UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2004

OR

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

COMMISSION FILE NUMBER 000-26124

IXYS CORPORATION
(Exact name of registrant as specified in its charter)

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

(408) 982-0700
(Registrant’s telephone number, including area 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.

Yes þ    No o

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

Yes þ    No o

THE NUMBER OF SHARES OF THE REGISTRANT’S COMMON STOCK, $0.01 PAR VALUE, OUTSTANDING AS OF OCTOBER 28, 2004 WAS 33,050,716.

IXYS CORPORATION

FORM 10-Q
September 30, 2004

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

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

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

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

4

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

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

5

IXYS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

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

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IXYS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Unaudited 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: allowance for sales returns, allowance for doubtful accounts, allowance for ship and debits, valuation of inventories, valuation of property, plant, equipment and intangible assets, revenue recognition, legal contingencies, goodwill, income tax and defined benefit plans. 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, 2004 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 net income or retained earnings.

2. Accounting for Stock-Based Compensation

     IXYS accounts for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Under APB No. 25, compensation cost is measured as the excess, if any, of the quoted market price of IXYS’s stock at the date of grant over the exercise price of the option granted. Compensation cost for stock options, if any, is recognized ratably over the vesting period. IXYS’s policy is to grant options with an exercise price equal to the quoted market price of IXYS’s stock on the grant date. Accordingly, no compensation has been recognized for its stock option plans. IXYS provides additional pro forma disclosures as required under SFAS No. 123, “Accounting for Stock-Based Compensation.”

     Had compensation cost for its stock plans been determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, IXYS’s net income (loss) and net income (loss) per share for the three and six month periods ended September 30, 2004 and 2003 would have changed to the pro forma amounts indicated below (in thousands, except per share amounts):

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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.

     3. Acquisition of Microwave Technology, Inc.

     On September 5, 2003, IXYS completed its acquisition of 100% of the voting equity interests of Microwave Technology, Inc. (“MwT”), a manufacturer of discrete gallium arsenide field effect transistors (“FETS”) based in the United States. The acquisition of MwT expanded the Company’s line of radio frequency, or RF, products by adding MwT’s gallium arsenide semiconductor products and increased IXYS’s presence in RF power semiconductors. The acquisition was intended to allow the combined organization to be more competitive and to achieve greater financial strength, operational efficiencies, access to capital and growth potential than either company could separately achieve. These factors contributed to the purchase price in excess of the fair value of MwT’s net tangible and intangible assets acquired, and as a result, IXYS has recorded goodwill in connection with this transaction. The acquisition was a stock-for-stock exchange. As such, none of the goodwill is expected to be deductible for tax purposes. MwT has been included in our statement of operations since September 5, 2003. In connection with the acquisition, approximately 767,000 shares of IXYS common stock and options exercisable for approximately 26,000 shares of IXYS common stock were issued. The total purchase price is as follows (in thousands):

     The fair value of IXYS’s common stock issued was determined using an average of the closing sales prices of a share of our common stock on Nasdaq National Market for the five trading days before and after the definitive agreement was signed. The fair value of the options assumed in the transaction was determined using the Black-Scholes option pricing model using an expected life of 2-years, risk free rate of 2% and expected volatility of 66% and no expected dividend rate. IXYS has finalized the fair values of identifiable intangible assets acquired. IXYS has allocated the purchase price to identifiable intangible assets, tangible assets, deferred tax assets, liabilities assumed and goodwill as follows (in thousands):

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Pro Forma Disclosure (in thousands, except per share data):

     The following unaudited pro forma combined amounts give effect to the acquisition of MwT as if the acquisition had occurred on April 1, 2003. On a pro forma basis, the results of operations of MwT for the three and six month period ended September 30, 2003 are consolidated with IXYS results for the three and six month period ended September 30, 2003. 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.

4. Inventories

Inventories consist of the following (in thousands):

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5. Computation of Net Income (Loss) Per Share

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 of options into common stock.

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

6. Segment Information

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, switch mode power supplies and medical electronics) and in the wired telecommunications industry. IXYS’s sales by major geographic area (based on destination) were as follows:

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     The following table sets forth revenues by product group for the three and six months ended September 30, 2004 and 2003:

7. Commitments and Contingencies

Legal Proceedings

     IXYS is currently involved in a variety of legal matters that arise in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters, including the matters described in the following paragraphs, will have a material adverse effect on IXYS’s financial condition, results of operations or cash flows. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations or cash flows for the period in which the ruling occurs.

