SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the transition period from _____________to_____________.

Commission File Number 0-9653

XICOR, INC.

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

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

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

NUMBER OF SHARES OUTSTANDING AT MAY 3, 2004
29,418,805

XICOR, INC.

FORM 10-Q

QUARTER ENDED MARCH 28, 2004

INDEX

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Part I: FINANCIAL INFORMATION

Item 1. Financial Statements.

XICOR, INC.

See accompanying notes to condensed consolidated financial information

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XICOR, INC.

See accompanying notes to condensed consolidated financial information

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XICOR, INC.

See accompanying notes to condensed consolidated financial information

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

Note 1 – Interim financial information:

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results of the interim periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The condensed consolidated results of operations for the three months ended March 28, 2004 are not necessarily indicative of the results to be expected for the full year. These financial statements, notes and analyses should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission.

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

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed using the weighted average number of common shares and all dilutive potential common shares outstanding. The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

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Potential common shares consisting of 4.0 million stock options and 0.1 million warrants to purchase Xicor common stock were the only reconciling items between the number of shares used to calculate Basic EPS and Diluted EPS for the first quarter of 2004. Thirty-two thousand anti-dilutive weighted average shares have been excluded from the effect of diluted securities because the options’ exercise prices were greater than the average price of the common stock for the first quarter of 2004. For the first quarter of 2003, the number of shares used in the calculations of both EPS amounts were the same since stock options aggregating 7.3 million at a weighted average price of $4.75 per share and warrants to purchase 1.0 million shares of common stock at $12.24 per share were excluded as they were antidilutive due to the net loss.

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

Note 3 — Accounting for stock options

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

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Note 4 — Balance sheet components:

Accounts receivable:

Accounts receivable at March 28, 2004 and December 31, 2003 are presented net of an allowance for doubtful accounts of $500,000.

Goodwill and intangibles:

At March 28, 2004 and December 31, 2003 goodwill, which resulted from the April 2002 acquisition of Analog Integration Partners LLC (AIP) and the October 2003 acquisition of Poweready, Inc. (“PRI”), totaled $20.3 million. In accordance with SFAS No. 142 goodwill is not amortized but instead evaluated periodically to determine whether events or circumstances have occurred indicating that goodwill might be impaired.

The following table summarizes our purchased intangible assets and related accumulated amortization from our 2003 acquisition of PRI and our 2002 acquisition of AIP:

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Amortization of purchased intangible assets was $454,000 in the first quarter of 2004 and $225,000 in the first quarter of 2003. Estimated annual amortization of purchased intangible assets, based on our intangible asset balance at March 28, 2004, is as follows:

Product Warranties:

In accordance with industry practice, we provide a limited warranty for our devices against defects in materials and workmanship for periods ranging from 90 days to one year. We accrue for warranty costs based on historical trends in product failure rates and the expected costs to provide warranty replacements. The following table summarizes the activity related to the product warranty liability (in thousands):

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

Note 5. – Other Income:

Other income for the first quarter of 2004 consists of a one-time gain of $0.2 million resulting from stock received from the demutualization of an insurance company in which we were a policyholder.

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Note 6. – Proposed Merger with Intersil Corporation

On March 14, 2004, we announced the execution of a definitive merger agreement with Intersil Corporation (“Intersil”) whereby we will merge with a wholly-owned subsidiary of Intersil. Under the terms of the Merger Agreement, subject to availability of desired consideration types, Xicor shareholders may elect to receive the merger consideration in all cash, all stock, or a combination of cash and stock, in each case having a value per Xicor share of $8.00 plus 0.335 of a share of Intersil common stock, allocated by prorating the cash and shares available in the merger among elections made. If the value of Intersil common stock issued in the merger is equal to or greater than 40% of the total consideration to be paid for Xicor common stock, the merger is intended to be reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. The consummation of the merger is subject to the approvals of our stockholders, effectiveness of the Intersil S-4 registration statement that is being reviewed by the SEC and other customary closing conditions. Under certain circumstances, we may be required to pay a $15.8 million termination fee if the merger agreement is terminated. In connection with the merger agreement, we entered into Amendment No. 1 to our Rights Agreement to exempt the proposed merger from the application of the Rights Agreement. During the first quarter of 2004, we incurred $0.9 million in merger-related expenses.

