IXYS CORP /DE/ - 10-Q Quarterly Report

3540 BASSETT STREET
SANTA CLARA, CALIFORNIA 95054-2704
(Address of principal executive offices and Zip Code)

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

THE NUMBER OF SHARES OF THE REGISTRANT’S COMMON STOCK, $0.01 PAR VALUE, OUTSTANDING AS OF NOVEMBER 10, 2003, WAS 32,742,971.


PART I — FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
	CONDENSED CONSOLIDATED BALANCE SHEETS	3
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	4
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	5
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	6
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	28
ITEM 4.	CONTROLS AND PROCEDURES	28
PART II – OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	31
ITEM 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS	32
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	32
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	32
ITEM 5.	OTHER INFORMATION	32
ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K	32
SIGNATURES		33
EXHIBIT INDEX

IXYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)


			September 30, 2003			March 31, 2003

			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents			$	39,595		$	40,094
Restricted cash				2,471			2,748
Accounts receivable, net of allowance for doubtful accounts of $2,847 at September 30, 2003 and $3,169 at March 31, 2003				26,929			21,475
Inventory				52,911			49,162
Prepaid expenses and other current assets				1,146			943
Deferred income taxes				10,285			10,285

		Total current assets		133,337			124,707
Plant and equipment, net				26,362			28,715
Goodwill				23,804			21,417
Other assets				7,547			5,655
Deferred income taxes				3,106			2,563

		Total assets	$	194,156		$	183,057

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capitalized lease obligations			$	3,168		$	3,238
Current portion of notes payable to bank				803			700
Accounts payable				13,919			11,177
Accrued expenses and other liabilities				16,758			14,167

		Total current liabilities		34,648			29,282
Capitalized lease obligations, net of current portion				3,608			4,887
Other liabilities				159			155
Pension liabilities				10,815			9,924

	Total liabilities			49,230			44,248

Commitments and contingencies (Note 11)
Stockholders’ equity
Preferred stock, $0.01 par value:
Authorized: 5,000,000 shares; none issued and outstanding				—			—
Common stock, $0.01 par value:
Authorized: 80,000,000 shares; 32,834,139 shares issued and outstanding at September 30, 2003 and 31,957,182 shares issued and outstanding at March 31, 2003				328			320
Deferred compensation				(24	)		(26	)
Additional paid-in capital				149,931			144,835
Notes receivable from stockholders				(913	)		(913	)
Accumulated deficit				(5,983	)		(6,318	)
Less cost of treasury stock: 95,302 shares at September 30, 2003 and at March 31, 2003				(447	)		(447	)
Accumulated other comprehensive income				2,034			1,358

	Total stockholders’ equity			144,926			138,809

Total liabilities and stockholders’ equity			$	194,156		$	183,057

The accompanying notes are an integral part of these condensed consolidated financial statements.

IXYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)


		Three Months Ended						Six Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

		(unaudited)						(unaudited)
Net revenues		$	42,926		$	35,311		$	83,022		$	62,748
Cost of goods sold			31,689			26,079			59,444			47,141

	Gross profit		11,237			9,232			23,578			15,607
Operating expenses:
Research, development and engineering			3,855			3,629			7,889			5,815
Selling, general and administrative			6,825			7,517			13,314			12,722
Restructuring charges			—			750			—			750

	Total operating expenses		10,680			11,896			21,203			19,287

Operating income (loss)			557			(2,664	)		2,375			(3,680	)
Interest income			174			239			286			442
Interest expense			(41	)		(32	)		(77	)		(71	)
Other expense, net			(848	)		(1,205	)		(2,059	)		(2,557	)

Income (loss) before income taxes			(158	)		(3,662	)		525			(5,866	)
Benefit from (provision for) income tax			49			227			(190	)		1,013

Net income (loss)		$	(109	)	$	(3,435	)	$	335		$	(4,853	)

Net income (loss) per share—basic		$	(0.00	)	$	(0.11	)	$	0.01		$	(0.16	)

Weighted average shares used in per share calculation - basic			32,213			31,842			32,051			29,931

Net income (loss) per share—diluted		$	(0.00	)	$	(0.11	)	$	0.01		$	(0.16	)

Weighted average shares used in per share calculation - diluted			32,213			31,842			33,061			29,931

The accompanying notes are an integral part of these condensed consolidated financial statements.

IXYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.


		Six Months Ended
		September 30,

		2003			2002

		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income		$	335		$	(4,853	)
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization			5,390			2,564
Provision for doubtful accounts			1,456			732
Write-down of excess and obsolete inventory			62			87
Gain on foreign currency transactions			(560	)		(709	)
Deferred income taxes			(237	)		2,030
Changes in operating assets and liabilities:
	Accounts receivable		(5,323	)		(1,441	)
	Inventories		(1,634	)		2,423
	Prepaid expenses		(198	)		(1,139	)
	Other assets		(429	)		(1,064	)
	Accounts payable		(578	)		1,892
	Accrued expenses and other liabilities		2,403			(788	)
	Pension liabilities		1,186			202

Net cash provided by (used in) operating activities			1,873			(64	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash			277			(9	)
Net cash acquired in acquisition of Clare, Inc.			—			7,905
Net cash acquired in acquisition of Microwave Technology, Inc.			143			—
Purchase of plant and equipment			(1,830	)		(131	)

Net cash provided by (used in) investing activities			(1,410	)		7,765

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital lease obligations			2,570			—
Principal payments on capital lease obligations			(4,381	)		(218	)
Proceeds from notes payable from bank			100			—
Proceeds from exercise of options			482			110
Proceeds from issuance of common stock			—			125

Net cash provided by (used in) financing activities			(1,229	)		17

Effect of foreign exchange rate fluctuations on cash and cash equivalents			267			(650	)

Net increase (decrease) in cash and cash equivalents			(499	)		7,068
Cash and cash equivalents at beginning of period		$	40,094		$	32,111

Cash and cash equivalents at end of period		$	39,595		$	39,179

The accompanying notes are an integral part of these condensed consolidated financial statements.

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The condensed consolidated financial statements include the accounts of IXYS Corporation (“IXYS” or the “Company”) and its wholly-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most difficult judgments include: assessment of recoverability of goodwill, property, plant and equipment, valuation of inventory, and the recognition and measurement of income tax assets and liabilities. All significant intercompany transactions have been eliminated in consolidation. All adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been made. It is recommended that the interim financial statements be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2003 contained in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of the operating results expected for later quarters or the full fiscal year. Certain reclassifications have been made to the prior period’s condensed consolidated financial statements to conform to the current period’s presentation. Such reclassifications had no effect on previously reported results of operations or retained earnings.

The Company generally sells products with a limited warranty of product quality and a limited indemnification of customers against intellectual property infringements claims related to the Company’s products. The Company accrues for known warranty and indemnification issues if a loss is probable and can be reasonably estimated, and accrues for estimated but incurred and unidentified issues based on historical activity. Actual warranty costs incurred have not materially differed from those accrued. IXYS’s warranty policy is effective for shipped products which are considered defective or fail to meet the product specifications. IXYS analyzes historical claims compared to historical revenue in evaluating the adequacy of the warranty allowance. Warranty costs are reflected in the income statement as a cost of revenues. There were no material changes in the warranty provision for the six month period ended September 30, 2003.

The Company has a stock option plan under which officers, key employees and non-employee directors may be granted options to purchase shares of the Company’s authorized but unissued common stock. Options granted by IXYS currently expire no later than 10 years from the grant date. Currently, options granted to existing and newly hired employees generally vest in increments over four years from the date of grant. In addition to the stock option plans, the Company also has an Employee Stock Purchase Plan, under which eligible employees may purchase shares of IXYS’s common stock at 85% of fair market value at specific, predetermined dates.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an Amendment of FASB Statement No. 123” (“SFAS No. 148”). SFAS No. 148 provides alternative methods of transition for companies making a voluntary change to fair value-based accounting for stock-based employee compensation. IXYS continues to account for its stock option plans under the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Effective for interim periods beginning after December 15, 2002, SFAS No. 148 also requires disclosure of pro-forma results on a quarterly basis as if the company had applied the fair value recognition provisions of SFAS No. 123.

As the exercise price of all options granted under these plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation, other than acquisition-related compensation, is recognized in net income. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended, to options granted under the stock option plans and rights to acquire stock granted under the Company’s Employee Stock Purchase Plan, collectively called “options.” For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes option pricing model and amortized ratably to expense over the options’ vesting periods. Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the employee may be significantly different.