     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.

     In 2002, the U.S. District Court entered a permanent injunction 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 and ruled 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 appealed and on March 19, 2004 the United States Court of Appeals for the Federal Circuit reversed or vacated all findings of patent infringement previously issued against IXYS by the U.S. District Court, and vacated the permanent injunction. On August 9, 2004, the Federal Circuit vacated the damages award.

     IXYS believes its defenses to the various remaining claims made by International Rectifier 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, results of operations and cash flows. Management has not accrued any amounts for damages in the accompanying balance sheets for the International Rectifier matter described above.

     As of August 11, 2004, IXYS and Advanced Power Technology, Inc. entered into an agreement and consented to a Stipulated Order of Dismissal regarding their patent infringement lawsuit in United States District Court in the Northern District of California. The agreement is a final settlement of all claims in the lawsuit.

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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.

Overview

     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.

     We design, manufacture and sell integrated circuits for a variety of applications. Our analog and mixed signal integrated circuits, or ICs, are principally used in telecommunication applications. Our mixed signal application specific ICs, or ASICs, address the requirements of the medical imaging equipment and display markets. Our power management and control ICs are used in conjunction with our power semiconductors.

     Our radio frequency, or RF, power semiconductors enable circuitry that amplifies or receives radio frequencies in wireless and other microwave communication applications, medical imaging applications and defense and space applications.

     For the quarter ended September 30, 2004, sales to customers in the United States represented approximately 29.1% and sales to international customers represented approximately 70.9% of our net revenues. Of our international sales, approximately 48.8% were derived from sales in Europe and the Middle East, approximately 48.2% were derived from sales in Asia and approximately 3.0% were derived from sales in the Americas other than the United States. No single end customer accounted for more than 10% of our net revenues for the quarter ended September 30, 2004.

Critical Accounting Policies and Significant Management Estimates

     The discussion and analysis of our financial condition and results of operations are based upon our unaudited, condensed, consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the reasonableness of its estimates. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     We believe the following critical accounting policies affect our more significant judgments and estimates used in preparing our consolidated financial statements.

     Allowance for sales returns. We maintain an allowance 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. Given that our revenues consist of a high volume of relatively similar products, our actual returns and allowances do not fluctuate significantly from period to period, and our returns provisions have historically been reasonably accurate. This allowance is included as part of the accounts receivable allowance for doubtful accounts on the balance sheet and as a reduction to gross revenues in the calculation of net revenues on the statement of operations.

     Allowance for doubtful accounts. We maintain an allowance 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. This allowance is reported on the balance sheet as part of the accounts receivable allowance for doubtful accounts and is included on the statement of operations as part of selling, general and administrative expense.

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     Allowance for ship and debits. Ship and debit is a program designed to assist distributors in meeting competitive prices in the marketplace on sales to their end customers. Ship and debit requires a request from the distributor for a pricing adjustment for a specific part for a customer sale to be shipped from the distributor’s stock. Ship and debit authorizations may cover current and future distributor activity for a specific part for sale to the distributor’s customer. In accordance with Staff Accounting Bulletin No. 104 Topic 13, “Revenue Recognition,” at the time we record sales to the distributors, we provide an allowance for the estimated future distributor activity related to such sales since it is probable that such sales to distributors will result in ship and debit activity. The sales allowance requirement is based on sales during the period, credits issued to distributors, distributor inventory levels, historical trends, market conditions, pricing trends we see in our direct sales activity with original equipment manufacturers and other customers, and input from sales, marketing and other key management. These procedures require the exercise of significant judgments. We believe that they enable us to make reliable estimates of future credits under the ship and debit program. Our actual results approximate our estimates. At the time the distributor ships the part from stock, the distributor debits us for the authorized pricing adjustment. This allowance is included as part of the accounts receivable allowance for doubtful accounts on the balance sheet and as a reduction to gross revenues in the calculation of net revenues on the statement of operations.

