e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005


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

COMMISSION FILE NUMBER 000-26124

IXYS CORPORATION

(Exact name of registrant as specified in its charter)


DELAWARE		77-0140882
(State or other jurisdiction		(IRS Employer Identification No.)
of incorporation or organization)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

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

Yes þ No o

THE NUMBER OF SHARES OF THE REGISTRANT’S COMMON STOCK, $0.01 PAR VALUE, OUTSTANDING AS OF AUGUST 3, 2005 WAS 33,573,611.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	June 30, 2005			March 31, 2005
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	70,440		$	58,144
Restricted cash		266			155
Accounts receivable, net of allowances of $2,737 at June 30, 2005 and $2,629 at March 31, 2005		35,444			41,388
Inventories		49,468			51,411
Prepaid expenses and other current assets		7,019			4,134
Deferred income taxes		6,773			6,649

Total current assets		169,410			161,881
Property, plant and equipment, net		35,078			27,814
Other assets		5,208			5,907
Deferred income taxes		2,610			2,787
Goodwill		21,502			21,502

Total assets	$	233,808		$	219,891


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capitalized lease obligations	$	2,423		$	2,733
Loans payable to bank, current portion		806			—
Accounts payable		11,920			12,962
Accrued expenses and other current liabilities		23,587			22,123

Total current liabilities		38,736			37,818
Capitalized lease obligations, net of current portion		3,800			4,409
Loans payable to bank, net of current portion		11,439			157
Pension liabilities		11,034			12,230

Total liabilities		65,009			54,614

Commitments and contingencies (Note 9)
Stockholders’ equity
Preferred stock, $0.01 par value:
Authorized: 5,000,000 shares; none issued and outstanding		—			—
Common stock, $0.01 par value:
Authorized: 80,000,000 shares; 33,769,763 issued and 33,542,761 outstanding at June 30, 2005 and 33,586,196 issued and 33,359,194 outstanding at March 31, 2005		338			336
Additional paid-in capital		154,562			153,376
Deferred compensation		(1	)		(4	)
Notes receivable from stockholders		(124	)		(355	)
Retained earnings		10,631			5,492
Less cost of treasury stock: 227,002 shares at June 30, 2005 and 227,002 shares at March 31, 2005		(1,552	)		(1,552	)
Accumulated other comprehensive income		4,945			7,984

Total stockholders’ equity		168,799			165,277

Total liabilities and stockholders’ equity	$	233,808		$	219,891

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

IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Three Months Ended
	June 30,
	2005			2004
Cash flows from operating activities:
Net income (loss)	$	5,139		$	1,863
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,409			2,823
Provision for receivables allowances		1,276			721
Write down of inventories		265			813
Foreign currency transactions		(608	)		(547	)
Interest forgiven on notes from shareholders		—			54
Changes in operating assets and liabilities
Accounts receivable		3,789			(6,227	)
Inventories		251			(1,882	)
Prepaid expenses and other current assets		(3,130	)		(807	)
Other assets		405			379
Accounts payable		(746	)		1,443
Accrued expenses and other liabilities		2,167			2,899
Pension liabilities		(542	)		393

Net cash provided by operating activities		10,675			1,925

Cash flows from investing activities:
Restricted cash increase		(111	)		(59	)
Purchases of plant and equipment		(9,881	)		(1,246	)

Net cash used in investing activities		(9,992	)		(1,305	)

Cash flows from financing activities:
Principal payments on capital lease obligations		(1,043	)		(1,075	)
Collections on notes receivables from stockholders		235			50
Proceeds from loans payable to bank		12,240			—
Proceeds from issuance of common stock under the employee stock purchase plan		369			297
Proceeds from exercise of stock options		799			97
Purchase of treasury stock		—			(138	)

Net cash provided by (used in) financing activities		12,600			(769	)

Effect of foreign exchange rate fluctuations on cash and cash equivalents		(987	)		(50	)