		Three Months Ended						Six Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

		(unaudited)						(unaudited)
Net income (loss) as reported		$	(109	)	$	(3,435	)	$	335		$	(4,835	)
Less: Total stock based compensation expense determined under fair value based method for all awards to employees			(907	)		(836	)		(1,737	)		(1,640	)

Pro forma net income (loss)		$	(1,016	)	$	(4,271	)	$	(1,402	)	$	(6,475	)

Basic net income (loss) per share:
	As reported	$	(0.00	)	$	(0.11	)	$	0.01		$	(0.16	)

	Pro forma	$	(0.03	)	$	(0.13	)	$	(0.04	)	$	(0.22	)

Diluted net income (loss) per share:
	As reported	$	(0.00	)	$	(0.11	)	$	0.01		$	(0.16	)

	Pro forma	$	(0.03	)	$	(0.13	)	$	(0.04	)	$	(0.22	)

SFAS No. 123 requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options.

On September 5, 2003, IXYS completed its acquisition of Microwave Technology, Inc. (“MwT”), a manufacturer of discrete gallium arsenide field effect transistors (“FETS”) based in the United States. The acquisition of MwT was intended to expand the Company’s line of radio frequency, or RF, products by adding MwT’s gallium arsenide semiconductor products. In connection with the acquisition, (a) approximately 767,000 shares of IXYS common stock were issued, and (b) options exercisable for approximately 26,000 shares of IXYS common stock were assumed. The estimated total purchase price is as follows (in thousands):

IXYS is in the process of determining the fair values of identifiable intangible assets acquired. The following presentation is subject to revision based on the final outcome of the Company’s determination of the purchase price allocation. IXYS has allocated the preliminary purchase price to identifiable intangible assets, tangible assets, liabilities assumed and goodwill as follows (in thousands):


	Current assets	$	2,182
	Plant and equipment		91

			2,273
Amortizable intangible assets:					Estimated useful lives
	Core technology		300			5 to 6 years
	Existing technology		1,300			5 to 6 years
	Contract and related customers’ relationships		400			5 to 6 years
	Tradename		200			5 to 6 years
	Backlog		200			3 to 6 months

			2,400
Total assets acquired			4,673
Fair value of liabilities assumed			(2,415	)

	Net assets acquired		2,258
Goodwill			2,368

Total purchase		$	4,626

The following unaudited pro forma combined amounts give effect to the acquisition of MwT as if the acquisition had occurred on April 1, 2002. On a pro forma basis, the results of operations of MwT for the three and six-month periods ended September 30, 2003 and 2002 are consolidated with IXYS results for the three and six-month periods ended September 30, 2003 and 2002. The pro forma amounts do not purport to be indicative of what would have occurred had the acquisition been made as of the beginning of the period or of results which may occur in the future.


	Three Months Ended						Six Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

	(unaudited)						(unaudited)
Revenue	$	43,783		$	36,896		$	85,406		$	65,515
Net income (loss)		(2,100	)		(3,458	)		(1,797	)		(5,502	)
Net income (loss) per share - basic		(0.06	)		(0.11	)		(0.07	)		(0.18	)
Shares used in per share calculation		32,740			32,642			32,715			30,731

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” 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 provision of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. In October 2003, the FASB deferred the implementation date by which all public companies must apply FIN 46. The FASB agreed to provide this deferral to allow time for certain implementation issues to be addressed through the issuance of a modification to FIN 46, and indicated that it expects to issue this modification in final form prior to the end of 2003. The Company has adopted FIN 46, as amended, and the adoption of this standard had no material impact on its results of operations and financial condition.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 of Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. This standard is effective for contracts entered into or modified after June 30, 2003. The

Company has adopted SFAS No. 149 and the adoption of this standard had no material impact on its results of operations and financial condition.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The Company has adopted SFAS No. 150 and the adoption of this standard had no material impact on its financial position or results of operations.

Basic earnings per share (“EPS”) is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of other securities into common stock. Dilutive net loss per share does not include outstanding options to purchase common stock, because their effect is anti-dilutive. Basic and diluted earnings per share are calculated as follows (in thousands, except per share amounts):

Basic and diluted earnings per share are calculated as follows (in thousands, except per share amounts):


		Three Months Ended						Six Months Ended
		September 30,						September 30,

		2003			2002			2003		2002

		(unaudited)						(unaudited)
BASIC:
	Weighted, average shares outstanding for the period		32,213			31,842			32,051		29,931

	Net income (loss) available for common stockholders	$	(109	)	$	(3,435	)	$	335	$	(4,853	)

	Net income (loss) available for common stockholders per share	$	(0.00	)	$	(0.11	)	$	0.01	$	(0.16	)

DILUTED:
	Weighted, average shares outstanding for the period		32,213			31,842			32,051		29,931
	Net effective dilutive stock options and warrants based on treasury stock method using average market price		—			—			1,010		—

	Shares used in computing per share amounts		32,213			31,842			33,061		29,931

	Net income (loss) available for common stockholders	$	(109	)	$	(3,435	)	$	335	$	(4,853	)

	Net income (loss) per share available for common stockholders	$	(0.00	)	$	(0.11	)	$	0.01	$	(0.16	)

	Total common stock equivalents excluded for the computation of earnings per share as their effect was anti-dilutive		5,470			4,953			525		4,953

IXYS operates in a single industry segment comprised of semiconductor products used primarily in power-related applications such as controlling energy in motor drives and power conversion (including uninterruptible power supplies and switch mode power supplies and medical electronics). IXYS’s sales by major geographic area (based on destination) were as follows:

Sales in North America consist primarily of sales in the United States. Sales in Europe and Middle East consist primarily of sales in Germany, UK and Italy. Sales in Asia Pacific consist primarily of sales in China and Korea.

IXYS’s foreign operations consist of those of its subsidiaries, IXYS GmbH and IXYS Berlin in Germany, IXYS CH in Switzerland and Westcode in the United Kingdom. Sales and net income of IXYS CH, which was established in fiscal year 2002, were not significant and are combined with German operations. The following tables (in thousands) summarize the sales and net income of IXYS’s U.S. and foreign operations, revenue by product and long-lived assets by country:


		Three Months Ended						Six Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

		(unaudited)						(unaudited)
Net revenue:
Foreign		$	21,421		$	16,149		$	42,119		$	30,981
U.S.			21,505			19,162			40,903			31,767

	Total	$	42,926		$	35,311		$	83,022		$	62,748

Net income (loss):
Foreign		$	1,025		$	457		$	2,940		$	(563	)
U.S.			(1,134	)		(3,892	)		(2,605	)		(4,290	)

	Total	$	(109	)	$	(3,435	)	$	335		$	(4,853	)

Revenue by product:
	Power MOS transistors	$	14,003		$	10,589		$	26,382		$	20,744
	Bipolar products		18,357			15,125			37,833			29,563
	ICs and others		10,566			9,597			18,807			12,441

	Total	$	42,926		$	35,311		$	83,022		$	62,748

Tangible long-lived assets by geographical locations are as follows (in thousands):

On June 22, 2000, International Rectifier Corporation filed an action for patent infringement against IXYS in the United States District Court for the Central District of California, alleging that certain of IXYS’s products sold in the United States infringe U.S. patents owned by International Rectifier. International Rectifier’s complaint against IXYS contended that IXYS’s alleged infringement of International Rectifier’s patents has been and continues to be willful and deliberate. Subsequently, the U.S. District Court decided that certain of IXYS’s power MOSFETs and IGBTs infringe certain claims of each of three International Rectifier U.S. patents.

On May 21, 2002, the U.S. District Court entered a permanent injunction, which became effective June 5, 2002, barring IXYS from making, using, offering to sell or selling in, or importing into, the United States, MOSFETs (including IGBTs) covered by the subject patents. On August 2, 2002, a three-judge panel of the United States Court of Appeals for the Federal Circuit granted IXYS’s motion to stay, pending appeal, the permanent injunction issued by the U.S. District Court. In granting this motion, the panel stated, among other things, that IXYS had shown a strong likelihood of success regarding its challenge to the U.S. District Court’s finding

that IXYS infringes the International Rectifier patents. IXYS’s appeal from the award of permanent injunction, including the finding of infringement upon which it is based, was argued on July 7, 2003 and the outcome is pending.

On August 5, 2002, the U.S. District Court entered its ruling that International Rectifier should be awarded damages of $9.1 million for IXYS’s alleged infringement of International Rectifier’s patents. In addition, the U.S. District Court ruled that IXYS had been guilty of willful infringement. Subsequently, the U.S. District Court increased the damages to a total of $27.2 million, plus attorney fees. IXYS has appealed the damages award. The United States Court of Appeals for the Federal Circuit has granted IXYS’s motion to stay the damages award pending disposition of the related appeals and has suspended briefing of IXYS’s appeal from the damages award pending outcome of the appeals argued on July 7, 2003.