     Inventories. Inventories are recorded at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market value. We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. The value of our inventories is dependent on our estimate of future demand as it relates to historical sales. If our projected demand is over-estimated, we may be required to adjust the valuation of our inventories. We regularly review inventory quantities on hand and record a provision for excess inventory based primarily on our historical sales. We perform an analysis of inventories and compare the sales for the preceding year(s). To the extent we have inventory in excess of a pre-determined number of years, generally not more than 2 years, we recognize a write down for excess inventories. Our provision for excess inventories includes a provision for on hand finished goods inventories 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 write-down of inventories may be materially different.

     Valuation of property, plant, equipment, and intangible assets. We regularly evaluate the recoverability of our property, plant, 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. Reviews are regularly performed to determine whether facts and circumstances exist indicating that the carrying amount of assets may not be recoverable or that the useful life is shorter than originally estimated. We assess the recoverability of our assets by comparing the projected undisclosed net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. If assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the net book value of the assets is depreciated over the newly determined remaining useful lives.

     Revenue Recognition. We recognize revenue from product sales upon shipment provided that we have received an executed purchase order, the price is fixed and determinable, 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. Our management must make estimates of potential future product returns and so called “ship and debit” transactions related to current period product revenue. Our management analyzes historical returns 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 allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and allowances in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.

     For our nonrecurring engineering, or NRE, related to engineering work performed by our Clare Micronix division to design chip prototypes that will later be used to produce required units, customers enter into arrangements with Clare Micronix to perform engineering work for a fixed fee. Clare Micronix records 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.” Clare Micronix records research and development costs as expenses are incurred. Clare Micronix then credits research and development expenses 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.

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     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, results of operations or cash flows.

     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 implied fair value of our company by comparing the fair value of the reporting unit with its carrying amount, including goodwill. Then, if the carrying amount of the reporting unit exceeds its fair value, we perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. We determine the implied fair value of goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, we report the excess as a impairment loss. We perform this impairment test annually during our fourth quarter 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 a reasonable basis in determining whether an impairment charge should be taken. To date, our goodwill has not been considered to be impaired based on the results of our analysis. We have one reporting unit.

     Income Tax. 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. A valuation allowance is required to reduce our deferred tax assets to the amount that is more likely than not to be realized. In determining the amount of the valuation allowance, we consider estimated future taxable income as well as feasible tax planning strategies in each taxing jurisdiction in which we operate. If we determine that we will not realize all or a portion of our remaining deferred tax assets, we will increase our valuation allowance with a charge to income tax expense. Conversely, if we determine that we will ultimately be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be released to income as a credit to income tax expense. 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 a valuation allowance which could materially impact our financial position and results of operations. Our ability to utilize our deferred tax assets and the need for a related valuation allowance are monitored on an ongoing basis.

     Defined Benefit Plans. We maintain pension plans covering certain of our employees in foreign locations. For financial reporting purposes, net periodic pension costs are calculated based upon a number of actuarial assumptions, including a discount rate for plan obligations, assumed rate of return on pension plan assets and assumed rate of compensation increase for plan employees. All of these assumptions are based upon management’s judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact the future expense recognition and cash funding requirements of our pension plans.

Recent Accounting Developments

     The Financial Accounting Standard Board, or FASB, issued an exposure draft entitled “Share-Based Payment, an Amendment of FASB Statements Nos. 123 and 95.” This exposure draft would require stock-based compensation to employees to be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. In the absence of an observable market price for the stock awards, the fair value of the stock options would be based upon the valuation methodology that takes into consideration various factors, including the exercise price of the option, the expected term of the option, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares and the risk-free interest rate. The proposed requirements in the exposure draft would be effective for the first fiscal year beginning after June 15, 2005. The FASB intends to issue a final statement in late 2004. We will continue to monitor communications on this subject from the FASB in order to determine the impact on our financial statements.

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Results of Operations — Three and Six Month Periods Ended September 30, 2004 and September 30, 2003

     The following table sets forth selected consolidated statements of operations data for the fiscal periods indicated and the percentage change in such data from period to period.

     The following table sets forth certain financial data as a percentage of net revenues for the fiscal periods indicated. These historical operating results may not be indicative of the results for any future period.

     Net Revenues.