On April 14, 2004, Freeport Partners, LLC (“Freeport”), a purported shareholder of Xicor, filed an action in the California Superior Court in Santa Clara County against Intersil, Xicor and Xicor’s directors. The complaint alleges causes of action for breach of fiduciary duty, failure to disclose, and indemnification, arising out of the negotiation of Intersil’s proposed acquisition of Xicor. Specifically, the complaint alleges that defendants breached fiduciary duties to the Xicor shareholders by agreeing to sell Xicor for an allegedly unfair price while allegedly receiving remuneration not received by other shareholders. The complaint seeks an injunction against Intersil’s acquisition of Xicor, additional disclosures to Xicor shareholders, damages of an unspecified amount and attorney’s fees. On May 6, 2004, the Court denied Freeport’s motion for a temporary restraining order and expedited discovery. Intersil, Xicor, and Xicor’s directors have filed demurrers to the complaint, arguing that it fails to state an actionable claim against them. The hearing on the demurrers currently is scheduled for June 22, 2004. A case management conference has been set for August 10, 2004. Discovery has commenced, but no trial date has been set. We intend to vigorously defend against the lawsuit.

Note 7. – Recent Accounting Pronouncements:

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. In December 2003, the FASB issued FIN 46R which supercedes FIN 46. FIN 46R will be applicable to all non-SPEs created prior to February 1, 2003 by Public Entities that are not small business issuers at the end of the first

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interim or annual reporting period ending after March 15, 2004. We believe that the adoption of this standard will have no material impact on our financial statements.

In April 2004, the Emerging Issues Task Force issued Statement No. 03-06, or EITF 03-06, “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share”. EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. The adoption of EITF 03-06 is not expected to have a material effect on our results of operations or financial position.

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

The following discussion should be read in conjunction with the accompanying Quarterly Financial Information and Notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the three months ended March 28, 2004 are not necessarily indicative of results to be expected in future periods. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially from those contained in the forward-looking statements due to a variety of factors, including, but not limited to, the factors identified in the “Factors Affecting Future Results” section below. Also see “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995” below.

RESULTS OF OPERATIONS

Overview and Recent Developments

We design, develop and market high performance analog mixed-signal integrated circuits used in communications, computing, networking, consumer and industrial applications. Our Mixed-Signal Products include data conversion products, power management integrated circuits, application specific standard products and time-keeping devices. Our programmable analog mixed-signal components regulate, control, convert and manage various voltages and currents through the use of a serial interface and internal EEPROM.

On March 14, 2004, we announced the execution of a definitive merger agreement with Intersil Corporation (“Intersil”) whereby we will be acquired by Intersil. Under the terms of the merger agreement, subject to availability of desired consideration types, Xicor shareholders may elect to receive the merger consideration in all cash, all stock, or a combination of cash and stock, in each case having a value per Xicor share of $8.00 plus 0.335 of a share of Intersil common stock, allocated by prorating the cash and shares available in the merger among elections made. If the value of Intersil common stock issued in the merger is equal to or greater than 40% of the total consideration to be paid for Xicor common stock, the merger is intended to be reorganization

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within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. The consummation of the merger is subject to the approval of our stockholders, effectiveness of the Intersil S-4 registration statement that is being reviewed by the SEC, and other customary closing conditions.