In light of the August 2, 2002 decision by the Federal Circuit, IXYS believes its defenses to the various claims and its arguments on appeal are meritorious. However, there can be no assurance of a favorable outcome. In the event of an adverse outcome, damages or injunctions awarded by the U.S. District Court would be materially adverse to IXYS’s financial condition and results of operations. Management has not accrued any amounts in the accompanying balance sheets for the International Rectifier matter described above.

International Rectifier also contends that IXYS’s importation into the United States of certain IXYS-designed MOSFET products manufactured for IXYS by Samsung Electronics Co., Ltd. is in violation of a consent decree and injunction entered against Samsung in another lawsuit to which IXYS was not a party. International Rectifier sought enforcement of the Samsung injunction against IXYS and Samsung, a contempt citation and a fine. On March 19, 2002, the U.S. District Court decided, among other things, that IXYS is bound by, and IXYS’s devices are not excepted from, the Samsung injunction. On June 12, 2002, the Federal Circuit stayed the application of the Samsung injunction to IXYS, stating that IXYS had shown a likelihood of success on appeal. This appeal was heard on July 7, 2003. On October 15, 2002, the District Court found contempt against Samsung as its “final ruling in this matter.” Subsequently, the District Court received briefing on the subject of monetary sanctions. Following oral argument in April 2003, the District Court took the matter under submission. On July 7, 2003 it issued an order awarding International Rectifier monetary damages for contempt, plus attorneys fees of $350,000. Under the order, if IXYS is found to infringe, Samsung is liable for a net amount of damages equal to approximately $2.5 million. International Rectifier has agreed to a stay of the contempt award pending resolution of the appeal. IXYS intervened in these damages proceedings against Samsung.

It remains IXYS’s intent to continue to vigorously contest the claims of International Rectifier. Furthermore, IXYS expects to appeal the final ruling of contempt, including the monetary sanctions awarded against its foundry, Samsung.

In response to International Rectifier’s claims, Samsung contends that IXYS is contractually obligated under the terms of IXYS’s wafer supply agreement with Samsung to defend it against the contempt claims made by International Rectifier and indemnify and hold Samsung harmless in connection with such claims. While IXYS believes that neither it nor Samsung are or could be in violation of the injunction for various reasons that IXYS believes to be meritorious, including an express reservation as to IXYS’s designed parts in the consent decree, there can be no assurance of a favorable outcome. In the event of an adverse ruling against IXYS on the ultimate issue of contempt, or if IXYS is obligated to indemnify Samsung, any damages awarded or injunction entered by the U.S. District Court could be materially adverse to IXYS’s financial condition and results of operations.

On January 17, 2002, IXYS sued International Rectifier in the United States District Court for the Northern District of California for infringement of three IXYS U.S. patents. On April 1, 2002, IXYS amended its complaint to assert infringement by International Rectifier of a modified group of five IXYS U.S. patents, including patents that relate to modules. In addition, the patents include IXYS’s patents for direct copper bond technology. After suit was filed, International Rectifier introduced a new product which purported to replace the originally accused product. The District Court has granted International Rectifier’s motions for summary judgment of non-infringement as to the new product. The District Court has also granted in part and denied in part International Rectifier’s motion for summary judgment as to pre-complaint damages for the original product. On July 12, 2002, the U.S. District Court denied International Rectifier’s motions to dismiss and for summary judgment. Following these rulings, the parties agreed to terms for a voluntary dismissal of the action and the action was dismissed.

In August 2002, IXYS filed an action for patent infringement against Advanced Power Technology, Inc., or APT, in the United States District Court for the Northern District of California, claiming that APT is infringing two of IXYS’s patents. APT has denied IXYS’s claim of infringement, has asserted several affirmative defenses and has filed a counterclaim against IXYS, claiming that IXYS is infringing one of APT’s patents.

The Company is currently a party to various claims and legal proceedings, including the above. If management believes that a loss arising from these actions is probable and can reasonably be estimated, the Company records the amount of the loss, or the minimum

estimated liability when the loss is estimated using a range and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these actions is assessed and the estimates are revised, if necessary. Based on currently available information, management believes that the ultimate outcome of these actions, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or overall trends in results of operations. However, litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or an injunction prohibiting the Company from selling one or more products. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs, or future periods.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion contains forward-looking statements, which are subject to certain risks and uncertainties, including, without limitation, those described elsewhere in this Item 2. Actual results may differ materially from the results discussed in the forward-looking statements. All forward-looking statements included in this document are made as of the date hereof, based on the information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.

We are a leading company in the design, development, manufacture and marketing of high power, high performance power semiconductors. Our power semiconductors improve system efficiency and reliability by converting electricity at relatively high voltage and current levels into the finely regulated power required by electronic products. We focus on the market for power semiconductors that are capable of processing greater than 500 watts of power.

The semiconductor industry is cyclical and has from time to time experienced depressed business conditions. The semiconductor industry has historically experienced a decrease in average selling prices of products over time. Additionally, a number of factors can result in quarter to quarter fluctuations in operating results, including: the reduction, rescheduling or cancellation of orders by customers; fluctuations in the timing and amount of customer requests for product shipments; fluctuations in the manufacturing yields and significant yield losses; and availability of production capacity.

For the quarter ended September 30, 2003, North American sales represented approximately 38.3%, and international sales represented approximately 61.7%, of our net revenues. Of our international sales, approximately 59.5% were derived from sales in Europe and the Middle East and approximately 40.5% were derived from sales in Asia. No single end customer accounted for more than 10% of our net revenues in fiscal year 2003. We do not hedge our foreign currency transactions. Accordingly, although many of our sales and expenses occur in the same currency, translation of foreign currencies into U.S. dollars may negatively impact us.

On September 5, 2003, we acquired Microwave Technology, Inc., a manufacturer of gallium arsenide semiconductors for wireless telecom infrastructure, industrial, medical and defense applications. In the acquisition, we issued approximately 767,000 shares of our common stock and assumed options exercisable for approximately 26,000 shares of common stock.

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Our critical accounting policies are as follows:

Allowance for sales returns. We maintain allowances for sales returns for estimated product returns by our customers. We estimate our allowance for sales returns based on our historical return experience, current economic trends, changes in customer demand, known returns we have not received and other assumptions. If we make different judgments or utilize different estimates, the amount and timing of our revenue could be materially different.

Allowance for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses from the inability of our customers to make required payments. We evaluate our allowance for doubtful accounts based on the aging of our accounts receivable, the financial condition of our customers and their payment history, our historical write-off experience and other assumptions. If we were to make different judgments of the financial condition of our customers or 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. Inventories are recorded at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market value. Our policy for valuation of inventory, including the determination of excess inventory, requires us to estimate the future demand for our products within specific time horizons, generally twelve to twenty-four months or less. We typically plan our production and inventory levels based on internal forecasts of customer demand, which is difficult to predict and can fluctuate substantially. The estimates of future demand that we use in the valuation of inventory are the basis for our published revenue forecast, which is also consistent with our short-term manufacturing plan. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-downs, which would have a negative impact on our gross margin. Our inventories include high technology parts and components that are specialized in nature or subject to technological obsolescence. We regularly review inventory quantities on hand and record a write-down for obsolete inventory. Our write-down for obsolete inventories includes on hand finished goods inventory with a date of

manufacture of greater than three years old. Actual demand and market conditions may be different from those projected by our management. This could have a material effect on our operating results and financial position. If we make different judgments or utilize different estimates, the amount and timing of our inventory write-downs may be materially different.

Warranty accrual. Our products are generally subject to warranty and we provide for the estimated future costs of repair, replacement or customer accommodation upon shipment of the product in the accompanying statements of operations. Our warranty accrual is estimated based on historical claims compared to historical revenues and assumes that we have to replace products subject to a claim. For new products, we use our historical percentage for the appropriate class of product. Should actual product failure rates differ from our estimates, revisions to the estimated warranty liability would be required.

Valuation of plant, equipment, and intangible assets. We evaluate the recoverability of our plant and equipment and intangible assets in accordance with Statement of Financial Accounting Standards No. 144, or SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The standard retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands on the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. Actual useful lives and cash flows could be different from those estimated by our management. This could have a material effect on our operating results and financial position.

Revenue recognition. We recognize revenue from product sales upon shipment provided that we have received an executed purchase order, the price is fixed, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Reserves for sales returns and allowances are recorded at the time of shipment. Specifically, our management must make estimates of potential future product returns and allowance for so called “ship and debit” transactions related to current period product revenue. Our management analyzes historical returns discounts and ship and debit transactions, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management makes different judgments or utilizes different estimates.