     The increase in net revenues in the quarter ended September 30, 2004 as compared to the quarter ended September 30, 2003 reflects increased sales across our product groups. The largest component was a $13.2 million increase in sales of power semiconductors. The increase in the power semiconductor group was due, in large part, to an increase of $5.9 million in sales of semiconductors for the consumer products market. The principal cause of the $2.6 million increase in RF power semiconductor and systems sales was the acquisition of Microwave Technology in September 2003, which accounted for $1.8 million of such increase.

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The following table sets forth the units, average selling price, or ASP, and revenues for each of our product groups in the quarter ended September 30, 2004 and compares such revenues against those of the quarter ended September 30, 2003:

     The increase in net revenues for the six months ended September 30, 2004 as compared to the six months ended September 30, 2003 reflects increased sales across our product groups. In comparing the six month periods, the increase in revenues from the sales of power semiconductors constituted $30.2 million of the increase. This included a $12.0 million increase in the sale of semiconductors for the consumer products market. The $5.7 million increase in RF power semiconductor and systems revenues was principally related to the Microwave Technology acquisition, which provided $4.8 million of the increase. The following table sets forth the units, ASP and revenues for each of our product groups in six months ended September 30, 2004 and compares such revenues against those of the six months ended September 30, 2003:

     Gross Profit.

     The increase in gross profit in terms of dollars in the three and six months ended September 30, 2004 as compared to the three and six months ended September 30, 2003 is primarily the result of the related increase in revenues and the acquisition of Microwave Technology. The acquisition of Microwave Technology resulted in a $949,000 increase in gross profit in the three months ended September 30, 2004 as compared to the three months ended September 30, 2003 and a $2.4 million increase in gross profit in the six months ended September 30, 2004 as compared to the six months ended September 30, 2003. Gross profit margin increased to 31.8% in the three months ended September 30, 2004 from 26.2% in the three months ended September 30, 2003 principally because of reductions in the cost to manufacture our products, combined with the addition for a full quarter of higher margin RF power product lines in the September 2004 quarter. Gross profit margin increased to 30.2% during the six months ended September 30, 2004 as compared to 28.4% in the six months ended September 30, 2003 principally because of the addition for the full period of higher margin RF power product lines and reductions in the cost to manufacture our products.

     Research, Development and Engineering.

     For the three and six months ended September 30, 2004 as compared to the three and six months ended September 30, 2003, research, development and engineering expenses increased with the funding of additional development projects to support our growth in revenues, but declined as a percentage of revenues due to revenue growth.

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     Selling, General and Administrative.

     For the three and six months ended September 30, 2004 as compared to the three and six months ended September 30, 2003, selling, general and administrative expenses increased principally due to increased expenses related to our growth in revenues, such as a general increase in the cost of compliance and sales commissions. Selling, general and administrative expenses declined as a percentage of revenues in the three and six months ended September 30, 2004 as compared to the three and six months ended September 30, 2003, principally as a result of our continuing efforts to control costs, combined with the impact of our growth in revenues. We have reclassified all expenses related to patent infringement litigation as SG&A expense, rather than other expense.

     Other Expense, Net.

     Other expense, net in the quarter ended September 30, 2004 was $77,000, as compared to $226,000 in the quarter ended September 30, 2003. Other expense, net in the six months ended September 30, 2004 was $433,000, as compared to $200,000 in the six months ended September 30, 2003. Other expense, net consists principally of gains and losses associated with changes in currency rates.

     Provision For Income Tax.

     In the quarter ended September 30, 2004, the provision for income tax reflected an effective tax rate of 38.8%, as compared to an effective tax rate of 31.0% in the quarter ended September 30, 2003. In the six months ended September 30, 2004, the provision for income taxes reflected an effective tax rate of 38.8%, as compared to an effective tax rate of 36.1% in the six months ended September 30, 2003. The higher tax rates for the three and six months ended September 30, 2004 were primarily related to a shift in profitability into higher tax rate jurisdictions.

Liquidity and Capital Resources

     At September 30, 2004, cash and cash equivalents of $48.8 million were 16.1% greater than the $42.1 million at March 31, 2004.