On April 14, 2004, Freeport Partners, LLC (“Freeport”), a purported shareholder of Xicor, filed an action in the California Superior Court in Santa Clara County against Intersil, Xicor and Xicor’s directors. The complaint alleges causes of action for breach of fiduciary duty, failure to disclose, and indemnification, arising out of the negotiation of Intersil’s proposed acquisition of Xicor. Specifically, the complaint alleges that defendants breached fiduciary duties to the Xicor shareholders by agreeing to sell Xicor for an allegedly unfair price while allegedly receiving remuneration not received by other shareholders. The complaint seeks an injunction against Intersil’s acquisition of Xicor, additional disclosures to Xicor shareholders, damages of an unspecified amount and attorney’s fees. On May 6, 2004, the Court denied Freeport’s motion for a temporary restraining order and expedited discovery. Intersil, Xicor, and Xicor’s directors have filed demurrers to the complaint, arguing that it fails to state an actionable claim against them. The hearing on the demurrers currently is scheduled for June 22, 2004. A case management conference has been set for August 10, 2004. Discovery has commenced, but no trial date has been set. We intend to vigorously defend against the lawsuit.

Sales

Total sales for the three months ended March 28, 2004 were $12.0 million, a 25% increase compared to total sales for the corresponding prior year quarter of $9.6 million.

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

We have had several consecutive quarters of sequential growth in mixed-signal sales, which has lead to increases in total sales. Mixed-signal sales increased $2.8 million or 41% in the first quarter of 2004 compared to the first quarter of 2003 primarily due to a broad-based increase in product sales of approximately $2.5 million and to a lesser extent, an increase in engineering revenues of approximately $0.3 million. Engineering revenues were 5% of total sales in the first quarter of 2004 compared to 4% in the first quarter of 2003.

Memory product sales declined $0.4 million or 16% in the first quarter of 2004 compared to the first quarter of 2003. Parallel EEPROM product sales decreased in the first quarter of 2004 compared to the first quarter of 2003 principally due to $0.3 million lower sales of high density parallel EEPROMs as the overall market for these products has contracted and we continue to focus on our mixed-signal business. Serial EEPROM

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product sales declined $0.1 million year over year and are expected to continue to decline as we have substantially exited from that business.

Cost of Sales and Gross Profit

Our gross profit percentage is expected to fluctuate from quarter to quarter as a result of changes in product mix, product costs and average selling prices. Over the past several years we have been transitioning the company from a manufacturer of commodity memory products with low gross margins into a fabless semiconductor company focused on the high performance analog mixed-signal segment of the semiconductor market with higher margins.

Gross profit as a percentage of sales was 57% in the first quarter of 2004 and 51% in the first quarter of 2003. The gross profit percentage in the first quarter of 2004 improved compared to the first quarter of 2003 due to a product mix that consisted of a higher proportion of mixed-signal products and better absorption of fixed costs as production volumes were higher in the first quarter of 2004 than the first quarter of 2003. The net benefit to the gross profit percentage resulting from the sale of products that had previously been written down was less than $0.1 million in the first quarter of both 2004 and 2003.

Research and Development

Research and development expenses amounted to $2.6 million or 22% of sales in the first quarter of 2004 compared to $2.9 million or 30% of sales in the first quarter of 2003. Research and development expenses decreased by $0.3 million in the first quarter of 2004 compared to the first quarter of 2003 principally due to a $0.3 million reduction in spending associated with improved productivity in new product development activities.

Selling, General and Administrative

Selling, general and administrative expenses amounted to $2.9 million or 24% of sales in the first quarter of 2004 compared to $2.5 million or 26% of sales in the first quarter of 2003. The $0.4 million increase in selling, general and administrative expenses was primarily due to a $0.3 million increase in personnel costs and to a lesser extent, a $0.1 million increase in advertising to promote new products.

Amortization of Purchased Intangible Assets

Amortization of intangibles was $0.5 million in the first quarter of 2004 compared to $0.2 million in the first quarter of 2003. Amortization of purchased intangibles increased in 2004 compared to 2003 due to our acquisition of PRI in the fourth quarter of 2003.

Merger — Related Expenses

Merger-related expenses are the expenses we incurred during the first quarter of 2004 related to the proposed merger with Intersil Corporation. Since we are being acquired, all merger-related expenses we incur are expensed. The first quarter 2004 merger-related expenses consist primarily of financial advisory, legal and accounting fees. We expect merger-related expenses to be significant and ongoing as we work towards completing the merger.