In addition, for non-recurring engineering, or NRE, work relating to the design of chip prototypes that will later be used to produce required units, our NRE accounting policy applies. Customers enter into arrangements for us to perform engineering work for a fixed fee. We record fixed-fee payments during the development phase from customers in accordance with Emerging Issues Task Force, or EITF, Abstracts 99-5, “Accounting for Pre-production Costs Related to Long-term Supply Arrangements.” Research and development costs are recorded as expenses as incurred. Research and development expense is credited for payments made by the customer. Up-front payments made by the customer are initially recorded as customer deposits and are charged to the statement of income as expenses for the project as costs are incurred.

Goodwill. We regularly evaluate whether events and circumstances have occurred that indicate a possible impairment of goodwill. In determining whether there is an impairment of goodwill, we calculate the estimated fair value of our company based on the closing sales price of our common stock and projected discounted cash flows as of the date we perform the impairment tests. We allocate a portion of the total fair value to different reporting units based on discounted cash flows. We then compare the resulting fair values of reporting units to their respective net book values, including goodwill. If the net book value of our company exceeds its fair value, we measure the amount of the impairment loss by comparing the implied fair value of our goodwill with the carrying amount of that goodwill. To the extent that the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, we recognized a goodwill impairment loss. We perform this impairment test annually and whenever facts and circumstances indicate that there is a possible impairment of goodwill. We believe the methodology we use in testing impairment of goodwill provides us with reasonable basis in determining whether an impairment charge should be taken.

Pension obligation. The determination of our obligation and expense for pension and other postretirement benefits is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 10 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003 and include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation. In accordance with generally accepted accounting principles, actual results that differ from our assumptions are accumulated and amortized over future periods and therefore generally affect our recognized expenses and recorded obligations in such future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other postretirement obligations and our future expenses.

Legal contingencies. We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. SFAS No. 5, “Accounting for Contingencies,” requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be

reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations.

Income taxes. As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current exposure together with assessing temporary differences resulting from differing treatment of items, such as pensions or capital leases, for tax and accounting purposes. These differences result in differed tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.

Results of Operations — Three and Six Month Periods Ended September 30, 2003 and September 30, 2002

Net revenues. Net revenues in the three month period ended September 30, 2003 were $42.9 million, a 21.6% increase from net revenues of $35.3 million in the three month period ended September 30, 2002. International net revenues were $26.5 million in the three month period ended September 30, 2003, or 61.7% of net revenues, as compared to $19.9 million, or 56.5% of net revenues, in the three month period ended September 30, 2002. The increase in net revenues for the three months then ended was primarily the result of a 26.8% increase in units shipped of our traditional products offset by a 6.6% decrease in the average selling prices of our traditional products. Net revenues in the six month period ended September 30, 2003 were $83.0 million, a 32.3% increase from net revenues of $62.7 million in the six month period ended September 30, 2002. International net revenues were $50.7 million in the six month period ended September 30, 2003, or 61.1% of net revenues, as compared to $35.8 million, or 57.1% of net revenues, in the six month period ended September 30, 2002. The increase in net revenues was primarily due to the inclusion of revenues from newly acquired entities in revenues for the six months ended September 30, 2003 (only partially included in the six month period ended September 30, 2002, the period of acquisition) and a 37.4% increase in units shipped of our traditional products, offset by a 6.0% drop in the average selling prices of our traditional products.

Gross profit. Gross profit was $11.2 million, or 26.2% of net revenues, in the three month period ended September 30, 2003, as compared to $9.2 million, or 26.1% of net revenues, in the three month period ended September 30, 2002. Gross profit was $23.6 million, or 28.4% of net revenues, in the six month period ended September 30, 2003, as compared to $15.6 million, or 24.9% of net revenues, in the six month period ended September 30, 2002. The increase in gross profit for the six month period ended September 30, 2003, as compared to the six month period in the prior year, was the result of efficiencies in manufacturing processes due to the large increase in units manufactured and shipped.

Research, development and engineering. During the three month period ended September 30, 2003, research, development and engineering, or R&D, expense was $3.9 million, or 9.0% of net revenues, as compared to $3.6 million, or 10.3% of net revenues, in the three month period ended September 30, 2002. During the six month period ended September 30, 2003, R&D expense was $7.9 million, representing 9.5% of net revenues, as compared to $5.8 million, or 9.3% of net revenues, for the six month period ended September 30, 2002. The increase in R&D expenses was due primarily to an increase in the number of R&D projects.

Selling, general and administrative. During the three month period ended September 30, 2003, selling, general and administrative, or SG&A, expense was $6.8 million, or 15.9% of net revenues, as compared to $7.5 million, or 21.3% of net revenues, in the three month period ended September 30, 2002. The decrease in SG&A expenses for the three month period was caused by cost cutting efforts, including headcount reductions and reductions in consulting expenses. During the six month period ended September 30, 2003, SG&A expense was $13.3 million, or 16.0% of net revenues, as compared to $12.7 million, or 20.3% of net revenues in the six month period ended September 30, 2002. The increase in SG&A expenses for the six month period was caused primarily by the addition of selling, general and administrative expenses of acquired entities, offset by cost cutting measures.

Interest income, net. During the three month period ended September 30, 2003, interest income, net was $133,000, as compared to interest income, net of $207,000 in the three month period ended September 30, 2002. During the six month period ended September 30, 2003, interest income, net was $209,000, as compared to interest income, net of $371,000 in the six month period ended September 30, 2002. Interest income in the 2003 periods declined as compared to the 2002 periods due to falling interest rates.

Other expense, net. Other expense, net, including loss on foreign currency transactions, in the three month period ended September 30, 2003 was $848,000, as compared to $1.2 million in the three month period ended September 30, 2002. Other expense, net in the six month period ended September 30, 2003 was $2.1 million, as compared to $2.6 million in the six month period ended September 30, 2002. Other expense, net fell during the 2003 periods as a result of reduced litigation expenses.

Income taxes. The benefit from income taxes in the quarter ended September 30, 2003 reflects an effective tax rate of 35%, as compared to an effective tax rate of 6% in the benefit from income taxes in the same quarter of the prior fiscal year, which reflected adjustments in connection with the acquisition of Clare.

Cash and cash equivalents. As of September 30, 2003, cash and cash equivalents were $39.6 million, a decrease of $499,000 from cash and cash equivalents of $40.1 million at March 31, 2003. The decrease in cash and cash equivalents was primarily due to cash used in investing and financing activities.

Cash flows from operating activities. Net cash provided by operating activities in the six-month period ended September 30, 2003 was $1.9 million, which represents an increase of $1.9 million from net cash used in operating activities of $64,000 in the six-month period ended September 30, 2002. The increase in net cash provided by operating activities was primarily attributable to non-cash charges such as depreciation and amortization included in net income and increases in accrued and pension liabilities, partially offset by increases in accounts receivables and inventories.

Cash flows from investing activities. Net cash used in investing activities in the six-month period ended September 30, 2003 was $1.4 million, a decrease of $9.2 million from $7.8 million provided by investing activities in the six-month period ended September 30, 2002. In the six months ended September 30, 2003, we acquired $7.9 million of cash in the acquisition of Clare and we did not have a comparable transaction in the six months ended September 30, 2003.

Cash flows from financing activities. During the six-month period ended September 30, 2003, net cash used in financing activities was $1.2 million, a decrease of $1.2 million from net cash provided by financing activities of $17,000 during the six-month period ended September 30, 2002. The decrease in net cash from financing activities was primarily due to net payments of capital lease obligations.

There are three lines of credit facilities available to us. We have one line of credit with a U.S. bank that consists of a $5.0 million commitment amount which is available through December 19, 2003. The line bears interest at the bank’s prime rate (4.0% at September 30, 2003). The line is collateralized by certain assets and contains certain general and financial covenants. At September 30, 2003, we had drawn $700,000 against such line of credit.

We have another line of credit with a U.S. bank that consists of a $100,000 commitment, which is available through November 14, 2004. The line bears interest at a fixed rate of 3.54%. The line is collateralized by a $100,000 certificate of deposit that we have with the bank. At September 30, 2003, we have drawn down $100,000 against such line of credit.

In 2000, IXYS Semiconductor GmbH obtained a $5.0 million line of credit with a German bank. This line supports a letter of credit facility. At September 30, 2003 there were $1.6 million in outstanding letters of credit secured by this line of credit.