     Net cash provided by operating activities in the six months ended September 30, 2004 was $11.3 million, as compared to $2.2 million for the six months ended September 30, 2003. During the six months ended September 30, 2004, the principal working capital use of cash was to fund the growth in accounts receivable and inventory. Net accounts receivable rose $4.6 million, or 13.9%, from March 31, 2004 to September 30, 2004, primarily due to higher revenues and a higher percentage of Asian customers who typically have longer payment terms than domestic customers. No one customer accounted for more than 10% of our revenues during the six months ended September 30, 2004 or 10% of our receivables at September 30, 2004. Our inventories at September 30, 2004 increased $3.0 million, or 6.2%, from March 31, 2004, principally to support higher revenues. Accounts payable increased by $2.7 million, or 18.0%, from March 31, 2004 to September 30, 2004, largely due to timing differences and the increase in revenues. Accrued expenses and other liabilities increased by $4.9 million, or 27.1%, from March 31, 2004 to September 30, 2004, primarily due to an increase in income tax liabilities.

     We used $3.6 million in net cash for investing activities during the six months ended September 30, 2004, as compared to $1.3 million used in investing activities during the six months ended September 30, 2003. During the six months ended September 30, 2004, we spent $3.6 million in capital expenditures.

     For the six months ended September 30, 2004, net cash used in financing activities was $865,000 as compared to $1,594,000 in the six months ended September 30, 2003. During the six months ended September 30, 2004, we used cash principally to pay capital lease obligations. We also purchased 74,900 shares of our common stock for an aggregate purchase price of $536,000.

     Another potential source of liquidity is borrowings under existing lines of credit. At September 30, 2004, we had available credit of $4.4 million. At September 30, 2004, our debt, consisting of capital lease obligations and notes payable to bank, was $5.9 million, representing 12.1% of our cash and cash equivalents and 3.9% of our stockholders equity.

     We believe that our cash and cash equivalents together with cash generated from operations and our line of credit will be sufficient to meet our anticipated cash requirements for the next 12 months. Our liquidity could be negatively affected by a decline in demand for our products, the need to invest in new product development or one or more acquisitions. There can be no assurance that additional debt or equity financing will be available when required or, if available, can be secured on terms satisfactory to us.

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RISK FACTORS

     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. Additional risks not presently known to us or that we currently believe are not serious may also impair our business and its financial condition.

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

     Given the nature of the markets in which we participate, we cannot reliably predict future revenues and profitability, and unexpected changes may cause us to adjust our operations. A large portion of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs. Thus, small declines in revenues could negatively affect our operating results in any given quarter. Our operating results may fluctuate significantly. Some of the factors that may affect our quarterly and annual results are:

	•		the reduction, rescheduling or cancellation of orders by customers;
	•		fluctuations in timing and amount of customer requests for product shipments;
	•		changes in the mix of products that our customers purchase;
	•		the cyclical nature of the semiconductor industry;
	•		competitive pressures on selling prices;
	•		market acceptance of our products;
	•		fluctuations in our manufacturing yields and significant yield losses;
	•		difficulties in forecasting demand for our products and the planning and managing of inventory levels;
	•		the availability of production capacity;
	•		the amount and timing of investments in research and development;
	•		changes in our product distribution channels and the timeliness of receipt of distributor resale information;
	•		the impact of vacation schedules and holidays, largely during the second and third fiscal quarters of our fiscal year; and
	•		the amount and timing of costs associated with product returns.

     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 may rapidly change from periods of strong demand. The industry is characterized by:

	•		periods of overcapacity and production shortages;
	•		cyclical demand for semiconductors;
	•		changes in product mix in response to changes in demand;
	•		significant price erosion;
	•		variations in manufacturing costs and yields;

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	•		rapid technological change and the introduction of new products; and
	•		significant expenditures for capital equipment and product development.

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

Our gross margin is dependent on a number of factors, including our level of capacity utilization.

     Semiconductor manufacturing requires significant capital investment, leading to high fixed costs, including depreciation expense. If we are unable to utilize our manufacturing and testing facilities at a high level, the fixed costs associated with these facilities will not be fully absorbed, resulting in higher average unit costs and lower gross margins. We have attempted to match production with anticipated customer demand. As a percentage of revenues, gross margin was 23.2% for fiscal 2004, compared to 21.2% for fiscal 2003, and 31.3% in fiscal 2002. Increased competition and other factors may lead to price erosion, lower revenues and lower margins for us in the future.

