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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File No. 0-12695

INTEGRATED DEVICE TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)

        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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes ý    No o

        The number of outstanding shares of the registrant's Common Stock, $.001 par value, as of Oct. 27, 2003, was approximately 104,830,000.

PART I FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)

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

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INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS)

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

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INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)

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

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INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1
Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements of Integrated Device Technology, Inc. (IDT or the Company) contain all normal adjustments which are, in the opinion of management, necessary to present fairly the interim financial information included therein.

        These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended March 30, 2003. The results of operations for the three-and six-month periods ended September 28, 2003 are not necessarily indicative of the results to be expected for the full year. Certain prior-period amounts have been reclassified to conform to the current presentation.

Note 2
Net Income (Loss) Per Share

        Net income (loss) per share has been computed using weighted-average common shares outstanding in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share."

        Net income (loss) per share for the three month period ended September 29, 2002 and the six-month periods ended September 28, 2003 and September 29, 2002 is based only on weighted average shares outstanding. Stock options based equivalent shares for these periods, of 1.4 million, 1.2 million, and 2.2 million, respectively were excluded from the calculation of diluted earnings per share, as their effect would be antidilutive in net loss periods. Employee stock options to purchase 3.7 million shares for the three month period ended September 28, 2003, were outstanding, but were excluded from the calculation of diluted earnings per share because the exercise price of the stock options was greater than the average share price of the common shares and therefore, the effect would be antidilutive.

Note 3
Stock-Based Employee Compensation

        The Company accounts for its stock option plans and employee stock purchase plan in accordance with the intrinsic value method prescribed in the Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In certain instances, primarily in connection with acquisitions, the Company records stock-based employee compensation cost in net income (loss). The following table illustrates the effect on net income (loss) and income (loss) per share if we had

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applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to stock-based employee compensation.

(1)

Assumes tax rate of 0% for fiscal 2004 and 39.7% for fiscal 2003

        During the third quarter of fiscal 2003, the Company completed a voluntary stock option exchange program for its eligible employees. The Company's chief executive officer, president, board of directors and employees within certain non-U.S. jurisdictions were not eligible to participate in this program. Under the exchange offer program, IDT employees were given the opportunity to voluntarily exchange unexercised vested and unvested stock options previously granted to them that had an exercise price of $11.01 or more. The offer to exchange expired on December 6, 2002. Of the approximately 1,900 employees who were eligible, approximately 1,200 participated. Of the approximately 12.6 million stock options eligible for exchange, approximately 10.1 million options were tendered by participants in the offer and were canceled by the Company. On June 11, 2003, the Company granted approximately 7.3 million options as a result of the exchange program. The exchange program did not result in the recording of any compensation expense in the consolidated statement of operations.

Note 4
Recent Accounting Pronouncements

        In November 2002, the EITF reached a consensus on Issue No. 00-21 (EITF 00-21), "Revenue Arrangements with Multiple Deliverables," which provides guidance on the timing and method of revenue recognition for arrangements that include the delivery of more than one product or service. EITF 00-21 is effective for arrangements entered into in periods beginning after June 15, 2003. The Company's adoption did not have a material impact on its financial position or results of operations.

        In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities (FIN 46)." FIN 46 requires an investor with a majority of the variable interests in a variable interest entity to consolidate the entity and to provide certain disclosures. A variable interest entity is defined as an entity in which the equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from the other parties. As of September 28, 2003, the Company had no investments which would require consolidation under FIN 46.

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        In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. This statement is effective for contracts entered into or modified after June 30, 2003. The Company's adoption did not have a material impact on its financial position or results of operations.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003. As of September 28, 2003, the Company had no financial instruments within the scope of this pronouncement.

Note 5
Cash Equivalents and Investments

        Cash equivalents are highly liquid investments with original maturities of three months or less at the time of purchase. All of the Company's investments are classified as available-for-sale at September 28, 2003 and March 30, 2003. Available-for-sale investments are classified as short-term investments, as these investments generally consist of highly marketable securities that are intended to be available to meet current cash requirements. Investment securities classified as available-for-sale are reported at market value, and net unrealized gains or losses are recorded in accumulated other comprehensive income, a separate component of stockholders' equity, until realized. Realized gains and losses on non-equity investments are computed based upon specific identification and are included in interest income and other, net. Management evaluates investments on a regular basis to determine if an other-than-temporary impairment has occurred.

Note 6
Inventories, Net

        Inventories (net of reserves of $41.9 million and $65.7 million at September 28, 2003 and March 30, 2003, respectively) are summarized as follows:

Note 7
Goodwill and Other Intangible Assets

        Goodwill is reviewed annually for impairment (or more frequently if indicators of impairment arise). The Company completed its annual impairment assessment in the fourth quarter of fiscal 2003 and concluded that goodwill was not impaired. For purposes of this assessment, the Company identified two reporting units, (1) Communications and High-Performance Logic and (2) SRAMs. All Company goodwill relates to the Communications and High-Performance Logic reporting unit.

        In August 2003, the Company acquired certain technology for use in high-speed packet processing from IBM in a transaction, immaterial in value, that does not constitute a business combination. The principal identifiable intangible assets acquired were existing technology and customer relationship. In

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process technology acquired was expensed at the date of acquisition. The fair values assigned are based on estimates and assumptions provided by management, and other information compiled by management, including a third-party valuation that utilized established valuation techniques appropriate for the high technology industry. In addition, incremental amounts will be paid if the seller achieves certain product development milestones within an agreed upon period and if the sales of product incorporating the acquired technology reach certain thresholds.

