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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number 0-29454

POWER-ONE, INC.

Registrant’s telephone number, including area code

Not Applicable

     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 a shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

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

     As of August 4, 2004, 83,849,421 shares of the Registrant’s $0.001 par value common stock were outstanding.

POWER-ONE, INC. INDEX

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PART I—FINANCIAL INFORMATION

POWER-ONE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements.

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POWER-ONE, INC.

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

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POWER-ONE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements.

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SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES

      On February 14, 2003, the Company acquired all the capital stock of di/dt, Inc. for approximately 1.4 million shares of the Company’s common stock valued at $6.3 million and $1.0 million in cash and acquisition costs.

      In conjunction with the acquisition, liabilities were assumed as follows (in thousands):

      During the second and third quarters of 2003, the Company distributed a total of 0.3 million shares of the Company’s common stock to former di/dt shareholders in connection with the earn-out provision of the acquisition. During the first quarter of 2004, the Company made a similar distribution of 0.2 million shares of the Company’s common stock. The earn-out payments in the second and third quarters of 2003 and the first quarter of 2004 valued at $1.9 million and $2.5 million, respectively, were recorded as additional goodwill. There was no earn-out payment in the second quarter of 2004. The maximum additional amount that may be distributed under the earn-out agreement is up to 0.5 million additional shares.

See notes to consolidated financial statements.

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POWER-ONE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

See notes to consolidated financial statements.

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POWER-ONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The accompanying consolidated financial statements have been prepared without audit and reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of financial position and the results of operations for the interim periods. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such SEC rules and regulations. Operating results for the period ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

      The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does 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 accompanying interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2003.

      Power-One, Inc.’s (“the Company”) reporting period coincides with the 52-to 53-week period ending on the Sunday closest to December 31, and its fiscal quarters are the 13- to 14-week periods ending on the Sunday nearest to March 31, June 30, September 30 and December 31. For simplicity of presentation, the Company has described the three- and six-month periods ended June 27, 2004 and June 29, 2003 as June 30, 2004 and 2003, respectively.

      Stock Compensation— The Company uses the intrinsic-value method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for stock options granted to employees. Accordingly, the Company does not recognize compensation expense for stock option grants to employees in the Consolidated Statements of Operations that have been made at fair market value.

      SFAS 123, “Accounting for Stock-Based Compensation,” encourages, but does not require, the recognition of compensation expense for employee stock-based compensation arrangements using the fair value method of accounting. The Company has elected the “disclosure only” alternative and has disclosed the pro forma net loss per share amounts using the fair value method. In accordance with SFAS No. 148,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

“Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123,” the required pro forma disclosure is shown below (in millions, except per share data).

      The pro forma amounts for the three- and six-month periods ended June 30, 2004 and 2003 do not include a tax benefit on the stock compensation due to the deferred income tax valuation allowance recorded by the Company in each respective period. The fair value of each option grant is estimated on the date of grant using the Black-Scholes model, with the following assumptions used in the three-month periods ended June 30, 2004 and 2003: risk-free interest rate of 4.2% and 3.3%, respectively; expected volatility of 46% and 52% respectively; an expected option life of 5.9 and 6.0 years, respectively; and no expected dividends for each of the periods. The following assumptions were used in the Black-Scholes model for the six-month periods ended June 30, 2004 and 2003: risk-free interest rate of 3.9% and 3.4%, respectively; expected volatility of 52% and 71% respectively; an expected option life of 5.9 years for each of the periods; and no expected dividends for each of the periods. The aggregate fair value of stock options granted were $1.5 million and $0.9 million in the three-month periods ended June 30, 2004 and 2003, respectively, and $5.0 million and $16.0 million in the six-month periods ended June 30, 2004 and 2003, respectively.

      The Company grants restricted shares to certain key employees. These shares vest ratably over eight years. The unvested portion of all restricted shares is recorded on the balance sheet as deferred stock compensation.