Our disclosure controls and procedures are not effective.

     In connection with their audit of our fiscal 2004, our auditors, PricewaterhouseCoopers LLP, advised us of a material weakness in our internal control. Our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2004, our disclosure controls and procedures were not effective. See “Item 4. Controls and Procedures” elsewhere in this Form 10-Q. Existence of this or other material weaknesses in our internal control could result in a material misstatement of our financial condition, results of operations or cash flows.

Investor confidence and share value may be adversely impacted if we or our independent registered public accounting firm are unable to provide adequate attestation over the adequacy of our internal control over financial reporting as of March 31, 2005, as required by Section 404 of the Sarbanes-Oxley Act of 2002.

     The Securities and Exchange Commission, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report of management on the company’s internal control over financial reporting in its Annual Report on Form 10-K that contain an assessment by management of the effectiveness of the company’s internal control over financial reporting. In addition, the company’s independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the company’s internal control over financial reporting. These requirements will first apply to our Annual Report on Form 10-K for the fiscal year ending March 31, 2005. Management may not conclude that our internal control over financial reporting is effective. Moreover, even if management does conclude that our internal control over financial reporting is effective, if our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which our controls are documented, designed, operated or reviewed, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently from us, then they may decline to attest to management’s assessment or may issue a report that is qualified. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our controls over financial reporting, which ultimately could negatively impact the market price of our shares.

We may not be successful in our acquisitions.

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

	•		diversion of management’s attention during the acquisition process;
	•		disruption of our ongoing business;
	•		the potential strain on our financial and managerial controls and reporting systems and procedures;
	•		unanticipated expenses and potential delays related to integration of an acquired business;
	•		failure to successfully integrate the operations of an acquired company with our own;
	•		the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions;
	•		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;
	•		the risk of entering new markets in which we have limited experience;

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	•		difficulties in expanding our information technology systems to accommodate the acquired businesses;
	•		failure to retain key personnel of the acquired businesses;
	•		the challenges inherent in managing an increased number of employees and facilities and the need to implement appropriate policies, benefits and compliance programs;
	•		customer dissatisfaction or performance problems with an acquired company;
	•		the cost associated with acquisitions and the integration of acquired operations; and
	•		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.

IXYS 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. After trial, the U.S. District Court awarded damages to International Rectifier of $27.2 million plus attorney fees and issued a permanent injunction against IXYS, effectively barring us from selling or distributing the allegedly infringing products. The United States Court of Appeals for the Federal Circuit reversed or reversed and remanded all findings of patent infringement previously issued against us by the U.S. District Court, and vacated the permanent injunction and the damages and attorneys fees awards. The litigation is expected to continue at the U.S. District Court and could result in another damages award, as well as an attorneys fees award and an injunction. We continue to contest International Rectifier’s claims vigorously but the outcome of this litigation remains uncertain. See “Item 1. 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, results of operations and cash flows.

     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.

Our international operations expose us to material risks.

     During fiscal 2004, our product sales by region were approximately 36.3% in North America, approximately 38.0% in Europe and the Middle East and approximately 25.7% 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:

	•		foreign currency fluctuations;
	•		changes in the laws, regulations or policies of the countries in which we manufacture or sell our products;
	•		trade restrictions;
	•		longer payment cycles;

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	•		challenges in collecting accounts receivable;
	•		cultural and language differences;
	•		employment regulations;
	•		transportation delays;
	•		work stoppages; and
	•		economic or political instability.

     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 generally 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 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.

We have experienced operating losses in the past, and we may experience additional declines in revenues and operating losses in the future.

     Our historical financial results have been, and our future financial results are anticipated to be, subject to substantial fluctuations. We incurred net losses of $4.4 million and $12.2 million in fiscal 2004 and 2003, respectively. Reduced end-user demand, continued price declines, excess inventory, underutilization of our manufacturing capacity and other factors could adversely affect our business in the near term and we may experience declines in revenue and operating losses in the future. In order to return to consistent profitability, we must successfully implement our objectives, including our cost reduction initiatives. However, we also currently face an environment of uncertain demand and pricing pressure in the markets our products address. Although we reported net income for the six months ended September 30, 2004, we cannot assure you that we will be able to sustain our profitability.