Net increase (decrease) in cash and cash equivalents		12,296			(199	)
Cash and cash equivalents at the beginning of the period		58,144			42,058

Cash and cash equivalents at the end of the period	$	70,440		$	41,859

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Unaudited Condensed Consolidated Financial Statements

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of IXYS Corporation (“IXYS” or the “Company”) and its wholly owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most difficult judgments include: allowance for sales returns, allowance for doubtful accounts, allowance for ship and debits, valuation of inventories, valuation of property, plant, equipment and intangible assets, revenue recognition, legal contingencies, goodwill, income tax and defined benefit plans. All significant intercompany transactions have been eliminated in consolidation. All adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been made. It is recommended that the interim financial statements be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2005 contained in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of the operating results expected for later quarters or the full fiscal year. A reclassification has been made to the prior period’s condensed consolidated financial statements to conform to the current period’s presentation. In the reclassification, litigation expenses in the amount of $1,474,000 for the three month period ended June 30, 2004 were reclassified from other expense, net to selling, general and administrative expenses. In addition, proceeds from capital lease obligations in the amount of $74,000 for the three month period ended June 30, 2004 were reclassified on the unaudited condensed consolidated statement of cash flows to a reduction of purchases of plant and equipment. Such reclassifications had no effect on previously reported net income or retained earnings.

2. Accounting for Stock-Based Compensation

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

Had compensation cost for its stock plans been determined based on the fair value at the grant date for awards in the three month periods ended June 30, 2005 and 2004 consistent with the provisions of SFAS No. 123, IXYS’s net income and net income per share would have decreased to the pro forma amounts indicated below (in thousands, except per share amounts):


	Three Months Ended
	June 30,
	2005			2004
	(unaudited)
Net income, as reported	$	5,139		$	1,863
Less: Total stock-based compensation determined under fair value based methods for all awards to employees, net of tax		(494	)		(471	)

Pro forma net income	$	4,645		$	1,392

Basic net income per share:
As reported	$	0.15		$	0.06

Pro forma	$	0.14		$	0.04


Diluted net income per share:
As reported	$	0.14		$	0.05

Pro forma	$	0.13		$	0.03

For purposes of computing pro forma net income, we estimate the fair value of option grants and employee stock purchase plan purchase rights using the Black-Scholes option pricing model. For purposes of the pro forma disclosure for the quarter ended June 30, 2005, we utilized an expected life of 4 years, a risk free interest rate of 3.76%, expected volatility of 63% and no expected dividend rate. For the quarter ended June 30, 2004, we utilized an expected life of 4 years, a risk free interest rate of 3.49%, expected volatility of 67% and no expected dividend rate.

3. Inventories

Inventories consist of the following (in thousands):


	June 30, 2005		March 31, 2005
	(unaudited)
Raw materials	$	11,890	$	13,386
Work in process		25,223		25,304
Finished goods		12,355		12,721

Total	$	49,468	$	51,411

4. Computation of Net Income per Share

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


	Three Months Ended
	June 30,
	2005		2004
	(unaudited)
BASIC:
Weighted average shares outstanding for the period		33,416		32,952
Net income available for common stockholders	$	5,139	$	1,863

Net income available for common stockholders per share	$	0.15	$	0.06


DILUTED:
Weighted average shares outstanding for the period		33,416		32,952
Net effective dilutive stock options based on treasury stock method using average market price		2,569		2,097

Shares used in computing per share amounts		35,985		35,049


Net income available for common stockholders	$	5,139	$	1,863

Net income per share available for common stockholders	$	0.14	$	0.05


Total common stock equivalents excluded for the computation of earnings per share as their effect was anti-dilutive		827		682

5. Borrowing Arrangements

On June 10, 2005, IXYS Semiconductor GmbH, a German subsidiary of IXYS, borrowed Euro 10.0 million, or about $12.2 million, from IKB Deutsche Industriebank for a term of 15 years.