In 2000, a German bank issued to IXYS a commitment letter for a (EUR) 3.8 million equipment lease facility. The equipment leases facility provides financing at varying pricing for periods up to 48 months. In addition to the rights to the equipment, the bank holds a security interest in the general asset of IXYS Semiconductor GmbH and unrestricted amounts deposited with the bank. At September 30, 2003, we had drawn (EUR) 2.5 million against such line of credit.

In 2000, in the same commitment letter discussed above, the bank also committed to issue a credit line to IXYS Semiconductor GmbH up to (EUR) 5.1 million for a wafer fabrication facility in Germany, including leasehold improvements, clean room construction and fabrication, computer and office equipment. At September 30, 2003, we had drawn (EUR) 166,000 under this commitment. The security interest of the bank under the equipment lease facility also collateralizes this line.

In 2001, IXYS entered into a term loan with a Swiss bank in the amount of SFR 200,000. The loan bears interest of 5.25% and is due in November 2006.

Our accounts receivable at September 30, 2003 were $26.9 million, an increase of 25.4% as compared to $21.5 million at March 31, 2003. Our inventories at September 30, 2003 were $52.9 million, an increase of 7.7% as compared to $49.2 million at March 31, 2003. Net plant and equipment at September 30, 2003 were $26.4 million, a decrease of 8.2% as compared to $28.7 million at March 31, 2003.

As of September 30, 2003, we had $39.6 million in cash and cash equivalents. We believe that these balances, including interest to be earned thereon, and borrowings available under our credit facilities will be sufficient to fund our working and other capital requirements, including potential investments in other companies and other assets to support the strategic growth of our business, over the next twelve months. In the ordinary course of business, we evaluate opportunities to acquire businesses, products and technologies and we expect to use our cash to fund these types of activities in the future. In the event additional needs for cash arise, we may raise

additional funds from a combination of sources including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all, particularly in light of the recent decline in the capital markets. If adequate funds were not available or were not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited.

Details of our contractual obligations and commitments as of September 30, 2003 to make future payments under contracts are set forth below:


	Payments Due by Period

			Less than						After
Contractual Obligations	Total		1 year		1-3 years		3-5 years		5 years

Long Term Debt Obligations	$	803	$	803	$	—	$	—	$	—
Capital Lease Obligations		6,776		3,168		3,540		68		—
Operating Lease Obligations		15,169		4,410		4,803		2,092		3,864
Pension Obligations		10,815		1,028		1,438		1,363		6,986
Purchase Obligations		6,803		6,803		—		—		—
Other liabilities		159		—		159		—		—

Total	$	40,525	$	16,212	$	9,940	$	3,523	$	10,850

On September 22, 2000, IXYS Corporation entered into a guaranty for $5.0 million in favor of Commerzbank AG to obtain a line of credit granted by Commerzbank AG to IXYS Semiconductor GmbH. At September 30, 2003, there were no amounts outstanding under this line of credit.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” 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 provision of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. In October 2003, the FASB deferred the implementation date by which all public companies must apply FIN 46. The FASB agreed to provide this deferral to allow time for certain implementation issues to be addressed through the issuance of a modification to FIN 46, and indicated that it expects to issue this modification in final form prior to the end of 2003. We have adopted FIN 46, as amended, and the adoption of this standard had no material impact on our results of operations and financial conditions.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. We have adopted SFAS No. 150 and the adoption of this standard had no material impact on our financial position or results of operations.

In addition to the other information in this Quarterly Report on Form 10-Q, the following risk factors should be considered carefully in evaluating us and our business. You should carefully consider the risks described below before making an investment decision. Additional risks not presently known to us or that we currently believe are not serious may also impair our business and its financial condition. The trading price of our common stock could decline at any time due to any of these risks, and you could lose all or part of your investment.

Our operating results fluctuate significantly because of a number of factors, many of which are beyond our control.

Our operating results may fluctuate significantly. Some of the factors that may affect our quarterly and annual results are:

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fluctuations in timing and amount of customer requests for product shipments;

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difficulties in forecasting demand for our products and the planning and managing of inventory levels;

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the amount and timing of costs associated with product warranties and returns;

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changes in our product distribution channels and the timeliness of receipt of distributor resale information;

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the impact of vacation schedules and holidays, largely during the second and third fiscal quarters of our fiscal year; and

As a result of these factors, many of which are difficult to control or predict, as well as the other risk factors discussed in this Quarterly Report on Form 10-Q, we may experience material adverse fluctuations in our future operating results on a quarterly or annual basis.

The semiconductor industry is cyclical, and an industry downturn could adversely affect our operating results.

Business conditions in the semiconductor industry have rapidly changed from periods of strong demand. The industry is characterized by:

These factors could harm our business and cause our operating results to suffer.

Our ability to grow and sustain growth levels may be adversely affected by the slowdown in the telecommunications industry.

The slowdown in telecommunications has adversely affected the sales of our integrated circuits, or ICs, used in telecommunication applications, including our solid state relays, or SSRs. If the telecommunications slowdown continues, our business, financial condition and results of operations may be adversely affected.

We have in the past made, and may in the future make, acquisitions. These acquisitions involve numerous risks, including:

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the potential strain on our financial and managerial controls and reporting systems and procedures;

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unanticipated expenses and potential delays related to integration of an acquired business;

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failure to successfully integrate the operations of an acquired company with our own;

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the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions;

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the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets;

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difficulties in expanding our information technology systems to accommodate the acquired businesses;

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the challenges inherent in managing an increased number of employees and facilities and the need to implement appropriate policies, benefits and compliance programs;

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the cost associated with acquisitions and the integration of acquired operations; and

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assumption of known or unknown liabilities or other unanticipated events or circumstances.

We cannot assure you that we will be able to successfully acquire other businesses or product lines or integrate them into our operations without substantial expense, delay in implementation or other operational or financial problems.

We could be harmed by litigation involving patents and other intellectual property rights.

As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. We have been sued on occasion for purported patent infringement and are currently defending against a number of such claims. For example, we have been sued by International Rectifier for purportedly infringing some of its patents covering power MOSFETs, or metal oxide semiconductor field effect transistors. After trial, the U.S. District Court awarded damages to International Rectifier of $27.2 million, plus attorney fees. In addition, the U.S. District Court has issued a permanent injunction against us, effectively barring us from selling or distributing the allegedly-infringing products. We have appealed the injunction and the award of damages, and the United States Court of Appeals for the Federal Circuit has stayed the injunction and award pending further review. We continue to contest International Rectifier’s claims vigorously but the outcome of this litigation remains uncertain. See “Legal Proceedings” provided elsewhere in this Quarterly Report on Form 10-Q.

Additionally, in the future, we could be accused of infringing the intellectual property rights of International Rectifier or other third parties. We also have certain indemnification obligations to customers with respect to the infringement of third party intellectual property rights by our products. No assurance can be provided that any future infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims will not be asserted or that assertions of infringement, if proven to be true, will not harm our business.

In the event of any adverse ruling in any intellectual property litigation, including the pending power MOSFET litigation with International Rectifier, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license from the third party claiming infringement with royalty payment obligations by us. An adverse decision in the International Rectifier power MOSFET litigation would, and in any other infringement action could, materially and adversely affect our financial condition and results of operations.

Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, is costly and may divert the efforts and attention of our management and technical personnel.

Of our revenues in fiscal year 2003, 37.2% came from wafers manufactured for us by external foundries. Our dependence on external foundries may grow. We have arrangements with seven wafer foundries, two of which produce the wafers for power semiconductors that we purchase from external foundries. Samsung Electronics’s facility in Kiheung, South Korea is our principal external foundry.

Our relationships with our external foundries do not guarantee prices, delivery or lead times, or wafer or product quantities sufficient to satisfy current or expected demand. These foundries manufacture our products on a purchase order basis. We provide these foundries with rolling forecasts of our production requirements; however, the ability of each foundry to provide wafers to us is limited by the foundry’s available capacity. At any given time, these foundries could choose to prioritize capacity for their own use or other customers or reduce or eliminate deliveries to us on short notice. Accordingly, we cannot be certain that these foundries will allocate sufficient capacity to satisfy our requirements. In addition, we cannot be certain that we will continue to do business with these or other foundries on terms as favorable as our current terms. If we are not able to obtain additional foundry capacity as required, our relationships with our customers could be harmed and our revenues would likely be reduced. Moreover, even if we are able to secure additional foundry capacity, we may be required, either contractually or as a practical business matter, to utilize all of that capacity or incur penalties or an adverse effect on the business relationship. The costs related to maintaining foundry capacity could be expensive and could harm our operating results. Other risks associated with our reliance on external foundries include:

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the unavailability of, or delays in obtaining access to, key process technologies;

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

Our requirements typically represent a small portion of the total production of the external foundries that manufacture our wafers and products. We cannot be certain these external foundries will continue to devote resources to the production of our wafers and products or continue to advance the process design technologies on which the manufacturing of our products is based. These circumstances could harm our ability to deliver our products on time or increase our costs.