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Other Income and Expense

Interest expense in the first quarter of 2004 amounted to $12,000 compared to $0.8 million in the first quarter of 2003. In April 2003, we repurchased all $35 million of the outstanding 5.5% convertible subordinated notes, which substantially reduced our interest expense and amortization commencing in the second quarter of 2003.

Interest income in the first quarter of 2004 amounted to $68,000 compared to $143,000 in the first quarter of 2003. Interest income decreased year over year primarily as a result of a decrease in the average balance invested and, to a lesser extent, lower interest rates.

Other income for the first quarter of 2004 consists of a one-time gain of $0.2 million resulting from stock received from the demutualization of an insurance company in which we were a policyholder.

Taxes

The first quarter 2004 provision for income taxes consisted primarily of federal and state minimum taxes, which resulted from limitations on the use of net operating loss carryforwards, and foreign taxes. No taxes were provided in the first quarter of 2003 due to the net loss. Net deferred tax assets at March 28, 2004 and December 31, 2003 were fully reserved because of the uncertainty regarding the ultimate realization of these assets.

LIQUIDITY AND CAPITAL RESOURCES

At March 28, 2004, we had $24.3 million in cash, cash equivalents and short-term and long-term investments compared to $22.3 million at the end of 2003. During the first quarter of 2004 we generated $88,000 of net cash from operating activities and we had net income of $171,000. Accounts receivable increased by $1.1 million in the first quarter due to the timing of sales within the quarter which was partially offset by a $0.5 million increase in accounts payable due to merger-related expenses. Cash used in investing activities of $2 million in the first quarter of 2004 consisted of net investments in cash-based available for sale securities. We generated $2 million of cash from financing activities in the first quarter of 2004 from the issuance of common stock under employee stock plans.

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On March 14, 2004 we announced the execution of a definitive merger agreement with Intersil whereby we will be acquired by Intersil. We expect merger-related expenses to be significant and ongoing as we work towards completion of the merger. Under certain circumstances, we may be required to pay a $15.8 million termination fee if the merger agreement is terminated.

Capital expenditures for 2004 are currently planned at less than $1 million and are primarily related to test and product design equipment. At March 28, 2004, we had entered into commitments for equipment purchases aggregating less than $0.5 million.

At March 28, 2004, our principal sources of liquidity were cash, cash equivalents and short and long-term investments aggregating $24.3 million. Management believes that our existing sources of liquidity will be adequate to support our activities for the next 12 months.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. In December 2003, the FASB issued FIN 46R which supercedes FIN 46. FIN 46R will be applicable to all non-SPEs created prior to February 1, 2003 by Public Entities that are not small business issuers at the end of the first interim or annual reporting period ending after March 15, 2004. We believe that the adoption of this standard will have no material impact on our financial statements.

In April 2004, the Emerging Issues Task Force issued Statement No. 03-06, or EITF 03-06, “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share”. EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. The adoption of EITF 03-06 is not expected to have a material effect on our results of operations or financial position.

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

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding completion of, and the terms of, our proposed merger with Intersil, the expectation that serial EEPROM sales will continue to decline, that our gross profit percentage will fluctuate from quarter to quarter as a result of changes in the product mix,

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product costs and average selling prices, that merger-related expenses will be significant and ongoing as we work towards completion of the merger, the projection that 2004 capital expenditures will be less than $1 million, and that our existing sources of liquidity will be adequate to support our activities for the next 12 months.