      Recent Pronouncements and Accounting Changes— In December 2003, the FASB issued FIN No. 46R, “Consolidation of Variable Interest Entities.” This requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the company that has a controlling financial interest. It also provides the framework for determining whether an entity should be consolidated based on voting interest or significant financial support provided to it. The adoption of FIN No. 46R did not have any impact on the Company’s financial condition or results of operations.

      On February 14, 2003, the Company completed its acquisition of di/dt Inc., a Delaware corporation based in Carlsbad, California and a technology innovator in the design and manufacture of high-density DC/ DC converters used mainly in communications systems and networking environments. The Company acquired di/dt primarily for its innovative technology in the DC/ DC space.

      The initial purchase price for di/dt was approximately $12.4 million, which consisted of the following: a $2.0 million note receivable from, as well as a $3.1 million cost basis investment in, di/dt prior to the acquisition; 1.4 million shares of the Company’s common stock valued at $6.3 million; and $1.0 million in

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

cash and acquisition costs. In addition to the $12.4 million purchase price, the Company granted a cash bonus of approximately $1.0 million to the original founders of di/dt upon acquisition, which was recorded as compensation expense, and the Company agreed to pay up to an additional 1.0 million shares of the Company’s common stock as earn-out to former di/dt shareholders. The earn-out is payable in varying installments for results through December 31, 2004, and is contingent upon the attainment of defined operational performance and new product introduction during 2003 and 2004. Earn-out payments made are recorded as additional goodwill. During 2003, a total of 0.3 million shares of Company’s common stock were distributed as part of the earn-out to former di/dt shareholders. During the quarter ended March 31, 2004, an additional 0.2 million shares of the Company’s common stock were distributed as part of the earn-out to former di/dt shareholders. There were no additional shares of the Company’s common stock that were distributed during the quarter ended June 30, 2004. The maximum additional amount that may be earned in 2004 under the earn-out agreement is 0.5 million shares. No earn-out provisions extend beyond the year ending December 31, 2004.

      The net purchase price, plus acquisition costs, was allocated to tangible assets and intangible assets. The excess of the aggregate purchase price over the estimated fair values of the net tangible assets acquired was recognized as goodwill and product technology. Product technology is being amortized over five years. The consolidated statements of operations, comprehensive income (loss) and cash flows for the six months ended June 30, 2003, included four months of di/dt’s operations. No pro forma information was included, as di/dt was not material to the Company’s financial position or operations.

      Prior to the acquisition, the Company held an exclusive license from di/dt for certain current and prospective di/dt products, under which license the Company was making royalty payments to di/dt relating to sales of licensed products. Stephens, Inc., a significant shareholder of the Company, was also a significant shareholder in di/dt. Additionally, the Company’s outside counsel, O’Melveny & Myers LLP, held a modest equity position in di/dt, and the Company’s CEO, Mr. Goldman, held a very small personal position in di/dt via an LLC created by Stephens, Inc. in connection with the original investment of Stephens, Inc. in di/dt.

      Inventories consist of the following (in millions):

      Basic and diluted loss per share is computed by dividing net loss by the weighted average common shares outstanding for the period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Basic and diluted loss per share are calculated as follows (in millions, except per share data):

      The dilutive effect of stock options outstanding at June 30, 2004 and 2003 was not included in the calculation of diluted loss per share for the three-and six-month periods ended June 30, 2004 and 2003 because to do so would have had an anti-dilutive effect as the Company had a net loss for each of these periods. The weighted average number of shares excluded from the diluted loss per share computation was approximately 3.0 million and 1.7 million for the three-month periods ended June 30, 2004 and 2003, respectively, and 3.3 million and 2.2 million for the six-month periods ended June 30, 2004 and 2003, respectively.

      Goodwill and intangible assets consist of the following (in millions):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The changes in the carrying amount of goodwill for the six months ended June 30, 2004 is as follows (in millions):

      Estimated annual amortization expense for 2004 through 2008 is as follows (in millions):

      In February 2004, the Company elected to repay its long term debt of $9.2 million, which was for the purchase of a subsidiary’s office and manufacturing facility in Norway, from its cash on hand.