We depend on external foundries to manufacture many of our products.

     Of our revenues in fiscal 2004, 41.4% came from wafers manufactured for us by external foundries. Our dependence on external foundries may grow. We have arrangements with eight wafer foundries, three 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. If growth in demand for our products occurs, these foundries may be unable or unwilling to allocate additional capacity to our needs, thereby limiting our revenue growth. 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 could be reduced or their growth limited. 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:

	•		the lack of control over delivery schedules;
	•		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
	•		potential misappropriation of our intellectual property.

     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.

Our success depends on our ability to manufacture our products efficiently.

     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:

	•		contaminants in the manufacturing environment;
	•		defects in the masks used to print circuits on a wafer;
	•		manufacturing equipment failure; or
	•		wafer breakage.

     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.

We may not be able to protect our intellectual property rights adequately.

     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.

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 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 semiconductors 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.

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Our backlog may not result in future revenues.

     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.

The markets in which we participate are intensely competitive.

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

	•		product quality, reliability and performance;
	•		product features;
	•		price;
	•		timely delivery of products;
	•		breadth of product line;
	•		design and introduction of new products; and
	•		technical support and service.

     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 our products 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, Legerity, NEC and Silicon Labs. Our RF power semiconductor competitors include RF Micro Devices and RF Monolithics. 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, 2004, 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 upon our ability to attract and retain highly-skilled technical, managerial, marketing and finance personnel, and 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 facilities for power semiconductors and RF

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power semiconductors are 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.

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

     To manage our possible future growth effectively, we will be required to continue to improve our operational, financial and management systems. In doing so, we will 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. During any transition, we could experience errors, delays and other inefficiencies, which could 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.

Our stock price is volatile.

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

	•		variations in our actual or expected quarterly operating results;
	•		announcements or introductions of new products;
	•		technological innovations by our competitors or development setbacks by us;
	•		conditions in the communications and semiconductor markets;
	•		the commencement or adverse outcome of litigation;
	•		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;
	•		sales of our common stock by one or more members of management, including Nathan Zommer, Ph.D., our President and Chief Executive Officer; or
	•		general economic and market conditions.

     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 2004, the great 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:

	•		reduced control over delivery schedules and quality;
	•		the potential lack of adequate capacity during periods of excess demand;
	•		difficulties selecting and integrating new subcontractors;
	•		limited warranties by subcontractors or other vendors on products supplied to us;

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	•		potential increases in prices due to capacity shortages and other factors;
	•		potential misappropriation of our intellectual property; and
	•		economic or political instability in foreign countries.

     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.

     The markets for our products are characterized by:

	•		changing technologies;
	•		changing customer needs;
	•		frequent new product introductions and enhancements;
	•		increased integration with other functions; and
	•		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. 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 our own expectations for customer demand. Actual customer demand, however, can be 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 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 may be able to 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.

We depend on a limited number of suppliers for our wafers.

     We purchase the bulk of our 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.

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Our ability to access capital markets could be limited.

     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.

Regulations may adversely affect our ability to sell our products.

     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 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 14.9% of our revenues in fiscal 2004 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.

Business interruptions may damage our facilities or those of our suppliers.

     Our operations and those of our suppliers 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 facilities in California are located near major earthquake fault lines and have experienced earthquakes in the past. If any of these events occur, our ability to conduct our operations 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.

We may be affected by environmental laws and regulations.

     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 14.9% of our net revenues in fiscal 2004 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.

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Nathan Zommer, Ph.D. owns a significant interest in our common stock.

     Nathan Zommer, Ph.D., our president and chief executive officer, beneficially owns, as of October 28, 2004, approximately 20% of the outstanding shares of our common stock. As a result, Dr. Zommer could exercise significant control over all matters requiring stockholder approval, including the election of the board of directors. His 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     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, 2004.

ITEM 4. CONTROLS AND PROCEDURES.