Forward-looking statements are subject to certain risks and uncertainties that could cause the actual results to differ materially from those projected. Factors that could cause actual results to differ materially include the following: failure to satisfy various conditions to the closing of our merger with Intersil, including requisite shareholder approval; general economic conditions and conditions specific to the semiconductor industry; fluctuations in customer demand, including loss of key customers, order cancellations or reduced bookings; product mix; competitive factors such as pricing pressures on existing products and the timing and market acceptance of new product introductions (both by us and our competitors); our ability to have available an appropriate amount of low cost foundry production capacity in a timely manner; our foundry partners’ timely ability to successfully manufacture products for us using our proprietary technology; any disruptions of our foundry relationships; manufacturing efficiencies; the ability to continue effective cost reductions; currency fluctuations; the successful and timely development and introduction of new products and submicron processes; and the risk factors listed from time to time in our SEC reports, including but not limited to the “Factors Affecting Future Results” section following and Part I, Item 1. of our Annual Report on Form 10-K for the year ended December 31, 2003. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release or otherwise disclose the result of any revision to these forward-looking statements that may be made as a result of events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

RISK FACTORS AFFECTING FUTURE RESULTS

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

RISKS RELATED TO OUR PROPOSED MERGER WITH INTERSIL CORPORATION

We face numerous risks in connection with the proposed merger with Intersil Corporation, which may adversely affect our results of operations whether or not the merger is completed, and the merger may not be completed on a timely basis or at all.

On March 14, 2004, we entered into a merger agreement with Intersil. Under the terms of the merger agreement, subject to the receipt of required shareholder and regulatory approvals, Xicor will merge with a wholly-owned subsidiary of Intersil. This transaction creates additional risks including:

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Unanticipated costs relating to the merger;

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Diversion of management’s time and attention from our existing business;

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Disruption of our ongoing business operations;

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Potential loss of key employees and employee productivity;

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Adverse effects on existing business relationships with customers and customer prospects, including potential loss of customers;

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Potential revenue declines as a result of customer, potential customer and distributor uncertainty;

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The inability to successfully integrate our operations, products and personnel with those of Intersil in a timely and efficient manner, or at all; and

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The inability to achieve the strategic objectives and anticipated potential benefits of the merger.

In addition, if the merger is not consummated for any reason, we may be subject to a number of risks including:

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The effect of incurring substantial costs related to the merger, such as legal, accounting and financial advisor fees, which will be required to be paid even if the merger is not consummated;

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Our ability to retain key employees may be adversely affected;

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Our relationships with customers, distributors and manufacturers' representatives may be adversely affected;

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The price of our common stock may decline; and

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Depending upon the circumstances of termination of the merger, the possible requirement that we pay a $15.8 million termination fee to Intersil.

We do not know whether the acquisition will close, or, if it closes, that we will be able to successfully integrate our business, products, technologies or personnel with those of Intersil or meet our financial or other strategic objectives. Any failure to do so could seriously harm our business, financial condition and results of operations.

RISKS RELATED TO OUR OPERATIONS

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

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

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

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

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

We cannot assure you that we will be able to identify new product opportunities successfully, develop and bring to market new products at competitive costs, achieve design wins or respond effectively to new technological changes or product announcements by our competitors. Furthermore, we may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense. Failure in any of these areas could harm our business, operating results and financial condition and potentially impair the $20.3 million assigned to goodwill.

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

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

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

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

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

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

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

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

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reduced control over delivery schedules and quality;

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the potential lack of adequate capacity, particularly during periods of strong demand;

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difficulties selecting and integrating new foundries and subcontractors;

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Limited warranties by third-party manufacturers on products supplied to us; and

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potential increases in product costs due to capacity shortages and other factors.

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

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

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

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

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

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We may fail to successfully integrate our business and technologies with those of the company that we recently acquired.

We completed the acquisition of Poweready, Inc. in October 2003. If we fail to integrate this business successfully or properly, our quarterly and annual results may be seriously harmed. Integrating people, technology, products and services with our existing business could be expensive, time-consuming and a strain on our resources. Specific issues that we face with regard to our acquisition include the difficulty of integrating acquired technology, the need to integrate and coordinate geographically separated organizations, the potential disruption of our ongoing business and distraction of management, the failure to successfully develop acquired technology resulting in the impairment of amounts capitalized as intangible assets, unanticipated expenses related to technology integration and the potential unknown liabilities associated with the acquired business.