      In addition, the Company maintains credit facilities with various banks in Europe and Asia. These credit facilities were acquired primarily as a result of acquisitions in 1998 and 2000. The aggregate limit on all credit facilities is approximately $8.2 million. The credit facilities bear interest on amounts outstanding at various intervals based on published market rates. Some credit agreements require the Company’s subsidiaries to maintain certain financial covenants and to provide certain financial reports to the lenders. At June 30, 2004, the only outstanding balance was on the Swiss credit facility and totaled $2.0 million at a weighted-average interest rate of 2.3%.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Other accrued expenses consist of the following (in millions):

      The Company is involved in certain claims and legal proceedings, including one patent dispute that arose in the normal course of business. Management does not believe that the outcome of any of the claims or legal proceedings in which the Company is currently involved will have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

VLT Corporation and Vicor Corporation v. Power-One, Inc., United States District Court, District of Massachusetts, Civil Action No. 01-10207-PBS. The Complaint, filed on February 5, 2001, alleges infringement of Vicor’s U.S. patent number Re. 36,098 by certain products of Power-One. The Complaint seeks certain injunctive relief and compensatory damages. The Company has vigorously defended the matter, denying all infringement, and aggressively refuting Vicor’s projections of, and claims for, potential recoverable damages. The trial court issued its ruling on patent claims construction, and on respective summary judgment motions of Vicor and Power-One, on January 2, 2003. The court’s ruling was consistent with the Company’s position, and supported the Company’s assertion that its accused products do not infringe the patent. The court denied both party’s motions for summary judgment.

      As a result of the January 2, 2003 ruling, judgment of non-infringement was entered in the Company’s favor on June 20, 2003. Vicor appealed this judgment, seeking appellate review of the January 2, 2003 claims construction ruling.

      The Federal Circuit Court of Appeals ruled in favor of the Company on May 24, 2004, upholding the January 2, 2003 trial court ruling which found no infringement by the Company’s products of the Vicor patent. Further appellate proceedings are pending.

      As part of its defense of the current patent dispute, the Company has asked for indemnification and reimbursement from escrow accounts which were created as part of the acquisition of Melcher AG. Management believes that a substantial portion of the costs of defense, and/or ultimate award (if any) the Company may pay in this patent case will be reimbursed from amounts held in the respective escrow accounts.

      During the quarter ended June 30, 2004, the Company announced a restructuring plan in accordance with SFAS 146, “Accounting for Costs Associated with Disposal Activities.” The Company recorded pre-tax charges of $0.8 million related to the restructuring of its operations primarily in Europe.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Restructuring Costs

      The restructuring charges included a workforce reduction in Europe, and the charge was comprised of severance and related benefits, consolidation of excess facilities, contract termination costs, and other shutdown costs. No restructuring charges were incurred during the three- and six-month periods ended June 30, 2003. The restructuring reserve at June 30, 2004, also includes severance related to a workforce reduction that occurred during the fourth quarter of 2003 as well as obligations on facilities that have been reserved in past years. The Company expects to pay the restructuring liabilities related to workforce reduction during 2004. The liabilities related to facilities closures contain continuing lease obligations, the longest of which extends to 2007.

      A summary of the restructuring costs and reserve activity during the six months ended June 30, 2004 is as follows:

Impairment of Fixed Assets

      During the quarter ended June 30, 2004, the Company performed an impairment review in accordance with SFAS 144 to determine whether any of its long-lived assets were impaired due to the restructuring of one of its European facilities. The Company identified manufacturing equipment, which was written down to fair market value resulting in an impairment charge of $0.7 million. The Company determined that the carrying values of these fixed assets would not be recovered from future cash flows of the continuing operations at this facility. Fair value was determined by using discounted cash flows. No asset impairment charges were incurred during the three- and six-month periods ended June 30, 2003.