We manufacture our products in facilities that are owned and operated by us, as well as in external wafer foundries and independent subcontract assembly facilities. The fabrication of semiconductors is a highly complex and precise process, and a substantial percentage of wafers could be rejected or numerous die on each wafer could be nonfunctional as a result of, among other factors:

For these and other reasons, we could experience a decrease in manufacturing yields. Additionally, as we increase our manufacturing output, we may also experience a decrease in manufacturing yields. As a result, we may not be able to cost effectively expand our production capacity in a timely manner.

Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts, we cannot be certain that the steps we take to protect our proprietary information will be adequate to prevent misappropriation of our technology, or that our competitors will not independently develop technology that is

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

During fiscal 2003, our product sales by region were approximately 42.2% in North America, approximately 39.4% in Europe and the Middle East and approximately 18.4% in Asia. We expect revenues from foreign markets to continue to represent a significant portion of total revenues. IXYS maintains significant operations in Germany and the United Kingdom and contracts with suppliers and manufacturers in South Korea, Japan and elsewhere in Europe and Asia. Some of the risks inherent in doing business internationally are:

•

changes in the laws, regulations or policies of the countries in which we manufacture or sell our products;

Our sales of products manufactured in our Lampertheim, Germany facility and our costs at that facility are denominated in Euros, and sales of products manufactured in our Chippenham, U.K. facility and our costs at that facility are primarily denominated in British pounds and Euros. Fluctuations in the value of the Euro and the British pound against the U.S. dollar could have a significant impact on our balance sheet and results of operations, including our net income. We currently do not enter into foreign currency hedging transactions to control or minimize these risks. Fluctuations in currency exchange rates could cause our products to become more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. If we expand our international operations or change our pricing practices to denominate prices in other foreign currencies, we could be exposed to even greater risks of currency fluctuations.

In addition, the laws of certain foreign countries may not protect our products or intellectual property rights to the same extent as do U.S. laws regarding the manufacture and sale of our products in the U.S. Therefore, the risk of piracy of our technology and products may be greater when we manufacture or sell our products in these foreign countries.

Our revenues are dependent upon our products being designed into our customers’ products.

Some of our new products are incorporated into customers’ products or systems at the design stage. The value of any design win largely depends upon the customer’s decision to manufacture the designed product in production quantities, the commercial success of the customer’s product and on the extent to which the design of the customer’s electronic system also accommodates incorporation of components manufactured by our competitors. In addition, our customers could subsequently redesign their products or systems so that they no longer require our products. We may not achieve design wins or our design wins may not result in future revenues.

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 revenues.

The time from initiation of design to volume production of new power semiconductor products often takes 18 months or longer. We first work with customers to achieve a design win, which may take nine months or longer. Our customers then complete the

design, testing and evaluation process and begin to ramp up production, a period which may last an additional nine months or longer. As a result, a significant period of time may elapse between our research and development efforts and our realization of revenues, if any, from volume purchasing of our products by our customers.

Our business is characterized by short term orders and shipment schedules. Customer orders typically can be cancelled or rescheduled without penalty to the customer. As a result, our backlog at any particular date is not necessarily indicative of actual revenues for any succeeding period. A reduction of backlog during any particular period, or the failure of our backlog to result in future revenues, could harm our results of operations.

Certain of our target markets are intensely competitive. Our ability to compete successfully in our target markets depends on the following factors:

In addition, our competitors or customers may offer new products based on new technologies, industry standards or end user or customer requirements, including products that have the potential to replace, or provide lower cost or higher performance alternatives to, our products. The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable.

Our primary power semiconductor competitors include Advanced Power Technology, Fairchild Semiconductor, Fuji, International Rectifier, Infineon, On Semiconductor, Powerex, Semikron International, STMicroelectronics, Siemens and Toshiba. Our IC products compete principally with those of Agere, Legacy, NEC and Silicon Labs. Many of our competitors have greater financial, technical, marketing and management resources than we have. Some of these competitors may be able to sell their products at prices below which it would be profitable for us to sell our products or benefit from established customer relationships that provide them with a competitive advantage.

We rely on our distributors and sales representatives to sell many of our products.

A substantial majority of our products are sold to distributors and through sales representatives. Our distributors and sales representatives could reduce or discontinue sales of our products. They may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect. In addition, we depend upon the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital. These distributors and sales representatives, in turn, depend substantially on general economic conditions and conditions within the semiconductor industry. We believe that our success will continue to depend upon these distributors and sales representatives.

At September 30, 2003, no distributor accounted for greater than 10% of our outstanding receivables. If this or any other distributor or sales representative experiences financial difficulties, or otherwise becomes unable or unwilling to promote and sell our products, our business could be harmed.

Our future success depends on the continued service of management and key engineering personnel and our ability to identify, hire and retain additional personnel.

Our success depends, to a significant extent, upon the efforts and abilities of Nathan Zommer, Ph.D., our president and chief executive officer, and other members of senior management. The loss of the services of one or more of our senior management or

other key employees could adversely affect our business. We do not maintain key person life insurance on any of our officers, employees or consultants. There is intense competition for qualified employees in the semiconductor industry, particularly for highly skilled design, applications and test engineers. Competition is especially intense in the Silicon Valley, where our U.S. design facility for power semiconductors is located. We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified individuals who could leave us at any time in the future. Our anticipated growth is expected to place increased demands on our resources, and will likely require the addition of new management and engineering staff as well as the development of additional expertise by existing management employees. If we lose the services of or fail to recruit key engineers or other technical and management personnel, our business could be harmed.

Our disclosure controls and procedures need improvement and are not adequately effective.

Our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2003, our disclosure controls and procedures needed improvement and were not adequately effective. Our auditors, PricewaterhouseCoopers LLP, advised us that there are material weaknesses in our internal control. See “Item 4. Controls and Procedures” elsewhere in this Form 10-Q. These material weaknesses and other deficiencies in our internal control could materially adversely affect us.

Periods of growth and expansion could continue to place a significant strain on our resources, including our employee base.

If growth occurs, we may continue to use our current operational, financial and management systems. We may find that these systems are not adequate, or sufficiently redundant, for the demands of our business. If we acquire other companies, we will acquire operational, financial and management systems that are different from our historical systems and the use or integration of these systems with our historical systems may present significant challenges. For example, we are currently operating a number of different management information systems, most acquired in connection with our acquisition of companies over the past several years, that are not integrated. The use of multiple management information systems increases the risk of error. To manage our possible future growth effectively, we may improve our operational, financial and management systems. In doing so, we may periodically implement new software and other systems that will affect our internal operations regionally or globally. The conversion process from one system to another is complex and requires, among other things, that data from the existing system be made compatible with the upgraded system. In any of the foregoing circumstances, we could experience errors, delays and other inefficiencies that could materially adversely affect our business.

Future growth will also require us to successfully hire, train, motivate and manage our employees. In addition, our continued growth and the evolution of our business plan will require significant additional management, technical and administrative resources. We may not be able to effectively manage the growth and evolution of our current business.

The market price of our common stock has fluctuated significantly to date. The future market price of our common stock may also fluctuate significantly due to:

•

changes in analysts’ estimates of our performance or changes in analysts’ forecasts regarding our industry, competitors or customers;

•

announcements of merger or acquisition transactions or a failure to achieve the expected benefits of an acquisition as rapidly or to the extent anticipated by financial analysts; or

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

Our dependence on independent subcontractors to assemble and test our products subject us to a number of risks, including an inadequate supply of products and higher materials costs.

We depend on independent subcontractors for the assembly and testing of our products. During fiscal year 2003, the majority of our products were assembled by independent subcontractors located outside of the United States. Our reliance on these subcontractors involves the following significant risks:

•

limited warranties by subcontractors or other vendors on products supplied to us;

These risks may lead to delayed product delivery or increased costs, which would harm our profitability and customer relationships.

In addition, we use a limited number of subcontractors to assemble a significant portion of our products. If one or more of these subcontractors experiences financial, operational, production or quality assurance difficulties, we could experience a reduction or interruption in supply. Although we believe alternative subcontractors are available, our operating results could temporarily suffer until we engage one or more of those alternative subcontractors.

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

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. Failure to do so could cause us to lose our competitive position and seriously impact our future revenues.

Our operating expenses are relatively fixed, and we may 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, therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls. Consequently, our operating results will be harmed if our revenues do not meet our revenue projections.