     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 Securities Exchange Act of 1934, as amended) as of September 30, 2004. This evaluation included various processes that were carried out in an effort to ensure that information required to be disclosed in our Securities and Exchange Commission, or 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 “control deficiencies,” “significant deficiencies” and, in particular, whether there were any “material weaknesses.” “Control deficiencies” exist when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. “Significant deficiencies” and “material weaknesses” are internal control deficiencies that adversely affect a company’s ability to initiate, authorize, record, process or report information in its external financial statements in accordance with generally accepted accounting principles. A “significant deficiency” is defined as a single deficiency, or a combination of deficiencies, that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential in amount will not be prevented or detected. A “material weakness” is defined as a significant deficiency that, by itself, or in combination with other significant deficiencies, results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

     Our auditors, PricewaterhouseCoopers LLP, or PwC, as a result of their audit of our financial statements for the year ended March 31, 2004, informed us of a material weakness. In the planning and performance of the audit, PwC considered the internal controls in order to complete its audit of the financial statements and not to provide assurance on internal controls. Had PwC performed an attestation engagement of the internal controls as of March 31, 2004, other significant deficiencies and/or material weaknesses may have come to the attention of PwC. The material weakness identified as a result of the PwC audit procedures related to inventory accounting. Certain of our inventory processes were not reviewed by a supervisor in sufficient detail, resulting in the following inaccurate adjustments: standard cost revisions; incomplete updating of costs included in the standards; journal entries recorded without the proper supporting documentation; and reconciliation of the general ledger balance to the perpetual records. PwC also observed a lack of procedures to track inventory transactions related to cut-off issues.

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     The net effect of the corrections of these errors on our financial statements for the year ended March 31, 2004 was a reduction in cost of goods sold on our statement of operations of $823,000, an increase in inventory of $1,099,000 and an increase in accrued expenses and other liabilities of $276,000.

     We believe that the material weakness relates to events in the fourth quarter of fiscal 2004 and had no material effect on financial statements for prior periods.

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

	•		rapid growth of the company through acquisitions;
	•		turnover of key finance personnel; and,
	•		integration of legacy accounting and information systems.

     In light of the material weakness 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, 2004, that our disclosure controls and procedures were not effective.

     We have implemented controls and procedures intended to address the material weakness. These controls and procedures include supervisory review of inventory reconciliations, review of standard costs and excess inventory and improved cycle count procedures. In addition, we have appointed a corporate controller and intend to employ a cost accountant and a financial analyst. In the future, we intend to schedule standard cost revisions for times other than when financial statement closings are occurring. As mitigation until the material weakness is successfully resolved, we are running additional procedures and expending additional time on our inventory accounting during the preparation of each Form 10-Q and Form 10-K.

     We are also in the process of 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 of 2002, or the 404 rules. Changes have been made and will be made to our internal controls as a result of these efforts. We believe that the material weakness and the effectiveness of our disclosure controls and procedures will be adequately addressed when we have concluded that our internal controls are effective as part of an annual attestation report under the 404 rules.

     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 fully implemented to date. It will take additional time to complete implementation and realize the benefits of our actions. Management intends to continue to work towards a resolution of the 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 our controls 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.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     We currently are involved in a variety of legal matters that arise in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters, including the matters described in the following paragraphs, will have a material adverse effect on our financial condition, results of operations or cash flows. 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 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.

     In 2002, the U.S. District Court entered a permanent injunction 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 and ruled that International Rectifier

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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 appealed and on March 19, 2004 the United States Court of Appeals for the Federal Circuit reversed or vacated all findings of patent infringement previously issued against us by the U.S. District Court. On August 9, 2004, the Federal Circuit vacated the damages award.

     We believe our defenses to the various remaining claims made by International Rectifier 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, results of operations and cash flows. Management has not accrued any amounts for damages in the accompanying balance sheets for the International Rectifier matter described above.

     Information regarding the patent infringement lawsuit between the Company and Advanced Power Technology, Inc. is contained in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. As of August 11, 2004, we and Advanced Power Technology, Inc. entered into an agreement and consented to a Stipulated Order of Dismissal regarding our patent infringement lawsuit in United States District Court in the Northern District of California. The agreement is a final settlement of all claims in the lawsuit.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

ITEM 5. OTHER INFORMATION

Not Applicable.

ITEM 6. EXHIBITS

See the Index to Exhibits, which is incorporated by reference herein.

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SIGNATURES

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

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EXHIBIT INDEX

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