      The Company offers its customers warranties on products sold based on product type and application. Management reviews and adjusts the warranty accrual based on warranty repair costs and the rate of return. Actual repair costs are offset against the reserve. A tabular presentation of the activity within the warranty accrual account for the six months ended June 30, 2004 and 2003 is presented below, in millions:

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Introduction

      We are a leading designer and manufacturer of hundreds of high-quality brand name power supplies/converters. We sell our products to original equipment manufacturers, distributors and service providers who value quality, reliability, technology and service. We have thousands of customers in the communications, industrial, transportation, automatic/semiconductor test equipment, medical equipment and other electronic equipment industries.

      We have four primary divisions: Compact Advanced Power Solutions (“CAPS”), Energy Solutions (“ES”), Silicon Power Systems (“SPS”), and di/dt. CAPS consists of the original Power-One AC/DC business and the high-density board-mounted DC/DC businesses obtained through our acquisitions of IPD in 1999 and of Melcher in 1998. ES represents the combination of our HC Power and Powec acquisitions in 2000. SPS is a new division that is engaged in developing next-generation silicon-based DC/DC technology. di/dt Inc., a technology leader in the DC/DC space, was acquired in 2003.

      Our CAPS division is a worldwide organization primarily engaged in the design, manufacture and sale of AC/DC and DC/DC power conversion products for multiple industries, although our products are generally geared toward the communications infrastructure and technology markets. Our board-mounted DC/DC products provide precise levels of DC power to sensitive electronic equipment such as routers and other communications systems. Our ES division is a global organization primarily engaged in the design, manufacture and sale of DC power systems to telecommunications and Internet service providers worldwide. Our SPS division is developing a family of innovative silicon-based products in the DC/DC space. di/dt is engaged in the design, manufacture and sale of DC/DC power conversion products for multiple industries, although most products are geared toward the communications infrastructure and technology markets. All products are sold under the Power-One brand name by our sales force.

      The communications infrastructure industry, in which much of our business is concentrated, entered a severe downturn in 2001. We initiated various cost containment measures at that time to mitigate the negative effects of the downturn, which resulted in significant downsizings of our operations, as well as restructuring and asset impairment charges, and inventory write-downs during 2001 and 2002. We saw improvements in our business and increased sales in 2003 and the first half of 2004 over 2002 and 2003 levels, respectively, and expect continued improvements during 2004. In fact, we believe that the industry is in an upturn, and we are anticipating and preparing for a return to growth and profitability during the latter half of 2004. However, we continue working to identify cost reduction opportunities, and may record additional restructuring charges in the future as we seek additional cost savings through closures and consolidation of certain manufacturing, research and development, and administrative facilities and related reductions in headcount.

      We are in the process of shifting our business model away from in-house manufacturing and toward the increased use of contract manufacturers, particularly in Asia. We believe that contract manufacturers will provide us with more flexibility and better ability to respond to changes in the market, and will be less capital intensive. In addition, we are shifting R&D and other administrative resources to locations with a lower cost structure and proximity to many of our customers and contract manufacturers.

      The SPS division is strategically significant to the Company and is engaged in the design of highly innovative and efficient silicon-based solutions for next generation DC/DC power conversion products in the Intermediate Bus Architecture (IBA) market. Our maXyz^TM product line, which was introduced in 2003, was developed specifically for the IBA market, and in 2004, we introduced a new digital power management architecture and our new Z-series product line and digital controller. We are scheduled to begin full production of these products by the end of the third quarter of 2004. We spent and anticipate spending significant capital on R&D related to this developing area of power conversion technology, but there can be no assurance that the market will accept the resulting technology or that we will recover our investment in this technology through sales of new products.

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      During the second quarter ended June 30, 2004, the Company announced and implemented a plan to restructure its European operations. The plan primarily consisted of a workforce reduction at one of the Company’s European facilities along with the impairment of the manufacturing equipment at that facility, as it was determined that the current values would not be recovered by the future cash flows from continuing operations of that facility. Certain functions of that facility were relocated to the Company’s other lower cost European facilities.

Critical Accounting Policies

      Application of our accounting policies requires management to make judgments and estimates about the amounts reflected in the financial statements. Management uses historical experience and all available information to make these estimates and judgments, although differing amounts may be reported if there are changes in the assumptions and estimates. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventory allowances, restructuring costs, impairment charges, depreciation and amortization, sales returns, warranty costs, taxes and contingencies. Management has identified the following accounting policies as critical to an understanding of our financial statements and as areas most dependent on management’s judgment and estimates.