We also 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 external suppliers and foundries, we may order materials or production in advance of anticipated customer demand. This advance ordering may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize.

We purchase silicon wafers from three vendors with whom we do not have long term supply agreements. Any of these suppliers could eliminate or terminate our supply of wafers at any time. Our reliance on a limited number of suppliers involves several risks, including potential inability to obtain an adequate supply of silicon wafers and reduced control over the price, timely delivery, reliability and quality of the silicon wafers. We cannot assure that problems will not occur in the future with suppliers.

From time to time we access the capital markets to obtain long-term financing. Although we believe that we can continue to access the capital markets on acceptable terms and conditions, our flexibility with regard to long-term financing activity could be limited by: our existing capital structure, our credit ratings, and the health of the semiconductor industry. In addition, many of the factors that affect our ability to access the capital markets, such as the liquidity of the overall capital markets and the current state of the economy, are outside of our control. There can be no assurances that we will continue to have access to the capital markets on favorable terms.

We may not be able to acquire additional production capacity to meet the present and future demand for our products.

The semiconductor industry has been characterized by periodic limitations on production capacity. Although we can currently obtain the capacity necessary to meet present demand, if we are unable to increase our production capacity to meet possible future demand, some of our customers may seek other sources of supply or our future growth may be limited.

Power semiconductors with operating voltages above 40 volts are subject to regulations intended to address the safety, reliability and quality of the products. These regulations relate to processes, design, materials and assembly. For example, in the United States some high voltage products are required to pass Underwriters Laboratory recognition for voltage isolation and fire hazard tests. Sales of power semiconductors outside of the United States are subject to international regulatory requirements that vary from country to country. The process of obtaining and maintaining required regulatory clearances can be lengthy, expensive and uncertain. The time required to obtain approval for sale internationally may be longer than that required for U.S. approval, and the requirements may differ.

In addition, approximately 17.1% of our revenues in fiscal year 2003 were derived from the sale of products included in medical devices that are subject to extensive regulation by numerous governmental authorities in the United States and internationally, including the U.S. Food and Drug Administration, or FDA. The FDA and certain foreign regulatory authorities impose numerous requirements for medical device manufacturers to meet, including adherence to Good Manufacturing Practices, or GMP, regulations and similar regulations in other countries, which include testing, control and documentation requirements. Ongoing compliance with GMP and other applicable regulatory requirements is monitored through periodic inspections by federal and state agencies, including the FDA, and by comparable agencies in other countries. Our failure to comply with applicable regulatory requirements could prevent our products from being included in approved medical devices.

Our business could also be harmed by delays in receiving or the failure to receive required approvals or clearances, the loss of previously obtained approvals or clearances or the failure to comply with existing or future regulatory requirements.

Our operations are vulnerable to interruption by fire, earthquake and other natural disasters, as well as power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan and do not have backup generators. Our corporate headquarters in California is located near major earthquake fault lines and has experienced earthquakes in the past. California also has recently been subject to shortages of electrical power and is subject to power outages. If power outages occur, our ability to conduct administrative matters and test our products could be seriously impaired, which could harm our business, financial condition and results of operations. We cannot be sure that the insurance we maintain against general business interruptions will be adequate to cover all our losses.

In addition, some of our suppliers are located in California and are subject to the same earthquake and power outage risks. A fire, major earthquake or other natural disaster near one or more of our facilities or those of our major suppliers could disrupt our operations and those of our suppliers, which could in turn limit the supply of our products and harm our business.

We are subject to a variety of laws, rules and regulations in the United States, England and Germany related to the use, storage, handling, discharge and disposal of certain chemicals and gases used in our manufacturing process. Any of those regulations could require us to acquire expensive equipment or to incur substantial other expenses to comply with them. If we incur substantial additional expenses, product costs could significantly increase. Our failure to comply with present or future environmental laws, rules and regulations could result in fines, suspension of production or cessation of operations.

We face the risk of financial exposure to product liability claims alleging that the use of devices that incorporate our products resulted in adverse effects.

Approximately 17.1% of our net revenues in fiscal year 2003 were derived from sales of products used in medical devices such as defibrillators. Product liability risks may exist even for those medical devices that have received regulatory approval for commercial sale. We do not currently carry product liability insurance, and any defects in our products used in these devices could result in significant recall or product liability costs to us.

Nathan Zommer, Ph.D., our president and chief executive officer, beneficially owns, as of October 1, 2003, approximately 20.5% of the outstanding shares of our common stock. As a result, Dr. Zommer could exercise significant influence over all matters requiring stockholder approval, including the election of the board of directors. Dr. Zommer’s holdings could result in a delay of, or serve as a deterrent to, possible changes in control of IXYS, which may reduce the market price of our common stock.

The anti-takeover provisions of our amended and restated certificate of incorporation and of the Delaware General Corporation Law may delay, defer or prevent a change of control.

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control because the terms of any issued preferred stock could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction, without the approval of the holders of the outstanding shares of preferred stock. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders.

Our stockholders must give substantial advance notice prior to the relevant meeting to nominate a candidate for director or present a proposal to our stockholders at a meeting. These notice requirements could inhibit a takeover by delaying stockholder action. The Delaware anti-takeover law restricts business combinations with some stockholders once the stockholder acquires 15% or more of our common stock. The Delaware statute makes it more difficult for us to be acquired without the consent of our board of directors and management.

Our market risk has not changed materially from the market risk disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2003.

An evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2003. This evaluation included various processes that were carried out in an effort to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified by the SEC. This evaluation also included consideration of certain aspects of our internal controls and procedures for the preparation of our financial statements.

In evaluating these internal controls we sought to determine whether there were any “significant deficiencies” and in particular whether there were any “material weaknesses.” Under the applicable accounting literature, “significant deficiencies” are referred to as “reportable conditions,” which are control issues that could have a significant adverse effect on our ability to record, process, summarize and report financial data in the financial statements. A “material weakness” is defined as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by the error may occur

in amounts that would be material in relation to the financial statements and that such misstatements would not be detected timely by employees in the normal course of performing their assigned functions.

Our audit committee has been made aware of two specific reportable conditions relating to our operations which were considered to be “material weaknesses” for the quarter ended September 30, 2003 under standards established by the American Institute of Certified Public Accountants, and a third material weakness resulting from the effect of a number of reportable conditions taken together or in combination.

Our auditors, PricewaterhouseCoopers LLP, or PwC, as a result of their review of the results of our quarter ended September 30, 2003 and the performance of early audit procedures for the year March 31, 2004, have informed us of certain material weaknesses and reportable conditions. In the planning and performance of the review, PwC considered the internal controls in order to complete its review of the financial statements and not to provide assurance on internal controls. Had PwC performed an attestation engagement of the internal controls as of September 30, 2003, other reportable conditions and/or material weaknesses may have come to the attention of PwC. The identified material weaknesses as a result of the PwC audit procedures are as follows:

•

financial statement consolidations based on electronic spreadsheets that place a great strain on the limited personnel resources of our finance organization, resulting in inadequate time for management to perform its financial review on a timely basis;

•

problems with the monthly close at our subsidiaries, particularly in its timing, procedures, management information systems, the content of the reports prepared and limited personnel resources, resulting in inadequate time for review by our finance management and for adjustment prior to the audit; and

•

several additional conditions relating to the Company’s internal accounting and disclosure controls that, in the context of the overall control environment and the current lack of accounting personnel resources, are considered reportable conditions and that, when taken together, represent a material weakness in internal controls.

Our Chief Executive Officer, Chief Financial Officer, and audit committee are aware of these conditions. The following factors contributed to the aforementioned control conditions:

•

significant turnover and other issues related to key finance personnel; and,

Certain of the material weaknesses and reportable conditions may also constitute deficiencies in our disclosure controls. In light of these material weaknesses and reportable conditions and the requirements enacted in the Sarbanes-Oxley Act of 2002 and the related rules and regulations adopted by the SEC, our Chief Executive Officer and Chief Financial Officer concluded, as of September 30, 2003, that our disclosure controls and procedures needed improvement and were not adequately effective. Management believes there are no material inaccuracies, or omissions of material facts necessary to make the statements made not misleading, in this Form 10-Q.

During our fiscal quarter ended September 30, 2003, we took the following steps to address our material weaknesses:

•

we employed a corporate financial analyst to improve our understanding of our financial performance, to assist in addressing internal control issues and to increase the timeliness of our financial statement preparation; and

We intend to implement additional changes to our internal controls in the future to address the material weaknesses and reportable conditions. We will consider implementation of the following, as well as other additional procedures:

•

developing a strategy for formalizing the consolidated enterprise’s internal controls and procedures for financial reporting in accordance with the SEC’s rules implementing the internal control report requirements included in Section 404 of the Sarbanes-Oxley Act. It is possible that additional changes will be made to our internal controls as a result of these efforts.