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

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

In addition, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. From time to time, in response to anticipated long lead times to obtain inventory and materials from our outside suppliers and foundries, we order materials and produce finished products in advance of anticipated customer demand. This advance ordering and production has resulted in, and may continue to result in, excess inventory levels or inventory write-downs if expected orders fail to materialize or prices decrease substantially.

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

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

Due to the length of the product design-in cycle, we usually require more than nine months to realize volume shipments after a customer first samples our product. We first work with customers to achieve a design win, which may take three months or longer. Our customers then complete the design, testing and evaluation process and begin to ramp up production, a period which typically lasts an additional six months or longer. As a result, a significant period of time

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may elapse between our research and development efforts and our realization of revenue, if any, from volume purchasing of our products by our customers.

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

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

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

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

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

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

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

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

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

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

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

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

Sales outside of North America, based upon the location to which the product was shipped, accounted for approximately 61% of total net sales in the first quarter of 2004. Our international business activities are subject to a number of risks, any of which could impose unexpected costs on us that would have an adverse effect on our operating results. These risks include difficulties in complying with regulatory requirements and standards; tariffs and other trade barriers; costs and risks of localizing products for foreign countries; severe currency fluctuations and economic deflation; reliance on third parties to distribute our products; longer accounts receivable payment cycles; potentially adverse tax consequences; and burdens of complying with a wide variety of foreign laws.

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

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

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

Technology companies like ours have a history of using broad based employee stock option programs to hire, incentivize and retain our workforce in a competitive marketplace. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, allows companies the choice of either using a fair value method of accounting for options which would result in expense recognition for all options granted, or using an intrinsic value method, as

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prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method. We have elected to apply APB 25 and accordingly we generally do not recognize any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant.

On March 31, 2004, the Financial Accounting Standard Board (FASB) issued an Exposure Draft, Share-Based Payment: an amendment of FASB statements No. 123 and 95, which would require a company to recognize, as an expense, the fair value of stock options and other stock-based compensation, thereby eliminating the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees. The FASB expects to have the new standard become effective sometime in 2005. If the FASB requires expensing of employee stock options by all companies, our results of operations prepared in accordance with generally accepted accounting principles would be adversely impacted.

Business interruptions could harm our business.

Our operations and those of our foundries and other manufacturing subcontractors are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. Business interruption insurance may not provide protection due to the deductible periods or be enough to compensate us for losses that may occur. Additionally, we have been unable to obtain earthquake insurance of reasonable costs and limits.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of

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our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal controls over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

On April 14, 2004, Freeport Partners, LLC (“Freeport”), a purported shareholder of Xicor, Inc. (“Xicor”), filed an action in the California Superior Court in Santa Clara County against Intersil Corporation, Xicor, Inc., and Xicor’s directors. The complaint alleges causes of action for breach of fiduciary duty, failure to disclose, and indemnification, arising out of the negotiation of Intersil’s proposed acquisition of Xicor. Specifically, the complaint alleges that defendants breached fiduciary duties to the Xicor shareholders by agreeing to sell Xicor for an allegedly unfair price while allegedly receiving remuneration not received by other shareholders. The complaint seeks an injunction against Intersil’s acquisition of Xicor, additional disclosures to Xicor shareholders, damages of an unspecified amount and attorney’s fees. On May 6, 2004, the Court denied Freeport’s motion for a temporary restraining order and expedited discovery. Intersil, Xicor, and Xicor’s directors have filed demurrers to the complaint, arguing that it fails to state an actionable claim against them. The hearing on the demurrers currently is scheduled for June 22, 2004. A case management conference has been set for August 10, 2004. Discovery has commenced, but no trial date has been set. We intend to vigorously defend against the lawsuit.

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

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(b)        Reports on Form 8-K:

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SIGNATURES

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

	XICOR, INC., a California Corporation
	By		/s/ Louis DiNardo
	Louis DiNardo
	Chief Executive Officer (Principal Executive Officer)

	By		/s/ Geraldine N. Hench
	Geraldine N. Hench
	Vice President, Finance and Administration (Principal Financial Officer)

Date: May 7, 2004

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EXHIBIT INDEX

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