        Goodwill and identified intangible assets relate to the Company's acquisition of Newave Semiconductor Corp. (Newave) in April 2001, Solidum Systems (Solidum) in October 2002, and the technology discussed above in August 2003. Balances as of September 28, 2003 and March 30, 2003 are summarized as follows:

        The tables above exclude the effects of impairment charges of $13.5 million recorded in Q4 2003.

        Amortization expense for identified intangibles is summarized below:

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        Based on the identified intangible assets recorded at September 28, 2003, the future amortization expense of identified intangibles for the next five fiscal years is as follows (in thousands):

Note 8
Non-Marketable Equity Securities

        Included in other assets as of September 28, 2003 and March 30, 2003 is a $30.0 million preferred-stock investment in a privately held technology company. This was an interest-bearing financial instrument which was converted by the issuer to preferred stock in the third quarter of fiscal 2003.

Note 9
Gain (Loss) on Equity Investments, Net

        During the quarter ended September 28, 2003, the Company sold its remaining shares in PMC-Sierra, Inc. (PMC) and recorded a $3.2 million, net gain. During the quarter ended September 29, 2002, the Company recorded a $6.6 million pretax charge ($4.0 million net of tax benefits) related to its investment in PMC. The charge represented what the Company considered to be an other-than-temporary decline in the aggregate market value of its PMC shares.

Note 10
Comprehensive Loss

        The components of comprehensive loss were as follows:

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        The components of accumulated other comprehensive income were as follows:

Note 11
Derivative Instruments

        As a result of its significant international operations, sales and purchase transactions, the Company is subject to risks associated with fluctuating currency exchange rates. The Company uses derivative financial instruments, principally currency forward contracts, to attempt to minimize the impact of currency exchange rate movements on its operating results and on the cost of capital equipment purchases. The Company does not enter into derivative financial instruments for speculative or trading purposes. The Company's major foreign currency exchange exposures and related hedging programs are described below.

        Forecasted transactions.    From time to time, the Company uses currency forward contracts to hedge exposures related to forecasted sales denominated in Japanese yen. These contracts are designated as cash flow hedges when the transactions are forecasted and in general closely match the underlying forecasted transactions in duration. The contracts are carried on the balance sheet at fair value and the effective portion of the contracts' gains and losses is recorded as other comprehensive income until the forecasted transaction occurs.

        If the underlying forecasted transactions do not occur, or it becomes probable that they will not occur, the gain or loss on the related cash flow hedge is recognized immediately, in other income. For the first three and six months of fiscal 2004 and 2003, the Company did not record any gains or losses related to forecasted transactions that became improbable or did not occur.

        The Company measures the effectiveness of hedges of forecasted transactions on at least a quarterly basis by comparing the fair values of the designated currency forward contracts with the fair values of the forecasted transactions. No ineffectiveness was recognized in earnings during the first three and six months of fiscal 2004 and 2003.

        Firm commitments.    As needed, the Company uses currency forward contracts to hedge certain foreign currency purchase commitments, primarily in Japanese yen and the euro. These contracts are designated as fair value hedges, and changes in the fair value of the contracts are offset against changes in the fair value of the commitment being hedged, through earnings. Net gains and losses included in earnings during the first three and six months of fiscal 2004 and 2003 were not significant.

        For firm commitment hedges, the Company excludes the time value of currency forward contracts from effectiveness testing, as permitted under SFAS No. 133. For the first three and six months of fiscal 2004 and 2003, the time value of these contracts was recorded as other income and were not significant.

        Balance sheet.    The Company also utilizes currency forward contracts to hedge currency exchange rate fluctuations related to certain foreign currency assets and liabilities. Gains and losses on these undesignated derivatives offset gains and losses on the assets and liabilities being hedged and the net amount is included in earnings. An immaterial amount of net gains and losses were included in earnings during the first three and six months of fiscal 2004 and 2003.

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        Equity investments.    The Company's policies allow for the use of derivative financial instruments to hedge the fair values of investments in publicly traded equity securities. As of September 28, 2003, the Company had not entered into this type of hedge.

Note 12
Industry Segments

        The Company operates in two segments: (1) Communications and High-Performance Logic and (2) SRAMs. The Communications and High-Performance Logic segment includes FIFOs and multi-ports, communications applications-specific standard products (ASSPs) and high-performance logic and clock management devices. The SRAMs segment consists of high-speed SRAMs.

        The tables below provide information about these segments for the three and six month periods ended September 28, 2003 and September 29, 2002:

Revenues by segment

Income (Loss) by segment

Note 13
Guarantees

        We indemnify certain customers, distributors, and subcontractors for attorney fees and damages awarded against these parties in certain circumstances in which our products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. The terms of our indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to our potential liability for indemnification relating to intellectual property infringement claims. We cannot estimate the amount of

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potential future payments, if any, that we might be required to make as a result of these agreements. We have not paid any claim or been required to defend any claim related to our indemnification obligations, and accordingly, we have not accrued any amounts for our indemnification obligations. However, there can be no assurances that we will not have any future financial exposure under these indemnification obligations.

        The Company maintains a reserve for obligations it incurs under its product warranty program. The standard warranty period offered is one year. Management estimates the fair value of its warranty liability based on actual past warranty claims experience, its policies regarding customer warranty returns and other estimates about the timing and disposition of product returned under the program. Activity for the Company's warranty reserve, which is included as part of "Other accrued liabilities" on the Condensed Consolidated Balance Sheet, for the six months ended September 28, 2003, is summarized below:

Note 14
Subsequent Event

        On October 24, 2003, the Company closed escrow on the sale of its decommissioned manufacturing facility in Salinas, California. In connection with the closing, the Company received $6.1 million. In addition, the Company received $10,000 for an additional 30 day option for the buyer to purchase an adjacent, vacant lot for an additional cost of $1.6 million.

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

        All references are to our fiscal quarters ended September 28, 2003 (Q2 2004), June 29, 2003 (Q1 2004) and September 29, 2002 (Q2 2003), unless otherwise indicated. Quarterly financial results may not be indicative of the financial results of future periods.

        This 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. Forward-looking statements involve a number of risks and uncertainties. These include, but are not limited to: operating results; new product introductions and sales; competitive conditions; capital expenditures and resources; manufacturing capacity utilization; customer demand and inventory levels; intellectual property matters; and the risk factors set forth in the section "Factors Affecting Future Results." As a result of these risks and uncertainties, actual results could differ from those anticipated in the forward-looking statements. Unless otherwise required by law, we undertake no obligation to publicly revise these statements for future events or new information after the date of this Report on Form 10-Q.

        Forward-looking statements, which are generally identified by words such as "anticipates," "expects," "plans," and similar terms, include statements related to revenues and gross profit, research and development activities, selling, general, and administrative expenses, intangible expenses, interest income and other, taxes, capital spending and financing transactions, as well as statements regarding successful development and market acceptance of new products, industry and overall economic conditions and demand, and capacity utilization.

Critical Accounting Policies and Estimates

        Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates are based on historical experience and other assumptions that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates.

        We believe that the following accounting policies are "critical" as defined by the Securities and Exchange Commission, in that they are both highly important to the portrayal of our financial condition and results, and require difficult management judgments and assumptions about matters that are inherently uncertain. We also have other important policies, including those related to revenue recognition and concentration of credit risk, however, these policies do meet the definition of critical accounting policies because they do not generally require us to make estimates or judgments that are difficult or subjective. These policies are discussed in the Notes to the Consolidated Financial Statements, which are included in the Company's Annual Report on Form 10-K for the fiscal year ended March 30, 2003.

        Income Taxes.    We account for income taxes under an asset and liability approach that requires the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities be recognized as deferred tax assets and liabilities. Generally accepted accounting principles require us to evaluate the realizability of our net deferred tax assets on an ongoing basis. A valuation allowance is recorded to reduce the net deferred tax assets to an amount that will more likely than not be realized. Accordingly, we consider various tax planning strategies, forecasts of future taxable income and our most recent operating results in assessing the need for a valuation allowance. In the consideration of the realizability of net deferred tax assets, recent losses must be given substantially more weight than any projections of future profitability. In the fourth quarter of fiscal 2003, we determined that, under applicable accounting principles, it was more likely than not that we

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would not realize any value for any of our net deferred tax assets. Accordingly, we established a valuation allowance equal to 100% of the amount of these assets.

        Inventories.    Inventories are recorded at the lower of standard cost (which generally approximates actual cost on a first-in, first-out basis) or market value. Among other inventory-related reserves, we record reserves for obsolete and excess inventory based on our forecasts of demand over specific future time horizons. Actual market conditions and demand levels in the volatile semiconductor markets that we serve may vary from our forecasts, potentially impacting our inventory reserves and resulting in material effects on our gross margin.

        Valuation of Long-Lived Assets and Goodwill.    We own and operate our own manufacturing facilities and have also acquired businesses in recent years. As a result, we have significant property, plant and equipment, goodwill and other intangible assets. We evaluate these items for impairment on an annual basis, or sooner if events or changes in circumstances indicate that carrying values may not be recoverable. Triggering events for impairment reviews may include adverse industry or economic trends, restructuring actions, lowered projections of profitability, or a sustained decline in our market capitalization. Evaluations of possible impairment and, if applicable, adjustments to carrying values, require us to estimate, among other factors, future cash flows, useful lives and fair market values of our reporting units and assets. Actual results may vary from our expectations. We recorded asset impairment charges of $121.4 million and $17.4 million in fiscal 2003 and 2002, respectively.

        In connection with our adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," we completed a transitional goodwill impairment review as of the beginning of fiscal 2003 and an annual impairment review during the fourth quarter of fiscal 2003. Neither review found impairment. Under our accounting policy, we plan to perform an annual review in the fourth quarter of each future fiscal year, or more often if indicators of impairment exist. Our annual reviews consider estimates of the fair value of our reporting units, and may include analyses of projected discounted cash flows, using management's estimates of future revenues and expenses over a multi-year horizon. As of September 28, and March 30, 2003, our assets included $40.2 million in goodwill related to the acquisitions of Newave Semiconductor Corp. (Newave) and Solidum Systems Inc. (Solidum).

RESULTS OF OPERATIONS

        Revenues (Q2 2004 compared to Q2 2003).    Our revenues for Q2 2004 were $80.8 million, $11.5 million or 12.4% lower than the same quarter one year ago.

        In Q2 2004, revenues for our Communications and High Performance Logic segment, (which includes FIFOs and multiports, communications applications-specific standard products (ASSPs), and high-performance logic and timing products) were down $11.4 million or 14.3% compared to Q2 2003. Though total units sold were up, the increase was more than offset by declines in average selling price (ASP) per unit. Revenues for the SRAMs segment were essentially flat on considerably higher units sold but lower ASP.

        Revenues (Q2 2004 compared to Q1 2004).    Our revenues for Q2 2004 were sequentially lower by $2.3 million or 2.7%.

        Between Q1 2004 and Q2 2004 revenues in our Communications and High Performance Logic segment declined by approximately 5%. Despite unit growth in certain product areas, such as our IP Coprocessors, overall units were lower due to declines in other segment products, such as our industry standard logic. Adjusting for product mix, ASP declined sequentially, but at a lower rate than in previous quarters. SRAM revenues increased $1.4 million in Q2 2004 compared to Q1 2004 on higher unit volumes, despite lower ASP.

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        Revenues (First six months of fiscal 2004 compared to first six months of fiscal 2003).    Our revenues year-to-date for fiscal 2004 were $163.8 million compared with $184.1 million for the first six months of fiscal 2003, a $20.2 million, or 11.0% decline.

        For both of our product segments, increases in unit volumes shipped were more than offset by declines in ASP. Revenue for our Communications and High Performance Logic segment declined by $17.9 million or 11.4%, while revenues for our SRAMs segment declined by $2.3 million or 8.8%.

        Revenues (recent trends and outlook).    While there are some indications of stabilization in certain markets we serve, customers continue to defer placing firm purchase orders for as long as possible and demand that products be delivered on very short lead times. These customer patterns, combined with a growing percentage of revenue generated through consignment programs, reduce our firm order backlog for immediately recognizable revenue and limit the visibility we might otherwise have on revenue in future periods. In the near-term, however, we currently anticipate that revenues in our third quarter of fiscal 2004 will be slightly higher from the levels recorded in Q2 2004.

        Gross Profit (Q2 2004 compared to Q2 2003).    Gross profit for Q2 2004 decreased to $38.6 million from $43.0 million in Q2 2003. Gross profit margin as a percentage of revenue increased to 47.8% in Q2 2004 versus 46.6% in Q2 2003.

        Gross profit was adversely impacted by lower revenue levels in Q2 2004, as discussed above, and by lower allocations of manufacturing costs to R&D. From a gross margin percentage perspective, these adverse impacts were offset by:

•

Lower manufacturing spending (including lower depreciation expenses of approximately $7 million related to the asset impairment charges taken in Q4 2003); and



•

Better manufacturing utilization related to ramping capacity at our Hillsboro, Oregon wafer-fabrication facility.

        Gross Profit (Q2 2004 compared to Q1 2004)    Gross profit for Q2 2004 increased to $38.6 million from $34.3 million in Q1 2004. As a percentage of revenue, gross profit margin improved to 47.8% in Q2 2004 versus 41.3% in Q1 2004.

        Although gross profit was adversely impacted by the lower revenue levels in Q2 2004, it benefited from better utilization of our manufacturing infrastructure.

        Gross Profit (first six months of 2004 compared to the first six months of 2003).    Gross profit for the first six months of 2004 decreased to $72.9 million from $77.8 million in the first six months of 2003. However, gross profit margin as a percentage of revenue increased to 44.5% for the first six months of 2004 versus 42.3% for the first six months of 2003 despite the lower revenue base.

        Gross profit was adversely impacted by lower revenue levels in the first six months of 2004, as discussed above, and by lower allocations of manufacturing costs to R&D. From a gross margin percentage perspective, these adverse impacts were offset by:

•

Lower manufacturing spending (including lower depreciation expenses of approximately $7 million per quarter related to the asset impairment charges taken in Q4 2003);



•

Lower non-recurring costs, as charges of $3.6 million (primarily retention bonuses) related to closing our Salinas manufacturing facility in Q1 2003 did not recur in 2004; and



•

Better manufacturing utilization, as a result of having ceased operations at the Salinas site and consolidated wafer manufacturing in our Hillsboro wafer-fabrication facility.

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        In Q2 2004, we estimate that gross profit received zero benefit from the sale of inventory previously reserved as excess. For the first six months of 2004, we estimate that gross profit benefited by approximately $2 million from the sale of inventory previously reserved as excess.

        Throughout fiscal 2004, any further improvement in gross profit will remain primarily dependent on better business conditions, increases in revenue, and improved levels of capacity utilization.

        Research and development.    For Q2 2004, research and development (R&D) expenses totaled $25.7 million, a decrease of $3.7 million and an increase of $0.4 million compared to Q2 2003 and Q1 2004, respectively.

        R&D spending in Q2 2004 was lower than the same quarter one year ago primarily due to asset impairments and restructuring and other cost control measures implemented by the company in the second half of fiscal year 2003, including the closure of our Dallas Design Center. We realized savings in depreciation, labor and manufacturing expense allocations as a result of these actions. Partially offsetting these benefits were higher costs attributable to our acquisition of Solidum Systems in Q3 2003. R&D spending in Q2 2004 was higher than in Q1 2004 mostly due to higher costs incurred for outside design services.

        For the first six months of fiscal 2004, R&D spending decreased by $8.5 million compared to the same period in fiscal 2003. In addition to those changes for Q2 2004 compared to Q2 2003, further described above, deferred stock-based compensation expense in connection with our acquisition of Newave was also lower in the first six months of fiscal 2004 than the same period for fiscal 2003.

        We currently expect R&D spending to remain essentially flat or decrease slightly in Q3 2004 compared with Q2 2004.

        Selling, general and administrative.    In Q2 2004, selling, general and administrative (SG&A) expenses were $18.3 million, a decrease of $1.7 million compared to Q2 2003 and essentially flat compared to Q1 2004.

        SG&A spending in Q2 2004 includes restructuring and other exit related charges of $0.7 million, compared with zero comparable charges in the same quarter one year ago. The charges (mostly severance) relate to a reduction in force and lease exit and moving costs realized in the period, some of which relate to our Q4 2003 restructuring plan. Compared with Q2 2003, bad debt reserves were also higher in Q2 2004. These increased costs were essentially offset by savings resulting from restructuring and other cost reduction actions taken in Q3 and Q4 of fiscal year 2003.

        For the first six months of fiscal 2004, SG&A spending decreased by $4.0 million compared to the same period in fiscal 2003. The decrease is due primarily to the same reasons as those described above in the comparison between Q2 2004 and Q2 2003.

        We currently anticipate SG&A spending to remain essentially flat in Q3 2004 compared with Q2 2004.

        Acquired in-process research and development.    In connection with our acquisition of technology from IBM during the quarter ended September 28, 2003, we recorded a $0.3 million charge for acquired in-process research and development (IPR&D). The allocation of the purchase price to IPR&D was determined by identifying technologies that had not attained technological feasibility and that did not have future alternative uses.

        Gain (Loss) on equity investments    During the quarter ended September 28, 2003, the Company sold its remaining shares of PMC Sierra (PMC). In connection with the sale, the Company recorded a net gain of $3.2 million. During the quarter ended September 29, 2002, the Company recorded a $6.6 million pretax charge ($4.0 million net of tax benefits) also related to its investment in PMC. The

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charge represented what the Company considered to be an other-than-temporary decline in the aggregate market value of its PMC shares.

        Interest income and other, net.    In Q2 2004, interest income and other, net, was $3.1 million, a decrease of $2.1 million compared to Q2 2003 and down $1.1 million compared to Q1 2004. The decrease in Q2 2004 as compared to Q1 2004 was primarily driven by lower average interest rates on our investment portfolio and was slightly offset by a non-recurring benefit of $0.2 million in connection with interest on a tax refund. From Q2 2003 to Q2 2004, interest income and other, net, declined primarily due to lower average interest rates and, to a lesser extent, due to lower invested balances.

        Provision for taxes.    We recorded a 100% valuation allowance in the fourth quarter of fiscal 2003 against our net deferred tax assets and, accordingly, we recorded no tax benefit for tax losses and tax credits generated during Q2 2004 or the six months then ended. The tax benefit for Q2 and Q1 2004 includes, however, $1.3 million and $0.8 million, respectively, for tax refunds we received related to previous tax years. We do not expect to recognize tax benefits on future operating losses until a sufficient level of profitability is achieved. Going forward, we currently expect to record a quarterly tax expense which relates to income generated in certain foreign tax jurisdictions.

Liquidity and Capital Resources

        Our cash, cash equivalents and investments were $567.9 million at September 28, 2003, an increase of $13.1 million compared to March 30, 2003. Long and short-term debt, excluding operating leases, was $7.7 million as of September 28, 2003, a decrease of $2.0 million compared to March 30, 2003.

        Net cash provided by operating activities was $36.9 million for the first six months of fiscal 2004, compared to $11.1 million for the same period in fiscal 2003. During the first six months of fiscal 2004, cash provided by non-cash related adjustments to net income, such as depreciation, and by changes in working capital balances more than offset our net loss. The adverse year-to-date impact on cash provided by operating activities due to deferred distributor income declined from $15.7 million in 2003 to $1.8 million in 2004, due to stabilizing levels of distributor channel inventory.

        Net cash used for investing activities was $8.8 million in the first six months of fiscal 2004, compared to $84.8 million for the same period in fiscal 2003. In Q2 2004, we made the initial payment in relation to the acquisition of technology from IBM. In Q1 2003, we invested $30.0 million in preferred shares of a privately held technology related company. In addition, in Q2 2003, we terminated the synthetic lease related to our Hillsboro, Ore., manufacturing site and exercised our option to purchase approximately $64.4 million in additional fixed assets. These amounts were partially offset by net proceeds of $16.4 million and $25.7 million from sales and maturities of marketable securities during the first six months of fiscal 2004 and fiscal 2003, respectively.

        Net cash provided by financing activities was $4.0 million for the first six months of fiscal 2004, compared to $37.1 million used for financing activities for the same period in fiscal 2003. Significant financing activities in the first six months of fiscal 2003 included repurchases of common stock of $40.4 million. In addition, payments on capital leases and other debt decreased by $1.1 million in the first six months of fiscal 2004, versus the comparable period of 2003.

        We anticipate capital expenditures of approximately $35.0 million during fiscal 2004, depending upon business conditions, to be financed primarily through cash generated from operations and existing cash and investments. This estimate includes $17.1 million in capital expenditures during the first six months of fiscal 2004.

        We believe that existing cash and investment balances, together with cash flows from operations, will be sufficient to meet our working capital and capital expenditure needs through the remainder of fiscal 2004 and 2005. We may choose to investigate other financing alternatives; however, we cannot be certain that additional financing will be available on satisfactory terms.

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Recent Accounting Pronouncements

        In November 2002, the EITF reached a consensus on Issue No. 00-21 (EITF 00-21), "Revenue Arrangements with Multiple Deliverables," which provides guidance on the timing and method of revenue recognition for arrangements that include the delivery of more than one product or service. EITF 00-21 is effective for arrangements entered into in periods beginning after June 15, 2003. The Company's adoption did not have a material impact on its financial position or results of operations.

        In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities (FIN 46)." FIN 46 requires an investor with a majority of the variable interests in a variable interest entity to consolidate the entity and to provide certain disclosures. A variable interest entity is defined as an entity in which the equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from the other parties. As of September 28, 2003, the Company had no investments which would require consolidation under FIN 46.

        In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. This statement is effective for contracts entered into or modified after September 29, 2003. The Company's adoption did not have a material impact on its financial position or results of operations.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAF No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003. As of September 28, 2003, the Company had no financial instruments within the scope of this pronouncement.

Factors Affecting Future Results

        Our operating results can fluctuate dramatically.    We recorded net losses of $277.9 million and $46.2 million in fiscal 2003 and 2002, respectively, after reporting net income of $415.2 million in fiscal 2001. Fluctuations in operating results can result from a wide variety of factors, including:

•

the cyclicality of the semiconductor industry and industry-wide wafer processing capacity;



•

changes in demand for our products and in the markets we serve;



•

the success and timing of new product and process technology announcements and introductions from us or our competitors;



•

potential loss of market share among a concentrated group of customers;



•

competitive pricing pressures;



•

changes in the demand for and mix of our products;



•

complex manufacturing and logistics operations;



•

availability and costs of raw materials, and of foundry and other manufacturing services;



•

costs associated with other events, such as intellectual property disputes, or other litigation; and



•

political and economic conditions in various geographic areas.

        In addition, many of these factors also impact our ability to recover the carrying value of certain manufacturing, tax, goodwill, and other tangible and intangible assets. As business conditions change,

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future writedowns or abandonment of these assets may occur. In fiscal 2003, we recorded impairment charges totaling $197.2 million for certain manufacturing, research and development, intangible and tax assets.

        Further, we may be unable to compete successfully in the future against existing or potential competitors, and our operating results could be harmed by increased competition. Our operating results are also impacted by changes in overall economic conditions, both domestically and abroad. Should economic conditions deteriorate, domestically or overseas, our sales and business results could be harmed.

        The cyclicality of the semiconductor industry exacerbates the volatility of our operating results.    The semiconductor industry is highly cyclical. Substantial changes in demand for our products have occurred rapidly and suddenly in the past. In addition, market conditions characterized by excess supply relative to demand and resulting pricing declines have also occurred in the past. Significant shifts in demand for our products and pricing declines resulting from excess supply may occur in the future. Large and rapid swings in demand and pricing for our products can result in significantly lower revenues and underutilization of our fixed cost infrastructure, both of which would cause material fluctuations in our gross margins and our operating results.

        Demand for our products depends primarily on demand in the communications markets.    The majority of our products are incorporated into customers' systems in enterprise/carrier class network, wireless infrastructure and access network applications. A smaller percentage of our products also serve in customers' computer storage, computer-related, and other applications. Customer applications for our products have historically been characterized by rapid technological change and significant fluctuations in demand. Demand for most of our products, and therefore revenue, depends on growth in the communications market, particularly in the data networking and wireless telecommunications infrastructure markets and, to a lesser extent, the computer-related markets. Any slowdown in these markets could materially adversely affect our operating results, as evidenced by conditions in fiscal 2002 and 2003.

        Our results are dependent on the success of new products.    New products and wafer processing technology will continue to require significant R&D expenditures. If we are unable to develop, produce and successfully market new products in a timely manner, and to sell them at gross margins comparable to or better than our current products, our future results of operations could be adversely impacted. In addition, our future revenue growth is also partially dependent on our ability to penetrate new markets, where we have limited experience and where competitors are already entrenched. Even if we are able to develop, produce and successfully market new products in a timely manner, such new products may not achieve market acceptance.

        We are dependent on a concentrated group of customers for a significant part of our revenues.    We are dependent on a limited number of original equipment manufacturer (OEM) end-customers, and our future results depend significantly on the strategic relationships we have formed with them. If these relationships were to diminish, and if these customers were to develop their own solutions or adopt a competitor's solution instead of buying our products, our results could be adversely affected. For example, any diminished relationship with Cisco or other key customers could adversely affect our results. We estimate that when all channels of distribution are considered, Cisco represented approximately 20-25% of our total revenues for fiscal 2003.

        Many of our end-customer OEMs has outsourced their manufacturing to a concentrated group of global contract electronic manufacturers (CEMs) who then buy product directly from us on behalf of the OEM. CEMs are achieving more autonomy in the design win, product qualification and product purchasing decisions, especially for commodity products. Furthermore, these CEMs have generally been centralizing their global procurement processes. This has had the effect of concentrating a significant percentage of our revenue with a small number of companies. Competition for the business of these

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CEMs is intense and there is no assurance we can remain competitive and retain our existing market share within these customers. If these companies were to allocate a higher share of commodity or second source business to our competitors instead of buying our products, our results would be adversely affected. Furthermore, as these CEMs represent a growing percentage of our overall business, our concentration of credit and other business risks with these customers has increased. Competition among global CEMs is intense, they operate on extremely thin margins, and their financial condition, on average, has declined during the current industry downturn. If any one or more of these global CEMs were to file for bankruptcy or otherwise experience significantly adverse financial conditions, our business would be adversely impacted as well. One CEM, Celestica, accounted for approximately 15% of our revenue for fiscal 2003.

        Finally, we utilize a relatively small number of global and regional distributors around the world, who buy product directly from us on behalf of their customers. If our business relationships were to diminish or any one or more of these global distributors were to file for bankruptcy or otherwise experience significantly adverse financial conditions, our business could be adversely impacted. One distributor represented 13% of revenues for fiscal 2003.

        Our product manufacturing operations are complex and subject to interruption.    From time to time, we have experienced production difficulties, including reduced manufacturing yields or products that do not meet our or our customers' specifications that have caused delivery delays, quality problems, and possibly lost revenue opportunities. While delivery delays have been infrequent and generally short in duration, we could experience manufacturing problems, capacity constraints and/or product delivery delays in the future as a result of, among other things, complexity of manufacturing processes, changes to our process technologies (including transfers to other facilities and die size reduction efforts), and ramping production and installing new equipment at our facilities.

        Substantially all of our revenues are derived from products manufactured at facilities which are exposed to the risk of natural disasters. We have a wafer fabrication facility in Hillsboro, Oregon, and assembly and test facilities in the Philippines and Malaysia. If we were unable to use our facilities, as a result of a natural disaster or otherwise, our operations would be materially adversely affected.

        We are dependent upon electric power generated by public utilities where we operate our manufacturing facilities and we have periodically experienced electrical power interruptions. We maintain limited backup generating capability, but the amount of electric power that we can generate on our own is insufficient to fully operate these facilities, and prolonged power interruptions could have a significant adverse impact on our business.

        Historically, we have utilized subcontractors for the majority of our incremental assembly requirements, typically at higher costs than at our own Malaysian and Philippines assembly and test operations. We expect to continue utilizing subcontractors to supplement our own production volume capacity. Due to production lead times and potential subcontractor capacity constraints, any failure on our part to adequately forecast the mix of product demand could adversely affect our operating results.

        Much of our manufacturing capability is relatively fixed in nature.    Much of our manufacturing cost structure remains relatively fixed and large and rapid swings in demand for our products can make it difficult to efficiently utilize this capacity on a consistent basis. Significant downturns, as we have recently experienced, will result in material under utilization of our manufacturing facilities while sudden upturns could leave us short of capacity and unable to capitalize on incremental revenue opportunities. These swings and the resulting under utilization of our manufacturing capacity or inability to procure sufficient capacity to meet end customer demand for our products will cause material fluctuations in the gross margins we report and could have a material adverse affect thereon.

        We build most of our products based on estimated demand forecasts.    Demand for our products can change rapidly and without advance notice. Demand and our visibility on demand for our products can

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also be affected by changes in our customer's levels of inventory and differences in the timing and order patterns between them and their end customers. If demand forecasts are inaccurate or change suddenly, we may be left with large amounts of unsold products, may not be able to fill all orders in the short term and may not be able to accurately forecast capacity utilization and other important business metrics. This can leave us holding excess and obsolete inventory or unable to meet customer short-term demands all of which can have an adverse impact on our operating results.

        We are dependent on a limited number of suppliers.    Our manufacturing operations depend upon obtaining adequate raw materials on a timely basis. The number of vendors of certain raw materials, such as silicon wafers, ultra-pure metals and certain chemicals and gases, is very limited. In addition, certain packages require long lead times and are available from only a few suppliers. From time to time, vendors have extended lead times or limited supply to us due to capacity constraints. Although we currently fabricate most of our wafers internally, we are dependent on outside foundries for a small but growing portion of our wafer requirements. Our results of operations would be materially adversely affected if we were unable to obtain adequate supplies of raw materials in a timely manner or if there were significant increases in the costs of raw materials, or if foundry capacity were not available or was only available at uncompetitive prices.

        We are subject to a variety of environmental and other regulations related to hazardous materials used in our manufacturing processes.    Any failure by us to adequately control the use or discharge of hazardous materials under present or future regulations could subject us to substantial costs or liabilities or cause our manufacturing operations to be suspended.

        Intellectual property claims could adversely affect our business and operations.    The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights, which have resulted in significant and often protracted and expensive litigation. In recent years, there has been a growing trend by companies to resort to litigation to protect their semiconductor technology from unauthorized use by others. We have been involved in patent litigation in the past, which adversely affected our operating results. Although we have obtained patent licenses from certain semiconductor manufacturers, we do not have licenses from a number of semiconductor manufacturers that have broad patent portfolios. Claims alleging infringement of intellectual property rights have been asserted against us and could be asserted against us in the future. These claims could result in our having to discontinue the use of certain processes; cease the manufacture, use and sale of infringing products; incur significant litigation costs and damages; and develop non-infringing technology. We might not be able to obtain such licenses on acceptable terms or to develop non-infringing technology. Further, the failure to renew or renegotiate existing licenses on favorable terms, or the inability to obtain a key license, could materially adversely affect our business.

        International operations add increased volatility to our operating results.    A substantial percentage of our revenues are derived from international sales, as summarized below:

        In addition, our assembly and test facilities in Malaysia and the Philippines, our design centers in Canada, China and Australia, and our foreign sales offices incur payroll, facility and other expenses in local currencies. Accordingly, movements in foreign currency exchange rates can impact our revenues

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and costs of goods sold, as well as both pricing and demand for our products. Our offshore sites and export sales are also subject to risks associated with foreign operations, including:

•

political instability and acts of war or terrorism, which could disrupt our manufacturing activities;



•

currency controls and fluctuations;



•

changes in local economic conditions; and



•

changes in tax laws, import and export controls, tariffs and freight rates.

        Contract pricing for raw materials and equipment used in the fabrication and assembly processes, as well as for foundry and subcontract assembly services, can also be impacted by currency exchange rate fluctuations.

        Finally, in support of our international operations, a portion of our cash and investment portfolio resides offshore. At September 28, 2003, we had cash and investments of approximately $48.8 million invested overseas in accounts belonging to various IDT foreign operating entities. While these amounts are primarily invested in US dollars, a portion is held in foreign currencies, and all offshore balances are exposed to local political, banking, and other risks.

        We depend on the ability of our personnel, raw materials, equipment and products to move reasonably unimpeded around the world.    Any political, military, world health (e.g., SARS) or other issue which hinders this movement or restricts the import or export of materials could lead to significant business disruptions. Furthermore, any strike, economic failure, or other material disruption on the part of major airlines or other transportation companies could also adversely affect our ability to conduct business. If such disruptions result in cancellations of customer orders or contribute to a general decrease in economic activity or corporate spending on information technology, or directly impact our marketing, manufacturing, financial and logistics functions our results of operations and financial condition could be materially adversely affected.

        We are exposed to potential impairment charges on investments.    From time to time, we have made strategic investments in other companies, both public and private. If the companies that we invest in are unable to execute their plans and succeed in their respective markets, we may not benefit from such investments, and we could potentially lose all of the amounts we invest. In addition, we evaluate our portfolio, including non-marketable equity securities, on a regular basis to determine if impairments have occurred. Impairment charges could have a material impact on our results of operations in any period. As of September 28, 2003, we carried approximately $30 million of such investments, all of which is included in other assets.

        Our common stock has experienced substantial price volatility.    Such volatility may occur in the future, particularly as a result of quarter-to-quarter variations in the actual or anticipated financial results of IDT, other semiconductor companies, or our customers. Stock price volatility may also result from product announcements by us or our competitors, or from changes in perceptions about the various types of products we manufacture and sell. In addition, our stock price may fluctuate due to price and volume fluctuations in the stock market, especially in the technology sector.

        We are dependent on key personnel.    Our performance is substantially dependent on the performance of our executive officers and key employees. The loss of the services of any our executive officers, technical personnel or other key employees could adversely affect our business. In addition, our future success depends on our ability to successfully compete with other technology firms in attracting and retaining key technical and management personnel. If we are unable to identify and hire highly qualified technical and managerial personnel, our business could be harmed.

        We may have difficulty integrating acquired companies.    From time to time, the Company has made acquisitions of businesses and technologies. Failure to successfully integrate acquired companies and

22

technologies into our business could adversely affect our results of operations. Integration risks and issues may include, but are not limited to, personnel retention and assimilation, management distraction, technology development, and unexpected costs and liabilities, including goodwill impairment charges.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Our interest rate risk relates primarily to our investment portfolio, which consisted of $176.5 million in cash and cash equivalents and $391.4 million in short-term investments as of September 28, 2003. By policy, we limit our exposure to longer-term investments, and a substantial majority of our investment portfolio has maturities of less than two years. As a result of the relatively short duration of our portfolio, a hypothetical 10% change in interest rates would have an insignificant effect on our financial position, results of operations or cash flows. We do not currently use derivative financial instruments in our investment portfolio.

        By policy, we mitigate the credit risk to our investment portfolio through diversification and for, debt securities, adherence to high credit-rating standards.

        We have minimal interest rate risk with respect to debt; our balance sheet at September 28, 2003 includes only $7.7 million in debt.

        We are exposed to foreign currency exchange rate risk as a result of international sales, assets and liabilities of foreign subsidiaries, and capital purchases denominated in foreign currencies. We use derivative financial instruments (primarily forward contracts) to help manage our foreign currency exchange exposures. We do not enter in derivatives for trading purposes. We performed a sensitivity analysis for both fiscal 2003 and the first six months of fiscal 2004 and determined that a 10% change in the value of the U.S. dollar would have an insignificant near-term impact on our financial position, results of operations or cash flows.

ITEM 4.    CONTROLS AND PROCEDURES

        We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

        As of September 28, 2003, the end of the quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level. There have been no significant changes in our internal controls over financial reporting during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II    OTHER INFORMATION

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

        On September 12, 2003, we held our 2003 Annual Meeting of Stockholders. On the record date, 104,108,459 shares of our Common Stock were outstanding and entitled to be voted. Tabulated proxies at the meeting represented 97,697,302 shares, or 94% of the total eligible. Voting results are summarized below:

        Proposal I: Election of one director;

        Proposal II: To approve an amendment to the Company's 1984 Employee Stock Purchase Plan.

        Proposal III: To ratify the selection of PricewaterhouseCoopers LLP as the Company's independent accountants for the fiscal year ended March 30, 2004.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a)

The following exhibits are filed herewith:

(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.

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QuickLinks

PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES

PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K