We have committed significant resources to address the internal control deficiencies identified to date. However, many of the salutary procedures and actions deemed desirable by management have not been implemented to date. It will take additional time to complete implementation and realize the benefits of our actions.

We are committed to ongoing periodic reviews of our controls and their effectiveness. In contrast to the evaluation made by PwC regarding our year ended March 31, 2003, PwC did not advise us that we have deficiencies in inventory accounting that it considers a material weakness when it reviewed our financial statements for the quarter ended September 30, 2003. Management intends to work vigorously to resolve the remaining control deficiencies.

We have no reason to believe that the financial statements included in this report are not fairly stated in all material respects. However, new problems could be identified in the future. We expect to continue to improve controls during each quarter in a multi-period effort to achieve disclosure controls and procedures and internal controls satisfactory for a company of our size in the semiconductor industry.

On June 22, 2000, International Rectifier Corporation filed an action for patent infringement against us in the United States District Court for the Central District of California, alleging that certain of our products sold in the United States infringe U.S. patents owned by International Rectifier. International Rectifier’s complaint against us contended that our alleged infringement of International Rectifier’s patents has been and continues to be willful and deliberate. Subsequently, the U.S. District Court decided that certain of our power MOSFETs and IGBTs infringe certain claims of each of three International Rectifier U.S. patents.

On May 21, 2002, the U.S. District Court entered a permanent injunction, which became effective June 5, 2002, barring us from making, using, offering to sell or selling in, or importing into, the United States, MOSFETs (including IGBTs) covered by the subject patents. On August 2, 2002, a three-judge panel of the United States Court of Appeals for the Federal Circuit granted our motion to stay, pending appeal, the permanent injunction issued by the U.S. District Court. In granting this motion, the panel stated, among other things, that we had shown a strong likelihood of success regarding our challenge to the U.S. District Court’s finding that we infringe the International Rectifier patents. Our appeal from the award of permanent injunction, including the finding of infringement upon which it is based, was argued on July 7, 2003 and the outcome is pending.

On August 5, 2002, the U.S. District Court entered its ruling that International Rectifier should be awarded damages of $9.1 million for our alleged infringement of International Rectifier’s patents. In addition, the U.S. District Court ruled that we had been guilty of willful infringement. Subsequently, the U.S. District Court increased the damages to a total of $27.2 million, plus attorney fees. We have appealed the damages award. The United States Court of Appeals for the Federal Circuit has granted our motion to stay the damages award pending disposition of the related appeals and has suspended briefing of our appeal from the damages award pending outcome of the appeals argued on July 7, 2003.

In light of the August 2, 2002 decision by the Federal Circuit, we believe our defenses to the various claims and its arguments on appeal are meritorious. However, there can be no assurance of a favorable outcome. In the event of an adverse outcome, damages or injunctions awarded by the U.S. District Court would be materially adverse to our financial condition and results of operations. Management has not accrued any amounts in the accompanying balance sheets for the International Rectifier matter described above.

International Rectifier also contends that our importation into the United States of certain MOSFET products of our design manufactured for us by Samsung Electronics Co., Ltd. is in violation of a consent decree and injunction entered against Samsung in another lawsuit to which we were not a party. International Rectifier sought enforcement of the Samsung injunction against Samsung and us, a contempt citation and a fine. On March 19, 2002, the U.S. District Court decided, among other things, that we are bound by, and our devices are not excepted from, the Samsung injunction. On June 12, 2002, the Federal Circuit stayed the application of the Samsung injunction to us, stating that we had shown a likelihood of success on appeal. This appeal was heard on July 7, 2003. On October 15, 2002, the District Court found contempt against Samsung as its “final ruling in this matter.” Subsequently, the District Court received briefing on the subject of monetary sanctions. Following oral argument in April 2003, the District Court took the matter under submission. On July 7, 2003 it issued an order awarding International Rectifier monetary damages for contempt, plus attorneys fees of $350,000. Under the order, if we are found to infringe, Samsung is liable for a net amount of damages equal to approximately $2.5 million. International Rectifier has agreed to a stay of the contempt award pending resolution of the appeal. We intervened in these damages proceedings against Samsung.

It remains our intent to continue to vigorously contest the claims of International Rectifier. Furthermore, we expect to appeal the final ruling of contempt, including the monetary sanctions awarded against our foundry, Samsung.

In response to International Rectifier’s claims, Samsung contends that we are contractually obligated under the terms of our wafer supply agreement with Samsung to defend it against the contempt claims made by International Rectifier and indemnify and hold Samsung harmless in connection with such claims. While we believe that neither we nor Samsung are or could be in violation of the injunction for various reasons that we believe to be meritorious, including an express reservation as to our designed parts in the consent decree, there can be no assurance of a favorable outcome. In the event of an adverse ruling against us on the ultimate issue of contempt, or if we are obligated to indemnify Samsung, any damages awarded or injunction entered by the U.S. District Court could be materially adverse to our financial condition and results of operations.

On January 17, 2002, we sued International Rectifier in the United States District Court for the Northern District of California for infringement of three of our U.S. patents. On April 1, 2002, we amended our complaint to assert infringement by International Rectifier of a modified group of five of our U.S. patents, including patents that relate to modules. In addition, the patents include our patents for direct copper bond technology. After suit was filed, International Rectifier introduced a new product which purported to replace the originally accused product. The District Court has granted International Rectifier’s motions for summary judgment of non-

infringement as to the new product. The District Court has also granted in part and denied in part International Rectifier’s motion for summary judgment as to pre-complaint damages for the original product. On July 12, 2002, the U.S. District Court denied International Rectifier’s motions to dismiss and for summary judgment. Following these rulings, the parties agreed to terms for a voluntary dismissal of the action and the action was dismissed.

In August 2002, we filed an action for patent infringement against Advanced Power Technology, Inc., or APT, in the United States District Court for the Northern District of California, claiming that APT is infringing two of our patents. APT has denied our claim of infringement, has asserted several affirmative defenses and has filed a counterclaim against us, claiming that we are infringing one of APT’s patents.

We are currently a party to various legal proceedings, including those noted above. While management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs.

On September 5, 2003, we consummated a merger with Microwave Technology, Inc., or MwT, pursuant to which MwT became our wholly owned subsidiary and we issued approximately 767,000 shares of our common stock in reliance upon the exemption afforded by Section 3(a)(10) of the Securities Act of 1933, as amended.

(b)

On July 18, 2003, we filed a Current Report on Form 8-K dated July 15, 2003 to furnish a press release announcing that we had completed our review of bookkeeping errors in our accounting that had resulted in the overstatement of inventories during the nine months ended December 31, 2002, restated our financial statements for the nine months ended December 31, 2002, updated our earnings for the fiscal year ended March 31, 2003 and filed our Form 10-K for such year.

On August 11, 2003, we filed a Current Report on Form 8-K dated August 11, 2003 to furnish a press release announcing financial results for the first fiscal quarter ended June 30, 2003.

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.


DELAWARE		77-0140882
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)


Value of IXYS common stock issued	$	4,189
Value of IXYS options issued		167
Estimated direct merger cost		270

Total purchase price	$	4,626


	September 30, 2003		March 31, 2003

	(unaudited)
Raw materials	$	9,845	$	8,765
Work in process		28,786		31,842
Finished goods		14,280		8,555

Total	$	52,911	$	49,162


Exhibit
No.		Description

3.1		Amended and Restated Certificate of Incorporation of the Registrant.(1)

3.2		Amended and Restated Bylaws of the Registrant.(2)

31.1		Certifications required under Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification required under Section 906 of the Sarbanes-Oxley Act of 2002.(3)

(1)		Filed as Exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2001 (000-26124) and incorporated herein by reference.

(2)		Filed as Exhibit 3.2 to the Quarterly Report on Form 10-Q for the period ended September 30, 2002 (000-26124) and incorporated herein by reference.

(3)		This exhibit is furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1933, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities and Exchange Act of 1993, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

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


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES.
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 31.1
EXHIBIT 32.1


		September 30,		March 31,
		2003		2003

		(unaudited)
Germany		$	14,003	$	14,771
Switzerland			2,585		1,657
United States			9,049		10,934
United Kingdom			4,159		4,026

	Total	$	29,796	$	31,388


		IXYS CORPORATION

		By: /s/ Arnold P. Agbayani

		Arnold P. Agbayani, Senior Vice President, Finance and Chief Financial Officer (Principal Financial Officer)