Form 10-Q

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to

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 has required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

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

Number of shares of Common Stock, $0.01 par value per share, outstanding at June 1, 2003: 73,370,175

The consolidated condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K.

In the opinion of the Company, these unaudited statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Semtech Corporation and subsidiaries as of April 27, 2003, and the results of their operations for the three months then ended and their cash flows for the three months then ended.

The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any subsequent period or for the entire year.

Basic earnings per common share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per common share incorporate the incremental shares issuable upon the assumed exercise of stock options. The weighted average number of shares used to compute basic earnings per share in the first quarters of fiscal years 2004 and 2003 were 73,236,000 and 72,681,000, respectively. For the first three months of fiscal years 2004 and 2003, the weighted average number of shares used to compute diluted earnings per share were 76,522,000 and 78,997,000, respectively.

Options to purchase approximately 4,886,000 and 76,000, respectively, were not included in the computation of first quarters of fiscal years 2004 and 2003 diluted net income per share because such options were considered anti-dilutive. Shares associated with the Company’s outstanding convertible subordinated notes are not included in the computation of earning per share as they are anti-dilutive.

The Company accounts for its employee stock plan under the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123.”

SFAS No. 123, and as amended by SFAS No. 148, permits companies to recognize, as expense over the vesting period, the fair value of all stock-based awards on the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Because the Company’s stock-based compensation plans have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, management believes that the existing option valuation models do not necessarily provide a reliable single measure of the fair value of awards from the plan. Therefore, as permitted, the Company applies the existing accounting rules under APB No. 25 and provides pro forma net income and pro forma net income per share disclosures for stock-based awards made during the indicated period as if the fair value method defined in SFAS No. 123, as amended, had been applied. Net income and net income per share for the first quarters of fiscal year 2004 and 2003 would have been reduced to the following pro forma amounts.

The pro forma effect on net income for the first quarters of fiscal year 2004 and 2003, may not be representative of the pro forma effect on net income of future years because the SFAS No. 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to January 30, 1995.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Option valuation models also require the input of highly subjective assumptions such as expected option life and expected stock price volatility.

As of January 26, 2003, the Company operates in two reportable segments: Standard Semiconductor Products and Rectifier, Assembly and Other Products. In previous years, the Company had a segment entitled Other Products, which in fiscal year 2003 and fiscal year 2002 were 0.5% and 2%, respectively, of net sales. The Other Product Category has been combined with the Rectifier and Assembly Products segment, and is now referred to as the Rectifier, Assembly and Other Products segment. The Rectifier, Assembly and Other Products segment has represented less than 10% of net sales for the last three fiscal years. Certain balances from the prior year’s corresponding quarter have been reclassified to be consistent with the current quarter’s presentation.

The Standard Semiconductor Products segment makes up the vast majority of overall sales and includes the power management, protection, test and measurement, advanced communications and human input device product lines. The Rectifier, Assembly and Other Products segment includes the Company’s line of assembly and rectifier devices, which are the remaining products from our original founding as a supplier into the military, aerospace and industrial equipment market. It also includes other products made up of custom integrated circuit and foundry sales.

The accounting policies of the segments are the same as those described above and in our Form 10-K for the year ended January 26, 2003 in the summary of significant accounting policies. The Company evaluates segment performance based on net sales and operating income of each segment. Management does not track segment data or evaluate segment performance on additional financial information. As such, there are no separately identifiable segment assets nor is there any separately identifiable statements of income data (below operating income).

The Company does not track or assign assets to individual reportable segments. Likewise, depreciation expense and capital additions are also not tracked by reportable segments.

No end-customer accounted for 10% or more of net sales in the first quarter of fiscal year 2004 or 2003. In the first quarter of fiscal year 2004, two of the Company’s Asian distributors accounted for approximately 13% and 11%,

respectively, of net sales. In the first quarter of fiscal year 2003, one of these Asian distributors accounted for approximately 14% of net sales.

As of the end of April 27, 2003, two of the Company’s Asian distributors accounted for approximately 13% and 11%, respectively, of net accounts receivable. Receivables from customers are not secured by any type of collateral.

A summary of net external sales by region follows. The Company does not track customer sales by region for each individual reporting segment.

Long-lived assets located outside the United States as of April 27, 2003 and January 26, 2003 were approximately $9.9 million and $9.3 million, respectively.

The Company relies on a limited number of outside subcontractors and suppliers for silicon wafers, packaging and certain other tasks. Disruption or termination of supply sources or subcontractors could delay shipments and could have a material adverse effect on the Company. Several of the Company’s outside subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Malaysia, the Philippines and Germany. A significant amount of the Company’s assembly and test operations are conducted by third-party contractors in Malaysia and the Philippines, and the largest source of silicon wafers come from an outside foundry located in China.

Temporary and long-term investments consist of government, bank and corporate obligations. Temporary investments have original maturities in excess of three months, but mature within twelve months of the balance sheet date. Long-term investments have maturities in excess of one year from the date of the balance sheet.

The Company realized interest income of $2.4 million and $5.7 million during the first quarters of fiscal years 2004 and 2003, respectively.

For the first quarter of fiscal year 2004, comprehensive income was $8.0 million, which reflects a decline in the three month period of the unrealized gain the Company recorded for its available-for-sale securities of $276,000 and a gain of $3,000 for translation adjustments. For the first quarter of fiscal year 2003, comprehensive income was $7.9

million, which reflects a decline in the three month period of the unrealized gain the Company recorded for its available-for-sale securities of $2.1 million and a loss of $3,000 for the change in translation adjustments.

On January 4, 2001, the Company announced that its Board of Directors had approved a program to repurchase up to $50.0 million of its common stock and registered convertible subordinated notes. In fiscal year 2002, the Company indicated that its Board had authorized an additional $50.0 million in buybacks, increasing the total amount authorized under the buyback program to $100.0 million. In fiscal year 2003, the Company indicated that its Board had authorized an additional $100.0 million in buybacks, increasing the total amount authorized under the buyback program to $200.0 million. In the first quarter of fiscal year 2004, the Company indicated that its Board had authorized an additional $75.0 million in buybacks, increasing the total amount authorized under the buyback program to $275.0 million. As of April 27, 2003, the Company had repurchased 2,071,200 shares of its common stock at a cost of $42.3 million under this program. Of these repurchased shares of common stock, all but 650,761 shares have been reissued as a result of stock options exercises. As of April 27, 2003, the Company had repurchased 217,930 convertible subordinated notes (face value of $1,000 each) for $195.9 million in cash in open market transactions. The Company has retired a majority of these repurchased notes, and plans to retire recently repurchased notes not yet retired.

In the first quarter of fiscal year 2004, the Company repurchased 59,500 convertible subordinated notes (face value of $1,000 each), resulting in a pre-tax net gain of $2.8 million. In the first quarter of fiscal year 2003, the Company repurchased 10,150 convertible subordinated notes (face value of $1,000 each), resulting in a pre-tax loss of $50,000.

On February 14, 2000, the Company completed a private offering of $400.0 million principal amount of convertible subordinated notes that pay interest semiannually at a rate of 4½% and are convertible into common stock at a conversion price of $42.23 per share. The notes are due on February 1, 2007 and are callable by the Company on or after February 6, 2003. Pursuant to a registration rights agreement, the Company was obligated to register the resale of the notes on behalf of the holders and to maintain the effectiveness of the registration until the holders could otherwise resell the notes under exemptions from registration. The Company’s obligation to keep the registration statement effective has terminated, and on August 30, 2002, it filed a post-effective amendment to de-register the notes and conversion shares that had not been sold under the prospectus contained in the registration statement. The post-effective amendment became effective on September 5, 2002.

In connection with these convertible subordinated notes, the Company incurred $11.5 million in underwriter fees and other costs. The underwriter fees and other costs are amortized as interest expense using the effective interest method for outstanding notes and written off against the gain for those notes repurchased and retired prior to maturity. The Company has used the net proceeds of the offering for general corporate purposes, including working capital, expansion of sales, marketing and customer service capabilities, and product development. In addition, the Company may use a portion of the net proceeds to acquire or invest in complementary businesses, technologies, services or products.

For the first quarters of fiscal year 2004 and 2003, the Company incurred $2.4 million and $4.4 million, respectively, in interest expense associated with these convertible subordinated notes. As of April 27, 2003, $182.1 million of the convertible subordinated notes were still outstanding, reflecting the Company’s repurchase of 217,930 of its convertible subordinated notes (face value of $1,000 each) for $195.9 million in cash in open market transactions.

On March 28, 2003, the Company announced that it had resolved a customer dispute. Under the terms of the settlement, the Company agreed to pay the customer $12.0 million in cash in two equal annual installments, plus rebates on the future purchase of certain products by the customer over a two year period. The rebates, which can be up to 10%, are dependent upon the amount of eligible products the customer purchases. The Company is vigorously pursuing insurance coverage for the full value of the settlement, although it is too early to estimate the size of, if any, eventual insurance settlement or to give a tentative date for when an insurance settlement might be reached. In the first quarter of fiscal year 2004, the Company made a $6.0 million cash payment to the customer, representing the first of two payments equaling the $12.0 million settlement. The second cash payment is due in fiscal year 2005.

On June 22, 2001, the Company was notified by the California Department of Toxic Substances Control (“State”) that it may have liability associated with the clean up of the one-third acre Davis Chemical Company site in Los Angeles, California. The Company has been included in the clean-up program, because it is one of the companies believed to have used the Davis Chemical Company site for waste recycling and/or disposal between 1949 and 1990. The Company has joined with other potentially responsible parties in an effort to resolve this matter with the State. The group is sharing the cost of an evaluation of the site prior to development of any remediation plan. The Company’s share of the estimated cost for this study is not material and the cost to date has been expensed. At this time there is not a specific proposal or budget with respect to the clean up of the site. Thus, no reserve has been established for this matter.

On February 7, 2000, the Company was notified by the United States Environmental Protection Agency (EPA) with respect to the Casmalia Disposal Site in Santa Barbara, California. The Company has been included in the Superfund program to clean up this disposal site because it used this site for waste disposal. We recorded $765,000 of the proposed settlement amount as an accrued liability in fiscal year 2002 and recorded an accrued liability to cover the remainder in fiscal year 2003. In April 2003, the Company paid approximately $732,000 into escrow for the EPA portion of the settlement. The funds in escrow will be released to the EPA, and the Company will pay the remainder of the settlement, when the settlement becomes final after the public comment period required by law.

The Company used an environmental consulting firm, specializing in hydrogeology, to perform periodic monitoring of the groundwater at its previously leased facility in Newbury Park, California. Certain contaminants have been found in the groundwater. Monitoring results over a number of years indicate that contaminants are coming from an adjacent facility. It is currently not possible to determine the ultimate amount of possible future clean-up costs, if any, that may be required of the Company at this site. Accordingly, no reserve for clean up has been provided at this time.

Effective June 11, 1998, the Company’s Board of Directors approved a Stockholder Protection Agreement to issue a Right for each share of common stock outstanding on July 31, 1998 and each share issued thereafter (subject to certain limitations). These Rights, if not cancelled by the Board of Directors, can be exercised into a certain number of Series X Junior Participating Preferred Stock after a person or group of affiliated persons acquire 25% or more of the Company’s common stock and subsequently allow the holder to receive certain additional Company or acquirer common stock if the Company is acquired in a hostile takeover.

From time to time, the Company is approached by persons seeking payment based on the Company’s alleged use of their intellectual property. The Company is also periodically named as a defendant in lawsuits involving intellectual property and other matters that are routine to the nature of its business. Management is of the opinion that the ultimate resolution of all such pending matters will not have a material adverse effect on the accompanying consolidated financial statements.

provisions, including the rescission of Statement No. 4, early application is encouraged. The Company applied this statement as of fiscal year 2003, and as a result the gain on the extinguishment of debt was not classified as an extraordinary item.

In June 2002, the FASB approved SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company has early adopted SFAS No. 146 and it has not had a material impact on the financial statements.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirement of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted this statement as of fiscal year 2003 and included the prominent disclosure. Since the Company continued to use the intrinsic value method, the adoption did not have a material impact on the Company’s financial position, results of operations or cash flows.

You should read the following discussion of our financial condition and results of operations together with the condensed financial statements and the notes to condensed financial statements included elsewhere in this Form 10-Q. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements, due to factors including, but not limited to, those set forth in the “Risk Factors and Forward Looking Statements” and “Quantitative and Qualitative Disclosure About Market Risk” sections of this Form 10-Q and the “Risk Factors” section of the Company’s annual report on Form 10-K for the year ended January 26, 2003. We undertake no obligation to update any forward-looking statements after the date of this Form 10-Q.

We design, produce and market a broad range of products that are sold principally to customers in the computer, communications and industrial markets. Our products are designed into a wide variety of end applications, including notebook and desktop computers, computer gaming systems, personal digital assistants (PDAs), cellular phones, wireline networks, wireless base stations and automated test equipment (ATE). Products within the communications market include products for local area networks, metro and wide area networks, cellular phones and base stations. Industrial applications include ATE, medical devices and factory automation systems. Our end customers are primarily original equipment manufacturers and their suppliers, including Agilent, Cisco, Compal Electronics, Dell, Hewlett Packard, IBM, Intel, Lucky Goldstar, Microsoft, Motorola, Quanta Computer, Samsung, Sony and Unisys.

We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, receipt by the customer has been confirmed, the fee is fixed or determinable and collectibility is probable. Product design and engineering revenue is recognized during the period in which services are performed. We defer revenue recognition on shipment of certain products to distributors where return privileges exist until the products are sold through to end users. Gross profit is equal to our net sales less our cost of sales. Our cost of sales includes materials, direct labor and overhead. We determine the cost of inventory by the first-in, first-out method. Our operating costs and expenses generally consist of selling, general and administrative (SG&A), product development and engineering costs (R&D), costs associated with acquisitions, and other operating related charges.

Most of our sales to customers are made on the basis of individual customer purchase orders. Many large commercial customers include terms in their purchase orders, which provide liberal cancellation provisions. Trends within the industry toward shorter lead-times and “just-in-time” deliveries have resulted in our reduced ability to predict future shipments. As a result, we rely on orders received and shipped within the same quarter for a significant portion of our sales. Sales made directly to original equipment manufacturers during the first quarter of fiscal year 2004 were 45% of net sales. The remaining 55% of net sales were made through independent distributors.

We divide and operate our business based on two reportable segments: Standard Semiconductor Products and Rectifier, Assembly and Other Products. In previous years, we had a segment entitled Other Products. The Other Product Category was combined with the Rectifier and Assembly Products segment, and is now referred to as the Rectifier, Assembly and Other Products segment. The Rectifier, Assembly and Other Products segment has represented less than 10% of net sales for the last three fiscal years. Certain balances from the prior year’s corresponding quarter have been reclassified to be consistent with the current quarter’s presentation.

We evaluate segment performance based on net sales and operating income of each segment. We do not track segment data or evaluate segment performance on additional financial information. We do not track balance sheet items by individual reportable segments. As such, there are no separately identifiable segment assets nor are there any separately identifiable statements of income data (below operating income). The Standard Semiconductor Products segment makes up the vast majority of overall sales and includes our power management, protection, test and measurement, advanced communications and human input device product lines. The Rectifier, Assembly and Other Products segment includes our line of assembly and rectifier devices, which are the remaining products from our founding as a supplier into the military, aerospace and industrial equipment markets . It also includes other products made up of custom integrated circuits and foundry sales.

Our business involves reliance on foreign-based entities. Most of our outside subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Malaysia, the Philippines and Germany. For the first quarter ended April 27, 2003, approximately 63% (calculated based on acquisition cost) of our silicon was manufactured in China. Foreign sales for the first quarter of fiscal year 2004 constituted approximately 68% of our net sales. Approximately 88% of foreign sales were to customers located in the Asia-Pacific region. The remaining sales were to customers in Europe.

In the past, we have made several small acquisitions in order to increase our pool of skilled technical personnel and penetrate new market segments, such as test and measurement, advanced communications and system management devices. These acquisitions include: USAR Systems Incorporated; Practical Sciences, Inc.; Acapella Limited; and Edge Semiconductor. The acquisitions of USAR, Acapella and Edge were accounted for as poolings of interests.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an ongoing basis, we evaluate and discuss with our audit committee our estimates, including those related to our allowance for doubtful accounts and sales returns, inventory reserves, asset impairments and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Our critical accounting policies and estimates do not vary between our two reportable segments. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies, among others, affect the significant judgments and estimates we use in the preparation of our consolidated financial statements:

Our temporary and long-term investments consist of government, bank and corporate obligations. Temporary investments have original maturities in excess of three months, but mature within twelve months of the balance sheet date. Long-term investments have maturities in excess of one year from the date of the balance sheet. In fiscal year 2002, we changed our investment classification from “hold to maturity” to “available for sale” because we expected to sell some securities prior to maturity. We included $1.1 million and $1.4 million of unrealized gain, net of tax, in the comprehensive income for the first quarters of fiscal year 2004 and 2003, respectively.

We evaluate the collectibility of our accounts receivable based on a combination of factors. If we are aware of a customer’s inability to meet its financial obligations to us, we record an allowance to reduce the net receivable to the amount we reasonably believe we will be able to collect from the customer. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and our historical experience. If the financial condition of our customers were to deteriorate or if economic conditions worsen, additional allowances may be required in the future.

We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, receipt by the customer has been confirmed, the fee is fixed or determinable and collectibility is probable. Product design and engineering revenue is recognized during the period in which services are performed. We defer revenue recognition on shipment of certain products to distributors where return privileges exist until the products are sold through to end-users. In addition, we record a provision for estimated sales returns in the same period as the related revenues are recorded. We base these estimates on historical sales returns and other known factors. Actual returns could be different from our estimates and current provisions for sales returns and allowances, resulting in future charges to earnings.

Our inventories are stated at lower of cost or market and consist of materials, labor and overhead. We determine the cost of inventory by the first-in, first-out method. At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand. In order to state our inventory at lower of cost or market, we maintain reserves against our inventory. If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in cost of goods sold in the period the revision is made.

We are involved in various disputes and litigation matters as a claimant and as defendant. We record any amounts recovered in these matters when collection is certain. We record liabilities for claims against us when the losses are probable and estimable. Any amounts recorded are based on reviews by outside counsel, in-house counsel and management. Actual results may differ from estimates.

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a

valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. Management continually evaluates its deferred tax asset as to whether it is likely that the deferred tax assets will be realized. If management ever determined that its deferred tax asset was not likely to be realized, a write-down of that asset would be required and would be reflected as a cost in the accompanying period.

Net Sales. Net sales for the first quarter of fiscal year 2004 were $44.0 million, a decline of 11% compared to $49.2 million for the first quarter of fiscal year 2003. Overall macro-economic and semiconductor industry conditions were weak in the first quarter of fiscal year 2004. Demand for our products in the first three months of fiscal year 2004 was strongest from portable applications, such as notebook computers and cellular phones. The weakest demand was from the desktop computer, computer gaming and ATE end-markets. In the first quarter of fiscal year 2003, demand for our products was stable across most end-markets, and was strongest out of the ATE and high-end desktop computer end-market segments.

Standard Semiconductor Products represented 94% of net sales in the first quarter of fiscal year 2004, while 6% were represented by the Rectifier, Assembly and Other Products segment. Sales of our Standard Semiconductor Products segment were 94% of net sales in the first quarter of fiscal year 2003 and Rectifier, Assembly and Other Products’ sales were 6%. Sales of Standard Semiconductor Products declined 11% in the first quarter of fiscal year 2004 as compared to the prior year period. Sales of Rectifier, Assembly and Other Products declined 5% over the prior year period.

The decline in sales of Standard Semiconductor Products in the first quarter of fiscal year 2004 reflected general declines in all major end-markets, with the desktop computer, computer gaming and ATE segments being the weakest. Standard Semiconductor Products sales for portable applications, such as notebook computers and cellular phones, were up over the prior year period. Our power management and protection product line benefited from strength in portable applications, while power management products used in desktop computers and computer gaming systems were negatively impacted by weakness in those end-markets. Weakness in the ATE market negatively impacted our test and measurement product line. These three product lines had the most impact on the Standard Semiconductor Products’ sales for the period.

Sales of our Rectifier, Assembly and Other Products segment shrank in the first quarter of fiscal year 2004 compared to the prior year period due to declining demand for these older technology products and other non-strategic product offerings which we have de-emphasized due to their lower growth and margin opportunities.

In the first quarter of fiscal year 2003, Standard Semiconductor Products were lower than the prior year period due in part to a year-over-year decline in the overall semiconductor industry caused by poor economic conditions and lower spending in the capital equipment end-markets of communications infrastructure and test systems. Sales of our Rectifier, Assembly and Other Products segment declined in the first three months of fiscal year 2003 due to weak industry conditions, a strategic focus on proprietary products and the de-emphasis of custom and foundry services.

Gross Profit. Gross profit for the first quarter of fiscal year 2004 was $24.9 million, compared to $28.1 million for the prior year period. The decline was due to lower sales and a slightly lower gross margin . Our gross margin was 56% for the first quarter of fiscal year 2004 and 57% in the first quarter of fiscal year 2003.

In the first quarter of fiscal year 2004, we sold $484,000 of previously written-off inventory and $229,000 of previously written-off inventory was sold in the first quarter of fiscal year 2003.

Operating Costs and Expenses. Operating costs and expenses were $16.8 million, or 38% of net sales in the first quarter of fiscal year 2004. Operating costs and expenses for the first three months of fiscal year 2003 were $15.9 million, or 32% of net sales. The increase in operating costs and expenses was the result of modest increases in spending in the areas of sales, general and administration, and research and development.

Operating Income. Operating income was $8.1 million in the first quarter of fiscal year 2004, down from operating income of $12.1 million in the first quarter of fiscal year 2003. Operating income was impacted by a decline in net sales, a slight decline in gross margin and modestly higher operating costs and expenses.

We evaluate segment performance based on net sales and operating income of each segment. Operating income for the Standard Semiconductor Products segment declined 37% in the first quarter of fiscal year 2004 as compared to the first quarter of fiscal year 2003, reflecting a drop in sales, lower gross margin and higher operating costs and expenses. Standard Semiconductor Products segment operating income was benefited by higher returns on power management and protection products used in portable applications, but was more than offset by lower returns on power management products sold in desktop computer, test and measurement products used in the ATE market. These three product lines had the most impact on the Standard Semiconductor Products’ operating income for the period.

Operating income for the Rectifier, Assembly and Other Products segment improved 8% in the first quarter of fiscal year 2004 as compared to the first quarter of fiscal year 2003. The Rectifier, Assembly and Other Products’ operating income benefited from cost cutting efforts and sales of higher margin products.

In the first quarter of fiscal year 2003, operating income for the Standard Semiconductor Products segment declined compared to the prior year period. Operating income in the Standard Semiconductor Products segment was hurt by a decline in all product lines, with the exception of the power management product line, which had sales increases and improved profit margin. Test and measurement products, which have operating margins above our corporate average, represented the largest product line decline compared to the prior year period. Operating income for the Rectifier, Assembly and Other Products segment declined in the first quarter of fiscal year 2003, reflecting the impact of poor efficiencies associated with a lower sales level.

Interest and Other Income, Net. Net interest and other income of $2.8 million was realized in the first quarter of fiscal year 2004, up from $1.2 million in the first quarter of fiscal year 2003. Other income and expenses includes interest income from investments, interest expense associated with our outstanding convertible subordinated notes, gain on the extinguishment of debt and other items. The increase in net interest and other income in the first quarter of fiscal year 2004 was mostly due to $2.8 million of gain on the extinguishment of debt. The interest income portion of net interest and other Income for the first quarter of fiscal year 2004 was down due to lower rates of return on our investments as compared to the prior year. Net interest and other income in the first quarter of fiscal year 2003 included $50,000 of loss on the extinguishment of debt.

Provision for Taxes. Provision for income taxes was $2.6 million for the first quarter of fiscal year 2004, compared to $3.3 million in the first quarter of fiscal year 2003. The effective tax rate for the first three months of fiscal year 2004 and 2003 were 24% and 25%, respectively. The decline is due to increased sales by our foreign-based subsidiaries that are in lower tax jurisdictions.

On February 14, 2000, we completed a private offering of $400.0 million principal amount of convertible subordinated notes that bear interest at the rate of 4½% per annum and are convertible into our common stock at a conversion price of $42.23 per share. The notes are due in 2007 and callable beginning in February of 2003. Pursuant to a registration rights agreement, we were obligated to register the resale of the notes on behalf of the

holders and to maintain the effectiveness of the registration until the holders could otherwise resell the notes under exemptions from registration. Our obligation to keep the registration statement effective has terminated, and on August 30, 2002, we filed a post-effective amendment to de-register the notes and conversion shares that had not been sold under the prospectus contained in the registration statement. The post-effective amendment was effective on September 5, 2002.

As of April 27, 2003, we had working capital of $396.6 million, compared with $420.9 million as of January 26, 2003. The ratio of current assets to current liabilities as of April 27, 2003 was 15.1 to 1, compared to 12.2 to 1 as of January 26, 2003. The decline in working capital as of April 27, 2003 was mostly the result of a decline in temporary investment and accrued liabilities.

Cash used in operating activities was $2.8 million for the first three months of fiscal year 2004, compared to cash provided by operating activities of $7.7 million in the first three months of fiscal year 2003. Net operating cash flows were impacted by non-cash charges for depreciation and amortization of $2.3 million and $2.8 million in the first quarters of fiscal years 2004 and 2003, respectively.

Operating cash flow in the first quarter of fiscal year 2004 was positively impacted by net income of $8.3 million and by a decrease in inventories and an increases in other liabilities. These were more than offset by increases in gains on repurchase of long-term debt, receivables, other assets, accounts payable, accrued liabilities, deferred revenue and income taxes payable.

Net operating cash flows in the first three months of fiscal year 2003 were positively impacted by net income of $10.0 million and by a decrease in inventories, tax benefit from stock option exercises, income taxes payable and other assets. These were partially offset by increases in receivables, deferred income taxes, accounts payable and accrued liabilities, and other assets and liabilities.

Investing activities provided $67.8 million in the first quarter of fiscal year 2004 compared to $6.4 million in the prior year period. Investing activities for both periods consist of changes in temporary investments and long-term investments, and cash used for capital expenditures.

Our financing activities used $54.2 million during the first three months of fiscal year 2004 and $4.5 million in the prior year period. Financing activities reflect the proceeds from stock option exercises and reissuance of treasury stock for stock option exercises, which were more than offset by cash used to repurchase long-term debt.

In order to develop, design and manufacture new products, we have incurred significant expenditures during the past five years. We expect to continue these investments aimed at developing new products, including the hiring of many design and applications engineers and related purchase of equipment. Our intent is to continue to invest in those areas that have shown potential for viable and profitable market opportunities. Certain of these expenditures, particularly the addition of design engineers, do not generate significant payback in the short-term. We plan to finance these expenditures with cash generated by operations and investments.

Purchases of new capital equipment were made to complete our corporate headquarters in Camarillo, California, expand our test capacity and support other engineering functions, including product design and qualification. These purchases were funded from our operating cash flows and cash reserves. We believe that operating cash flows and cash reserves are sufficient to fund operations and capital expenditures for the foreseeable future.

We do not have any transactions, arrangements and other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources. We have no special purpose or limited purpose entities that provided off-balance sheet financing, liquidity or market or credit risk support, engage in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the financial statements.

As of April 27, 2003, we have approximately $7.8 million in operating lease commitments that extend over an eight-year period. The portion of these operating lease payments due during fiscal year 2004 is approximately $1.6 million. Presented below is a comprehensive summary of contractual obligations.

We have a contract (“Purchase obligations” in table above) with one of our third-party wafer foundries in which we guarantee that wafer foundry a certain minimum level of quarterly business. Under the contract, which runs from April of 2003 until June of 2004, we have agreed to buy approximately $3.1 million of fabricated silicon wafers on a calendar quarter basis from this foundry. If we do not meet this minimum obligation on a quarterly basis, we are obligated to pay the difference. We can earn back any shortfall in a given quarter by purchasing more wafers in a subsequent quarter.

Inflationary factors have not had a significant effect on our performance over the past several years. A significant increase in inflation would affect our future performance.

In April 2002, the Financial Accounting Standards (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. This statement is effective for fiscal years beginning after May 15, 2002. For certain provisions, including the rescission of Statement No. 4, early application is encouraged. We have applied this statement as of fiscal year 2003, and as a result the gains on the extinguishment of debt was not classified as an extraordinary item.

In June 2002, the FASB approved SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. We have early adopted SFAS No. 146 and it has not had a material impact on our financial statements.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirement of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We adopted this statement as of fiscal year 2003 and included the prominent disclosure. Since we continued to use the intrinsic value method, the adoption did not have a material impact on our financial position, results of operations or cash flows.

We maintain a website at www.semtech.com. We make available free of charge, either by direct access or a link to the SEC website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available directly at the SEC’s website at www.sec.gov.

You should carefully consider and evaluate all of the information in this Form 10-Q, including the risk factors listed below. The risks described below are not the only ones facing our company. Additional risks not now known to us or that we currently deem immaterial may also impair our business operations.

If any of these risks actually occur, our business could be materially harmed. If our business is harmed, the trading price of our common stock and convertible subordinated notes could decline.

This Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this Form 10-Q. We undertake no duty to update any of the forward-looking statements after the date of this Form 10-Q.

We sell our products into several commercial markets, primarily the computer, communication and industrial end-markets, whose performance is tied to the overall economy. Many of these industries have been impacted in the calendar years 2001 and 2002 due to an economic slowdown in the United States and globally. If the economic conditions continue to worsen or a wider global slowdown occurs, the demand for our products may be reduced. In addition, these economic slowdowns may also affect our customers’ ability to pay for our products. Accordingly, economic slowdowns may harm our business.

The cyclical nature of the electronics and semiconductor industries may limit our ability to maintain or increase revenue and profit levels during industry downturns

The semiconductor industry is highly cyclical and has experienced significant downturns, which are characterized by reduced product demand, production overcapacity, increased levels of inventory, industry-wide fluctuations in the demand for semiconductors and an erosion in average prices. The occurrence of these conditions has adversely affected our business in the past. During the calendar years 1999 and 2000, high consumption levels by electronics manufacturers was a major driver of demand for semiconductors, including the products we sell. However, calendar year 2001 was a year of significant decline for the overall semiconductor and electronics industries and, consequently, our business suffered. In calendar year 2002 and so far in calendar year 2003, semiconductor and electronic industry conditions have remained weak, with declines in average selling prices offsetting gains in unit shipment growth. Past downturns in the semiconductor industry have resulted in a sudden impact on the semiconductor and capital equipment markets. Consequently, a continuation of the current downturn and any future downturns in the semiconductor industry may harm our business. In addition, the semiconductor manufacturing industry is currently experiencing conditions of manufacturing overcapacity. If these conditions persist, they could lead to excess production in the industry and result in an underutilization of our internal manufacturing capacity and a decrease in the prices of our products.

We compete against larger, more established entities and our market share may be reduced if we are unable to respond to our competitors effectively

The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change and design and other technological obsolescence. We compete with domestic and international semiconductor companies, many of which have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing and distribution of their products. Some of these competitors include: Texas Instruments, National Semiconductor, Linear Technology, Maxim Integrated Products, Fairchild Semiconductor and Intersil Semiconductor, with respect to our power management products; ST Microelectronics N.V. and Protek, with respect to our protection products; Analog Devices, Maxim Integrated Products, ON Semiconductor and Micrel Semiconductor, with respect to our test and measurement products; Zarlink Semiconductor and Silicon Laboratories, with respect to our advanced communications products; and Synaptics Inc. and Alps with respect to our HID products. We expect continued competition from existing competitors as well as competition from new entrants in the semiconductor market. Our ability to compete successfully in the rapidly evolving area of integrated circuit technology depends on several factors, including:

To the extent that our products achieve market success, competitors typically seek to offer competitive products or lower prices, which, if successful, could harm our business.

Fluctuations and seasonality in the personal computer industry and economic downturns in our end-markets may have adverse consequences for our business

Many of our products are used in personal computers and related peripherals. For the first quarter of fiscal year 2004, approximately 41% of our sales were used in computer applications. For the fiscal year ended January 26, 2003, approximately 49% of our sales were used in computer applications. Industry-wide fluctuations in demand for desktop computers have in the past, and may in the future, harm our business. In addition, our past results have reflected some seasonality, with demand levels being higher in computer segments during the third and fourth quarters of the year in comparison to the first and second quarters.

A decline in any of our end-markets, particularly the computer, cellular phone and automated test equipment (ATE) markets, could also harm our business. For the first quarter of fiscal year 2004, approximately 10% of our sales were to ATE customers. For the fiscal year ended January 26, 2003, shipment of our products to the ATE customers represented approximately 13% of our net sales. Consequently, a downturn in the ATE market may adversely affect our business.

In fiscal year 2003, we saw demand from cellular phone manufacturers increase throughout the year. We estimated 26% of our sales in the first quarter of fiscal year 2004 were tied to wireless end-market applications. Any decline in the number of cellular phones made, especially feature-rich phones with color displays, or declines in the number of wireless base stations made, could adversely affect our business.

We obtain certain essential components and materials and certain manufacturing services from a limited

Our reliance on a limited number of outside subcontractors and suppliers for silicon wafers, packaging, test and certain other processes involves several risks, including potential inability to obtain an adequate supply of required components and reduced control over the price, timely delivery, reliability and quality of components. These risks may be attributable to several factors including limitation on resources, labor problems, equipment failures or the occurrence of natural disasters. There can be no assurance that problems will not occur in the future with suppliers or subcontractors. Disruption or termination of our supply sources or subcontractors could significantly delay our shipments and harm our business. Delays could also damage relationships with current and prospective customers. Any prolonged inability to obtain timely deliveries or quality manufacturing or any other circumstances that would require us to seek alternative sources of supply or to manufacture or package certain components internally could limit our growth and harm our business.

Most of our outside subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Malaysia, the Philippines and Germany. For fiscal year 2003, approximately 66% of our silicon, in terms of finished wafers, was supplied by a third-party foundry in China and this percentage could be even higher for all of fiscal year 2004. A majority of our package and test operations are performed by third-party contractors that are based in Malaysia, the Philippines and China. Our international business activities, in general, are subject to a variety of potential risks resulting from certain political and economic uncertainties. Any political turmoil or trade restrictions in these countries, particularly China, could limit our ability to obtain goods and services from these suppliers and subcontractors. The effect of an economic crisis or a political turmoil on our suppliers located in these countries may impact our ability to meet the demands of our customers. If we find it necessary to transition the goods and services received from our existing suppliers or subcontractors to other firms, we would likely experience an increase in production costs and a delay in production associated with such a transition, both of which could have a significant negative effect on our operating results, as these risks are substantially uninsured.

We may be unsuccessful in developing and selling new products required to maintain or expand our business

We operate in a dynamic environment characterized by price erosion, rapid technological change and design and other technological obsolescence. Our competitiveness and future success depend on our ability to achieve design wins for our products with current and future customers and introduce new or improved products that meet customer needs while achieving favorable margins. A failure to achieve design wins, to introduce these new products in a timely manner or to achieve market acceptance for these products, could harm our business.

The introduction of new products presents significant business challenges because product development commitments and expenditures must be made well in advance of product sales. The success of a new product depends on accurate forecasts of long-term market demand and future technological developments, as well as on a variety of specific implementation factors, including:

The failure of our products to achieve market acceptance due to these or other factors could harm our business.

Our products may be found to be defective, product liability claims may be asserted against us and we may not have sufficient liability insurance

One or more of our products may be found to be defective after shipment, requiring a product replacement, recall or a software fix which would cure the defect but impede performance of the product. We may also be subject to product returns which could impose substantial costs and harm our business.

Product liability claims may be asserted with respect to our technology or products. Although we currently have insurance, there can be no assurance that we have obtained a sufficient amount of insurance coverage, that asserted claims will be within the scope of coverage of the insurance, or that we will have sufficient resources to satisfy any asserted claims.

Our share price could be subject to extreme price fluctuations, and shareholders could have difficulty trading shares

The markets for high technology companies in particular have been volatile, and the market price of our common stock has been and may continue to be subject to significant fluctuations. Fluctuations could be in response to operating results, announcements of technological innovations and market conditions for technology stocks in general. Additionally, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated to the operating performance of individual companies. These market fluctuations, as well as general economic conditions, may adversely affect the price of our common stock.

In the past, securities class action litigation has often been instituted against a company following periods of volatility in the company’s stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management’s attention and resources.

In addition, the future sale of a substantial number of shares of common stock by us or by our existing stockholders may have an adverse impact on the market price of the shares of common stock. There can be no assurance that the trading price of our common stock will remain at or near its current level.

We sell and trade with foreign customers, which subjects our business to increased risks applicable to international sales

Sales to foreign customers accounted for approximately 68% of net sales in the first quarter of fiscal year 2004. Sales to foreign customers accounted for approximately 67% of net sales in fiscal year 2003. Sales to our customers located in Taiwan and Korea constituted 28% and 13%, respectively, of net sales for fiscal year 2003. International sales are subject to certain risks, including unexpected changes in regulatory requirements, tariffs and other barriers, political and economic instability, difficulties in accounts receivable collection, difficulties in managing distributors and representatives, difficulties in staffing and managing foreign subsidiary operations and potentially adverse tax consequences. These factors may harm our business. Our use of the Semtech name may be prohibited or restricted in some countries, which may negatively impact our sales efforts. In addition, substantially all of our foreign sales are denominated in U.S. dollars and currency exchange fluctuations in countries where we do business could harm us by resulting in pricing that is not competitive with prices denominated in local currencies.

The outbreak of severe acute respiratory syndrome or SARS, could impact our customer or supply base, especially in Asia

A large percentage of our sales are to customers located in Asia and a large percentage of our products are manufactured in Asia. Our largest customer base in Asia is located in Taiwan. Our largest wafer source is located in China. SARS or other health related issues could have a negative impact on consumer demand, on travel needed to secure new business, on transportation of our products from our suppliers or to our customers, or on workers needed to manufacture our products or our customers’ products.

Reductions in communications infrastructure investments could adversely affect our business

The overall semiconductor industry, and our business in particular, has benefited from the build-out of voice, data, and mobile networks and the related demand for communications infrastructure equipment that supports higher-

speed (higher bandwidth) networks. The electronics needed to support this trend within the communications market rely heavily on companies such as ours to develop the circuits used in these systems.

Much of our sales growth and margin expansion in fiscal year 2001 and 2000 was the result of product sales into wireless, local area networks, wide area networks and long-haul communications applications. This market saw a dramatic decline in total carrier spending throughout calendar years 2001 and 2002. Moreover, carrier spending on telecom equipment could decline further in the future. Although we believe that the communication equipment market has not been characterized by cyclicality to date, this market may in the future exhibit general cyclical characteristics similar to the market for semiconductor capital equipment. Any major reduction in communications infrastructure investment will have a negative impact on the overall industry and our sales into these end-market segments.

Our foreign currency exposures may change over time as the level of activity in foreign markets grows and could have an adverse impact upon financial results

As a global enterprise, we face exposure to adverse movements in foreign currency exchange rates. Certain of our assets, including certain bank accounts and accounts receivable, exist in nondollar-denominated currencies, which are sensitive to foreign currency exchange rate fluctuations. The nondollar-denominated currencies are principally the Euro, Swiss Francs, and British Pounds Sterling. Additionally, certain of our current and long-term liabilities are denominated principally in British Pounds Sterling currency, which are also sensitive to foreign currency exchange rate fluctuations. With the growth of our international business, our foreign currency exposures may grow and under certain circumstances could harm our business.

Our future operating results may fluctuate, fail to match past performance or fail to meet expectations

Our operating results may fluctuate in the future, may fail to match our past performance or fail to meet the expectations of analysts and investors. Our operating results may fluctuate as a result of:

As a result of these factors, our past financial results are not necessarily indicative of our future results.

We receive a significant portion of our revenues from a small number of customers and the loss of any one of these customers or failure to collect a receivable from them could adversely affect our operations and financial position

Historically, we have had significant customers that individually accounted for 10% or more of consolidated revenues in certain quarters or represented 10% or more of net accounts receivables at any given date. The identity of our largest customers has varied from year to year. In fiscal year 2002, one of our ATE end customers, including

its subcontractors, accounted for approximately 13% of net sales. In the first quarter of fiscal year 2004, two of our Asian distributors accounted for approximately 13% and 11%, respectively, of net sales. For fiscal year 2003 and 2002, one of our Asian distributors accounted for approximately 14% and 12%, respectively, of net sales. As of April 27, 2003, two of the Company’s Asian distributors accounted for approximately 13% and 11%, respectively, of net accounts receivable. Receivables from our customers are not secured by any type of collateral, and likewise are subject to the risk of being uncollectable.

We primarily conduct our sales on a purchase order basis, rather than pursuant to long-term supply contracts. The loss of any significant customer, any material reduction in orders by any of our significant customers, the cancellation of a significant customer order or the cancellation or delay of a customer’s significant program or product could harm our business.

We have acquired and may continue to acquire other companies and may be unable to successfully integrate these companies into our operations

In the past, we have expanded our operations through strategic acquisitions, and we may continue to expand and diversify our operations with additional acquisitions. If we are unsuccessful in integrating these companies into our operations or if integration is more difficult than anticipated, then we may experience disruptions that could harm our business. Some of the risks that may affect our ability to integrate acquired companies include those associated with:

We must commit resources to product production prior to receipt of purchase commitments and could lose some or all of the associated investment

Sales are made primarily on a current delivery basis pursuant to purchase orders that may be revised or cancelled by our customers without penalty, rather than pursuant to long-term supply contracts. Some contracts require that we maintain inventories of certain products at levels above the anticipated needs of our customers. As a result, we must commit resources to the production of products without binding purchase commitments from customers. Our inability to sell products after we devote significant resources to them could harm our business.

The loss of key personnel or the failure to attract or retain the specialized technical and management personnel could impair our ability to grow our business

Our future success depends upon our ability to attract and retain highly qualified technical, marketing and managerial personnel. We are dependent on a relatively small group of key technical personnel with analog and mixed-signal expertise. Personnel with highly skilled managerial capabilities, analog and mixed-signal design expertise are scarce and competition for personnel with these skills is intense. There can be no assurance that we will be able to retain existing key employees or that we will be successful in attracting, integrating or retaining other highly qualified personnel in the future. If we are unable to retain the services of existing key employees or are unsuccessful in attracting new highly qualified employees, our business could be harmed.

We are subject to environmental regulations which may require us to incur significant expenditures

The Company and its suppliers are subject to a variety of United States federal, foreign, state and local governmental laws, rules and regulations related to the use, storage, handling, discharge or disposal of certain toxic, volatile or

otherwise hazardous chemicals used in the manufacturing process. Any of these regulations could require the acquisition of equipment or other substantial expenditures to comply with environmental regulations. If we or our suppliers were to incur substantial additional expenses, product costs could significantly increase, thus harming our business. Any failure to comply with present or future environmental laws, rules and regulations could result in fines, suspension of production or cessation of operations, any of which could harm our business.

Our corporate headquarters, a portion of our assembly and research and development activities and certain other critical business operations are located near major earthquake fault lines. We do not maintain earthquake insurance and could be harmed in the event of a major earthquake.

Terrorist attacks, war and other acts of violence may negatively affect our operations and your investment

Terrorist attacks, such as the attacks that took place on September 11, 2001, wars, such as the current war in Iraq, and other acts of violence, such as those that may result from the increasing tension in the Middle East and the Korean Peninsula, or any other national or international crisis, calamity or emergency, may result in interruption to the business activities of many entities, business losses and overall disruption of the U.S. economy at many levels. These events or armed conflicts may directly impact our physical facilities or those of our customers and suppliers. Additionally, these events or armed conflicts may cause some of our customers or potential customers to reduce the level of expenditures on their services and products that ultimately may reduce our revenue. The consequences of these reductions are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business. For example, as a result of these events, insurance premiums for businesses may increase and the scope of coverage may be decreased. Consequently, we may not be able to obtain adequate insurance coverage for our business and properties. A “high” or “Orange” or “severe” or “Red” threat condition announced by the Homeland Security Advisory System or similar agency and any consequent effect on the transportation industry may adversely affect our ability to timely import materials from our suppliers located outside the United States or impact our ability to deliver our products to our customers without incurring significant delays. To the extent that these disruptions result in delays or cancellations of customer orders, a general decrease in corporate spending, or our inability to effectively market our services and products, our business and results of operations could be harmed.

We pursue patents for some of our new products and unique technologies, but we rely primarily on a combination of nondisclosure agreements and other contractual provisions, as well as our employees’ commitment to confidentiality and loyalty, to protect our know-how and processes. We intend to continue protecting our proprietary technology, including through trademark and copyright registrations and patents. Despite this intention, we may not be successful in achieving adequate protection. Our failure to adequately protect our material know-how and processes could harm our business. There can be no assurance that the steps we take will be adequate to protect our proprietary rights, that our patent applications will lead to issued patents, that others will not develop or patent similar or superior products or technologies, or that our patents will not be challenged, invalidated, or circumvented by others. Furthermore, the laws of the countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as laws in the United States.

The semiconductor industry is characterized by frequent claims of infringement and litigation regarding patent and other intellectual property rights. Due to the number of competitors, patent infringement is an ongoing risk since other companies in our industry could have patent rights that may not be identifiable when we initiate development efforts. Litigation may be necessary to enforce our intellectual property rights and we may have to defend ourselves against infringement claims. Any such litigation could be very costly and may divert our management’s resources. If one of our products is found to infringe, we may have liability for past infringement and may need to seek a license going forward. If a license is not available or if we are unable to obtain a license on terms acceptable to us, we would either have to change our product so that it does not infringe or stop making the product.

We could be required to register as an investment company and become subject to substantial regulation that would interfere with our ability to conduct our business

The Investment Company Act of 1940 requires the registration of companies which are engaged primarily in the business of investing, reinvesting or trading in securities, or which are engaged in the business of investing, reinvesting, owning, holding or trading in securities and which own or propose to acquire investment securities with a value of more than 40% of the company’s assets on an unconsolidated basis (other than U.S. government securities and cash). We are not engaged primarily in the business of investing, reinvesting or trading in securities, and we intend to invest our cash and cash equivalents in U.S. government securities to the extent necessary to take advantage of the 40% safe harbor. To manage our cash holdings, we invest in short-term instruments consistent with prudent cash management and the preservation of capital and not primarily for the purpose of achieving investment returns. U.S. government securities generally yield lower rates of income than other short-term instruments in which we have invested to date. Accordingly, investing substantially all of our cash and cash equivalents in U.S. government securities could result in lower levels of interest income and net income.

If we were deemed an investment company and were unable to rely upon a safe harbor or exemption under the Investment Company Act, we would among other things be prohibited from engaging in certain businesses or issuing certain securities. Certain of our contracts might be voidable, and we could be subject to civil and criminal penalties for noncompliance.

We are subject to review by taxing authorities, including the Internal Revenue Service

We are subject to review by domestic and foreign taxing authorities, including the Internal Revenue Service (IRS). The IRS is currently performing a routine review of our open-year tax filings. If the IRS were to prevail in securing tax liabilities in excess of those previously provided for, our tax loss carryforwards could be materially reduced, resulting in a tax provision charge in a future period.

Some of the information in this Form 10-Q and in the documents that are incorporated by reference, including the risk factors in this section, contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In many cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or continue,” or the negative of these terms and other comparable terminology. These statements are only predictions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors including the risks faced by us described above and elsewhere in this Form 10-Q.

As a global enterprise, we face exposure to adverse movements in foreign currency exchange rates. Because of the relatively small size of each individual currency exposure, we do not employ hedging techniques designed to mitigate foreign currency exposures. Likewise, we could experience unanticipated currency gains or losses. Our foreign currency exposures may change over time as the level of activity in foreign markets grows and could have an adverse impact upon our financial results.

Certain of our assets, including certain bank accounts and accounts receivable, exist in nondollar-denominated currencies, which are sensitive to foreign currency exchange rate fluctuations. The nondollar-denominated currencies are principally the Euro, Swiss Francs and British Pounds Sterling. Additionally, certain of our current and long-term liabilities are denominated principally in British Pounds Sterling currency, which are also sensitive to foreign currency exchange rate fluctuations.

Substantially all of our foreign sales are denominated in United States dollars. Currency exchange fluctuations in countries where we do business could harm our business by resulting in pricing that is not competitive with prices denominated in local currencies.

As of April 27, 2003, we had $182.1 million in long-term debt outstanding at a fixed interest rate of 4½% per annum. We do not currently hedge any potential interest rate exposure. Interest rates affect our return on excess cash and investments. A significant decline in interest rates would reduce the amount of interest income generated from our excess cash and investments.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within required time periods. Within 90 days prior to the date of this report (the “Evaluation Date”), the Company carried out an evaluation under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures.

Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective in timely alerting them to material information relating to the Company (and its consolidated subsidiaries) required to be included in the Company’s Exchange Act Filings.

Subsequent to the Evaluation Date, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls.

We periodically become subject to legal proceedings in the ordinary course of our business. We are not currently involved in any legal proceedings that we believe will materially and adversely affect our business.

On February 7, 2000, we were notified by the United States Environmental Protection Agency (EPA) with respect to the Casmalia Disposal Site in Santa Barbara, California. We have been included in the Superfund program to clean up this disposal site as a result of our involvement in utilizing this site for waste disposal. We have accepted a settlement offer from the EPA and certain State agencies under which are required to pay approximately $783,000 with respect to the wastes at the Casmalia Disposal Site attributable to us. We recorded $765,000 of the proposed settlement amount as an accrued liability in fiscal year 2002 and recorded an accrued liability to cover the remainder in fiscal year 2003. In April 2003, we paid approximately $732,000 into escrow for the EPA portion of the settlement. The funds in escrow will be released to the EPA, and we will pay the remainder of the settlement, when the settlement becomes final after the public comment period required by law.

On June 22, 2001, we were notified by the California Department of Toxic Substances Control that we may have liability associated with the clean up of the one-third acre Davis Chemical Company site in Los Angeles, California. We have been included in the clean-up program because we are one of the companies that are believed to have used the Davis Chemical Company site for waste recycling and/or disposal between 1949 and 1990. The Company has joined with other potentially responsible parties in an effort to resolve this matter with the State. The group is sharing the cost of an evaluation of the site prior to development of any remediation plan. The Company’s share of the estimated cost for this study is not material and the cost to date has been expensed. At this time there is not a specific proposal or budget with respect to the clean-up of the site. Thus, no reserve has been established for this matter.

The Company filed the following reports on Form 8-K during the period covered by this report:


February 6, 2003		To file a press release dated February 6, 2003 regarding an upcoming investor presentation by the Company CEO and earnings guidance for the fourth quarter

February 13, 2003		To file a press release dated February 13, 2003 regarding the Company’s program to repurchase its stock and convertible notes

February 25, 2003		To file a press release dated February 25, 2003 regarding financial results for the fourth quarter of fiscal year 2003 and the Company’s outlook for the first quarter

March 28, 2003		To file a press release dated March 28, 2003 regarding the Company’s settlement of a customer dispute

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.

	Three Months Ended
	April 27, 2003		April 28, 2002
Net sales	$	44,017	$	49,188
Cost of sales		19,160		21,108

Gross profit		24,857		28,080

Operating costs and expenses:
Selling, general and administrative		8,946		8,412
Product development and engineering		7,825		7,524

Total operating costs and expenses		16,771		15,936

Operating income		8,086		12,144
Interest and other income, net		2,792		1,179

Income before provision for taxes		10,878		13,323
Provision for taxes		2,611		3,331

Net income	$	8,267	$	9,992

Earnings per share:
Basic	$	0.11	$	0.14
Diluted	$	0.11	$	0.13
Weighted average number of shares:
Basic		73,236		72,681
Diluted		76,522		78,997

	April 27, 2003			January 26, 2003
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	147,800		$	137,041
Temporary investments		225,769			273,382
Receivables, less allowances		21,117			17,676
Inventories		14,673			16,351
Income taxes refundable		6,011			—
Deferred income taxes		5,331			11,731
Other current assets		4,125			2,267

Total current assets		424,826			458,448
Property, plant and equipment, net		50,366			51,547
Investments, maturities in excess of 1 year		56,759			78,624
Deferred income taxes		25,593			27,143
Other assets		3,591			4,784

Total Assets	$	561,135		$	620,546

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	8,876		$	5,725
Accrued liabilities		13,984			26,596
Income taxes payable		4,030			3,593
Deferred revenue		1,269			1,583
Other current liabilities		44			39

Total current liabilities		28,203			37,536
Long-term debt		182,070			241,570
Stockholders’ equity:
Common stock, $0.01 par value, 250,000,000 shares authorized, 73,815,727 issued and 73,086,427 outstanding on April 27, 2003 and 74,006,614 issued and 73,165,414 outstanding on January 26, 2003		740			740
Treasury stock, at cost, 650,761 shares as of April 27, 2003 and 841,200 shares as of January 26, 2003		(6,828	)		(9,072	)
Additional paid-in capital		182,524			182,524
Retained earnings		173,091			165,640
Accumulated other comprehensive income		1,335			1,608

Total Stockholders’ equity		350,862			341,440

Total Liabilities and Stockholders’ Equity	$	561,135		$	620,546

	Three Months Ended
	April 27, 2003			April 28, 2002
Cash flows from operating activities:
Net income	$	8,267		$	9,992
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,305			2,825
Deferred income taxes		7,950			812
Tax benefit of stock option exercises		—			1,997
Gain on repurchase of long-term debt		(2,805	)		50
(Gain) Loss on disposition of property, plant and equipment		(109	)		324
Provision for doubtful accounts		30			—
Changes in assets and liabilities:
Receivables		(3,471	)		(6,394	)
Inventories		1,678			1,874
Other assets		(1,316	)		(592	)
Accounts payable and accrued liabilities		(9,461	)		(5,143	)
Deferred revenue		(314	)		(246	)
Income taxes payable/refundable		(5,574	)		2,161
Other liabilities		5			9

Net cash provided by (used in) operating activities		(2,815	)		7,669
Cash flows from investing activities:
Temporary investments, net		47,329			(37,537	)
Long-term investments, net		21,873			46,008
Additions to property, plant and equipment		(1,395	)		(2,084	)

Net cash provided by investing activities		67,807			6,387
Cash flows from financing activities:
Exercise of stock options		—			5,497
Cost of buyback of convertible subordinated notes		(55,664	)		(9,981	)
Reissuance of treasury stock		1,428			—

Net cash used in financing activities		(54,236	)		(4,484	)
Effect of exchange rate changes on cash and cash equivalents		3			(3	)

Net increase (decrease) in cash and cash equivalents		10,759			9,569
Cash and cash equivalents at beginning of period		137,041			46,300

Cash and cash equivalents at end of period	$	147,800		$	55,869

	Three Months Ended
	(in thousands)
	April 27, 2003			April 28, 2002
Net income as reported	$	8,267		$	9,992
Additional pro forma compensation expense		7,219			8,592
Tax benefit of pro forma compensation expense		(1,805	)		(2,217	)

Pro forma net income	$	2,853		$	3,617

Pro forma earnings per share—basic	$	0.04		$	0.05
Pro forma earnings per share—diluted	$	0.04		$	0.05

	Three Months Ended
	(in thousands)
Net Sales	April 27, 2003		April 28, 2002
Standard Semiconductor Products	$	41,359	$	46,382
Rectifier, Assembly and Other Products		2,658		2,806

Total Net Sales	$	44,017	$	49,188


	Three Months Ended
	(in thousands)
Operating Income	April 27, 2003		April 28, 2002
Standard Semiconductor Products	$	7,065	$	11,201
Rectifier, Assembly and Other Products		1,021		943

Total Operating Income	$	8,086	$	12,144

	(in thousands)
	April 27, 2003		January 27, 2003
Raw materials	$	502	$	536
Work in process		8,948		9,449
Finished goods		5,223		6,366

Total inventories	$	14,673	$	16,351

	Payments due by period
	Total		Less than 1 year		2-3 years		4-5 years		After 5 years
	(in thousands)
Long-term debt	$	182,070	$	—	$	—	$	182,070	$	—
Operating leases		7,656		1,518		1,991		1,626		2,521
Purchase obligations		14,651		12,560		2,091		—		—

Total contractual cash obligations	$	204,377	$	14,078	$	4,082	$	183,696	$	2,521

	SEMTECH CORPORATION Registrant

Date: June 10, 2003		/s/ JOHN D. POE
		John D. Poe Chairman of the Board and Chief Executive Officer