      Revenue Recognition— We recognize revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and collectibility is probable. We recognize revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition.” Sales are recorded net of sales returns and discounts, which are estimated at the time of shipment based upon historical data. Changes in assumptions regarding the rate of sales returns and discounts earned by our customers could impact our results.

      Impairment of Long-Lived Assets and Goodwill— We review the recoverability of the carrying value of long-lived assets using the methodology prescribed in Statement of Financial Accounting Standards (SFAS) 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.” SFAS 144 superceded SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Upon such an occurrence, recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows to which the assets relate, to the carrying amount. If the asset is determined to be unable to recover its carrying value, it is written down to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. Methodologies for determining fair value are inherently based on estimates that may change, such as the useful lives of assets and our cash flow forecasts associated with certain assets. A change in these estimates may result in impairment charges, which would impact our operating results.

      We review the carrying value of goodwill and non-amortizable intangible assets using the methodology prescribed in SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 requires that we not amortize goodwill, but instead subject it to impairment tests on at least an annual basis and whenever circumstances suggest that goodwill may be impaired. These impairment tests are also dependent on management’s forecasts, which frequently change. A change in our forecasts may result in impairment charges.

      Restructuring Costs— Effective January 1, 2003, we adopted and recorded restructuring charges in accordance with SFAS 146, “Accounting for Costs Associated with Disposal Activities,” which requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, in contrast to the date of an entity’s commitment to an exit plan. Restructuring costs were related to the downsizing of our operations and primarily consisted of specific charges that had been incurred or were to be incurred with no future economic benefit. These charges included costs related to personnel severance, continuing lease obligations for vacant facilities and write-off of leasehold improvements and equipment therein, and certain contract termination penalties and other shutdown costs. Calculation of the restructuring reserves includes management’s judgment regarding closed facilities, which

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      Deferred Income Tax Asset Valuation Allowance— We record a deferred income tax asset in jurisdictions where we generate a loss. We also record a valuation allowance against these deferred tax assets in accordance with SFAS 109, “Accounting for Income Taxes,” when, in management’s judgment, it is more likely than not that the deferred income tax assets will not be realized in the foreseeable future.

      Inventories— Inventories are stated at the lower of cost (first-in, first-out method) or market. Slow moving and obsolete inventory are written down quarterly based on a comparison of on-hand quantities to 12-month projected usages. Additionally, reserves for non-cancelable open purchase orders for parts we are obligated to purchase in excess of projected usage, or for open purchase orders where the market price is lower than the purchase order price, are recorded as other accrued expenses on the balance sheet. Calculation of inventory write-downs is based on management’s assumptions regarding projected usage of each component, which are subject to changes in market demand.

      Accounts Receivable and Allowance for Doubtful Accounts— We establish the allowance for doubtful accounts using the specific identification method, and provide a reserve in the aggregate. Our estimates for calculating the aggregate reserve is based on historical information. Any changes to our assumptions or estimates may impact our operating results.

      Recent Pronouncements and Accounting Changes— In December 2003, the FASB issued FIN No. 46R, “Consolidation of Variable Interest Entities.” It requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the company that has a controlling financial interest. It also provides the framework for determining whether a variable interest entity should be consolidated based on voting interest or significant financial support provided to it. The adoption of FIN No. 46R did not have a material impact on our financial condition or results of operations.

Results of Operations

      Net Sales. Net sales increased $15.5 million, or 12.3%, to $141.2 million for the six months ended June 30, 2004 from $125.7 million for the six months ended June 30, 2003. Net sales increased $3.2 million, or 4.6%, to $72.5 million for the quarter ended June 30, 2004 from $69.3 million for the quarter ended June 30, 2003. The increase was attributable to strength in sales to distributors and strength in high power product lines, and due to growth related to our di/dt acquisition.

      Net sales by customer category were as follows: