an investment portfolio of fixed income securities that are classified as “available-for-sale securities.” These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. We attempt to limit this exposure by investing primarily in short-term securities. Due to the short duration and conservative nature of our investment portfolio a movement of 10% by market interest rates would not have a material impact on our operating results and the total value of the portfolio over the next fiscal year.

      We are exposed to risks associated with foreign exchange rate fluctuations due to our international manufacturing and sales activities. We generally have not hedged currency exposures. These exposures may change over time as business practices evolve and could negatively impact our operating results and financial condition. All of our sales are denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and therefore reduce the demand for our products. Such a decline in the demand could reduce sales and/or result in operating losses.

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XICOR, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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XICOR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

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XICOR, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY