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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 30, 2003

OR

For the transition period from           to        .

Commission File Number 0-9653

XICOR, INC.

Registrant’s telephone number, including area code: (408) 432-8888

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [  ] NO [X]

NUMBER OF SHARES OUTSTANDING AT APRIL 21, 2003
26,810,943

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XICOR, INC.

FORM 10-Q

QUARTER ENDED MARCH 30, 2003

INDEX

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Part I: FINANCIAL INFORMATION

Item 1. Financial Statements.

XICOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)

See accompanying notes to condensed consolidated financial information

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XICOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)

See accompanying notes to condensed consolidated financial information

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XICOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

See accompanying notes to condensed consolidated financial information

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XICOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 – Interim financial information:

In the opinion of management, all adjustments necessary for a fair statement of the results of the interim periods presented (consisting only of normal recurring adjustments) have been included. These financial statements, notes and analyses should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission.

Note 2 – Net income (loss) per share and comprehensive net income (loss):

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed using the weighted average number of common shares and all dilutive potential common shares outstanding. Outstanding options to purchase 7.3 million and 5.0 shares of common stock at March 30, 2003 and March 31, 2002, respectively, were excluded from the earnings per share (EPS) computation for the three months ended March 30, 2003 and March 31, 2002 as they were anti-dilutive.

The net income (loss) for the periods reported also represented the comprehensive income (loss) for such periods.

Note 3 – Balance sheet components:

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Accounts receivable:

Accounts receivable at March 30, 2003 and December 31, 2002 are presented net of an allowance for doubtful accounts of $500,000.

Goodwill and intangibles:

At March 30, 2003 and December 31, 2002, goodwill resulting from the April 2002 acquisition of Analog Integration Partners LLC (AIP) amounted to $10.8 million. The 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 of circumstances have occurred indicating that goodwill might be impaired.

Purchased intangible assets related to the acquisition of AIP were as follows (in thousands):

Amortization of purchased intangible assets was $0.2 million in the first quarter of 2003. Amortization of purchased intangible assets is expected to be $0.9 million in each of 2003 and 2004 and $0.3 million in 2005.

Restructuring:

In the three months ended March 30, 2003, we utilized $0.4 million of the restructuring accrual for exit costs consisting primarily of rent after exiting the facilities we vacated in the fourth quarter of 2002 and $0.2 million of the restructuring accrual for severance costs to terminated employees. At March 30, 2003, the restructuring accrual of $0.1 million consisted primarily of severance costs payable to terminated employees. We expect to complete these restructuring activities in 2003.

The following table summarizes the restructuring reserve activity for the first quarter of 2003 (in thousands):

Warranties:

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 accrue for warranty costs based on historical trends in product failure rates and the expected costs to

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provide warranty replacements. The following table summarizes the activity related to the product warranty liability during the three months ended March 30, 2003 (in thousands).

As is customary in our industry, we indemnify our customers and selected business partners in connection with certain intellectual property infringement claims with respect to our products. Historically, we have not incurred significant costs related to such indemnities.

Note 4 – Accounting for stock options:

In accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), we apply Accounting Principles Board Opinion No. 25 as interpreted in Financial Accounting Standards Board Interpretation No. 44 for purposes of accounting for employee stock options. Because the exercise prices of our employee stock options equal the market price of the underlying stock on the date of grant, no compensation expense at time of grant is recognized in the financial statements. The following table summarizes the effect on net income and earnings per share if we applied the fair value provisions of SFAS 123 to stock-based employee compensation.

Note 5 – Subsequent Events

In April 2003, we repurchased all $35 million of our outstanding 5.5% convertible subordinated notes for total consideration of $27.5 million or 79 cents on each dollar of face value. The consideration consisted of $14.4 million in cash and $13.1 million of common stock (2,888,560 shares of Xicor common stock valued at the closing price on the respective repurchase dates). The repurchase is expected to result in a one-time gain of approximately $2.8 million that will be

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included as other income in our second quarter 2003 results. The repurchase of the notes will significantly reduce our interest expense, and to a lesser extent, our interest income commencing in the second quarter of 2003. Warrants to purchase 922,461 shares of our common stock at an exercise price of $12.24 per share, originally issued in connection with the convertible subordinated notes, remain outstanding subsequent to the completion of the note repurchase.

Note 6. - Recent Accounting Pronouncements

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 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.

Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the accompanying Quarterly Financial Information and Notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2002. The results of operations for the three months ended March 30, 2003 are not necessarily indicative of results to be expected in future periods. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially from those contained in the forward-looking statements due to a variety of factors, including, but not limited to, the factors identified in the “Factors Affecting Future Results” section below. Also see “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995” below.

RESULTS OF OPERATIONS

Sales

Sales for the first quarter of 2003 were $9.6 million. Sales for the first quarter of 2002 were $10.0 million and included a benefit of $0.4 million resulting from putting all our global distribution partners on our fiscal calendar. This change in 2002 was made in connection with

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the realignment of our distribution channel to better serve fulfillment and demand creation efforts.

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

Mixed-signal product sales increased 44% in the first quarter of 2003 compared to the first quarter of 2002 primarily due to higher unit sales of data conversion products used to control the LCD brightness in cellular phone handsets and higher unit sales of power management products. Contributing to a lesser extent were engineering revenues generated by the Signal Processing Group which was established in the second quarter of 2002 with the acquisition of AIP.

Mixed-signal product sales also increased sequentially from $6.6 million in the fourth quarter of 2002 to $6.9 million in the first quarter of 2003. Sequential increases in power management product sales and engineering revenues were partially offset by lower data conversion product sales to a cellular handset customer due to their delay of the product delivery schedule.

As shown in the table below, memory product sales declined 49% in the three months ended March 30, 2003 compared to the comparable prior year period (in thousands):

Parallel EEPROM product sales decreased year over year principally due to lower unit shipments as the overall market for these products contracted and weak economic conditions persisted. Serial EEPROM product sales have declined, and are expected to continue to decline, as we have substantially exited from that business.

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Cost of Sales and Gross Profit

The first quarter 2003 gross profit percentage was 51% compared to 50% in the first quarter of 2002. The gross profit percentage in the first quarter of 2002 benefited by $0.6 million or six percentage points from the quarterly amortization of the deferred gain on the sale of the fab assets, which subsequently ended in the third quarter of 2002. The gross profit percentage in the first quarter of 2003 benefited from lower manufacturing overhead expenses compared to the first quarter of 2002, which offset the impact of no longer receiving a benefit from the amortization of the deferred gain on the sale of the fab assets. Additionally, the gross profit percentage for the first quarter of 2003 improved compared to the first quarter of 2002 due to a product mix that consisted of increased sales of mixed-signal products and lower sales of serial EEPROM products, partially offset by a decline in the gross profit percentage of parallel sales resulting from a change in the product mix towards lower density, commodity parallel parts. The net benefit to the gross profit percentage resulting from the sale of products that had previously been written down was less than $0.1 million in the first quarter of 2003 and less than $0.2 million in the first quarter of 2002.

The gross profit percentage also improved sequentially from 48% in the fourth quarter of 2002 to 51% in the first quarter of 2003 primarily due to an increase in mixed-signal product sales and an improvement in the mixed-signal gross margin percentage due to product mix. The gross profit percentage is expected to fluctuate from quarter to quarter as a result of changes in product mix, product costs and average selling prices.

Research and Development

Research and development expenses amounted to $2.9 million or 30% of sales in the first quarter of 2003 compared to $3.0 million or 30% of sales in the first quarter of 2002. The absolute dollar amount of research and development expenses in the first quarter of 2003 was relatively consistent with the first quarter 2002 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).

Selling, General and Administrative

Selling, general and administrative expenses amounted to $2.5 million or 26% of sales in the first quarter of 2003 compared to $3.0 million or 30% of sales in the first quarter of 2002. The decrease in the dollar amount of selling, general and administrative expenses in the first quarter of 2003 compared to the comparable 2002 period is primarily due to reduced personnel expenses of $0.2 million related to headcount reductions and spending controls.

Restructuring

In 2002, due to the ongoing weak industry conditions, we implemented two 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. In the fourth quarter of 2002, we notified 16 employees that their employment would cease which resulted in a $0.2 million restructuring charge for severance-related costs.

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Additionally, 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 to our corporate headquarters. The vacating of these facilities 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 future rent payable for periods subsequent to vacating the facilities.

In the three months ended March 30, 2003, we utilized $0.4 million of the restructuring accrual for exit costs from the aforementioned facilities and $0.2 million of the restructuring accrual for severance costs to terminated employees. At March 30, 2003, the restructuring accrual of $0.1 million consisted primarily of severance costs payable to terminated employees.

Acquisition

In the second quarter of 2002 we established our Signal Processing Group, with the acquisition of Analog Integration Partners, LLC (AIP), a privately held company that designs and develops high-performance analog signal processing and data conversion circuits. We allocated the $1.8 million of the purchase price related to AIP’s engineering effort focused on developing the analog front end for the high-end flat panel display market using a standard digital 0.18 micron CMOS process to in-process research and development expense. 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. As of the acquisition date, the estimated cost to complete the project was approximately $3 million. The project is on schedule, and revenues related to products developed under this project are planned to begin toward the end of 2003.

Other Income and Expense

Interest expense in the first quarter of 2003 and 2002 included $788,000 and $782,000, respectively, of interest expense and amortization resulting from our November 2001 issuance of $35 million of 5.5% convertible subordinated notes and warrants. In April 2003, we repurchased all of the outstanding convertible subordinated notes, which will substantially reduce our interest expense and amortization commencing in the second quarter of 2003. The interest expense and related amortization associated with the notes and warrants ceased with the repurchase of the notes, and is expected to amount to $110,000 in the second quarter of 2003.

Interest and other income of $640,000 for the quarter ended March 31, 2002, included a $400,000 benefit associated with the sale of our wafer fabrication facility in 2000 and $240,000 of interest income. First quarter 2003 interest income of $143,000 decreased compared to the first quarter of 2002 interest income of $240,000 primarily as a result of a decrease in the average balance invested and, to a lesser extent, lower interest rates. The average balance invested, and corresponding interest income, will decrease sequentially in the second quarter of 2003 compared

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to the first quarter of 2003 due to the repurchase of all of our outstanding convertible subordinated notes in April 2003.

Taxes

No taxes were provided in 2003 or 2002 due to the net loss. Net deferred tax assets at March 30, 2003 and December 31, 2002 were fully reserved because of the uncertainty regarding the ultimate realization of these assets.

LIQUIDITY AND CAPITAL RESOURCES

At March 30, 2003, we had $37.2 million in cash, cash equivalents and short-term and long-term investments compared to $38.4 million at the end of 2002. During the three months ended March 30, 2003, we used $1.1 million of cash in operating activities (including $0.6 million associated with restructuring activities). Cash used in investing activities was $2.1 million in the first quarter of 2003, consisting of net investments in cash-based, available for sale securities of $2.0 million and $0.1 million for equipment purchases. We generated $0.1 million of net cash from financing activities in the first quarter of 2003, consisting of $0.3 million of cash generated from the issuance of common stock under employee stock plans, partially offset by $0.2 million of cash used to repay long-term capital lease obligations.

Subsequent to the first quarter of 2003, we used $14.4 million of cash as part of the consideration paid to repurchase all of our outstanding convertible subordinated notes and $0.8 million of cash for the related accrued interest. Capital expenditures for 2003 are currently planned at approximately $3.6 million and are primarily related to test and product design equipment. At March 30, 2003, we had entered into commitments for equipment purchases aggregating less than $0.5 million. At March 30, 2003 our principal source of liquidity was cash, cash equivalents and short-term and long-term investments. Management believes that our existing sources of liquidity will be adequate to support our activities for the next twelve months.

RECENT ACCOUNTING PRONOUNCEMENTS

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 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

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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 Quarterly 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 without limitation the expectation of a continuing decline in Serial EEPROM product sales; 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 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 expense and related amortization will be substantially reduced due to the repurchase of our outstanding convertible subordinated notes in April 2003; the expectation that interest income will decrease in the second quarter of 2003 compared to the first quarter of 2003 principally due to lower average balance invested; the projection that 2003 capital expenditures will approximate $3.6 million; and the expectation that existing sources of liquidity will be adequate to support operations for the next twelve months.

Forward-looking statements 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 our Annual Report on Form 10-K for the year ended December 31, 2002. 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.

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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; 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.

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 and potentially impair the $10.8 million assigned to goodwill.

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.

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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.

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.

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 to subcontractors located in Asia and Europe. 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:

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reduced control over delivery schedules and quality;

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	•		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.

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

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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 occurs, 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

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and diversion of resources and can harm our business, operating results and financial condition regardless of the outcome of the litigation.

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 62% of total net sales in the first quarter of 2003. 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; and burdens of complying with a wide variety of foreign laws.

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 use our limited resources to increase new product development and build our mixed-signal product business. This could cause a further decline in our revenues.

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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 using 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.

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. 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.

Item 3.         Quantitative and Qualitative Disclosures About Market Risk

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

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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.

Item 4.           Controls and Procedures.

(a)    Evaluation of disclosure controls and procedures.

Our chief executive officer and our chief financial officer, after evaluating our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-14(c) and 15-d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this Quarterly Report on Form 10-Q have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b)    Changes in internal controls.

Subsequent to the Evaluation Date, there were no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken.

PART II:       OTHER INFORMATION

Item 6.           Exhibits and Reports on Form 8-K.

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SIGNATURES

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

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CERTIFICATIONS

I, Louis DiNardo, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Xicor, Inc.;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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I, Geraldine N. Hench, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Xicor, Inc.;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  May  12, 2003	By:/s/Geraldine N. Hench
	Geraldine N. Hench Vice President, Finance and Administration

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EXHIBIT INDEX