The interest rate on the loan is determined by adding the then effective 3-month Euribor rate and a margin. The margin can range from 70 basis points to 125 basis points, depending on the calculation of a ratio of indebtedness to cash flow for the German subsidiary. During the first five years of the loan, if the Euribor rate exceeds 3.75%, the interest rate may not exceed 4.1%, and, if the Euribor rate falls below 2%, the interest rate may not be lower than 3%. Thereafter, the interest rate is recomputed annually. The interest rate at June 30, 2005 was 2.863%.

Each fiscal quarter during the first five years of the loan, a principal payment of Euro 167,000, or about $200,000, will be required. Thereafter, the amount of the payment will be recomputed.

Financial covenants for a ratio of indebtedness to cash flow and a ratio of equity to total assets for the German subsidiary must be satisfied for the loan to remain in good standing. The loan may be prepaid in whole or in part at the end of a fiscal quarter without penalty. The loan is collateralized by a security interest in the facility owned by IXYS in Lampertheim, Germany.

6. Purchase of Facilities

On May 6, 2005, IXYS purchased the 83,000 square foot facility used by its Clare, Inc. subsidiary in Beverly, Massachusetts for $9.1 million.

7. Pension Plans

IXYS maintains two defined benefit pension plans: one for the United Kingdom employees and one for German employees. These plans cover most of the employees in the United Kingdom and Germany. Benefits are based on years of service and the employees’ compensation. The Company deposits funds for these plans, consistent with the requirements of local law, with investment management companies, insurance companies, trustees, and/or accrues for the unfunded portion of the obligations.

The net periodic pension expense includes the following components:


	Three Months Ended
	June 30,
	2005			2004
	(unaudited)
Service cost	$	220		$	204
Interest cost on projected benefit obligation		429			427
Expected return on plan assets		(309	)		(281	)
Curtailment or settlement (gain)		(172	)		—
Recognized actuarial loss		13			286

Net periodic pension expense	$	181		$	636

IXYS expects to make contributions to the plans of approximately $1.1 million in the fiscal year ended March 31, 2006. This contribution is primarily contractual.

8. Segment Information

IXYS operates in a single industry segment and has a single reporting unit comprised of semiconductor products used primarily in power-related applications, including those in motor drives, consumer products and power conversion (among them, uninterruptible power supplies, switch mode power supplies and medical electronics), and in the telecommunications industry. IXYS’s sales by major geographic area (based on destination) were as follows:


	Three Months Ended
	June 30,
	2005		2004
	(unaudited)
North America
United States	$	20,094	$	16,824
Europe and the Middle East
Germany		6,943		6,800
Italy		1,820		1,878
United Kingdom		3,936		3,735
Other		8,616		8,147
Asia Pacific
Korea		9,107		9,732
China		5,119		4,894
Japan		1,695		1,900
Other		2,722		4,540
Rest of the World		3,289		1,504

Total	$	63,341	$	59,954

The following table sets forth revenues for each of IXYS’s product groups for the three months ended June 30, 2005 and 2004:


	Three Months Ended
	June 30,
	2005		2004
	(unaudited)
Power Semiconductors	$	47,827	$	44,500
ICs		10,536		10,245
Systems and RF Power Semiconductors		4,978		5,209

Total	$	63,341	$	59,954

9. Commitments and Contingencies

Legal Proceedings

IXYS currently is involved in a variety of legal matters that arise in the normal course of business. Were an unfavorable ruling to occur, there could be a material adverse impact on the Company’s financial condition, results of operations and cash flows.

On June 22, 2000, International Rectifier Corporation filed an action for patent infringement against IXYS in the United States District Court for the Central District of California, alleging that certain of IXYS’s products sold in the United States infringe U.S. patents owned by International Rectifier. International Rectifier’s complaint against IXYS contended that IXYS’s alleged infringement of International Rectifier’s patents has been and continues to be willful and deliberate. Subsequently, the U.S. District Court decided that certain of IXYS’s power MOSFETs and IGBTs infringe certain claims of each of three International Rectifier U.S. patents.

In 2002, the U.S. District Court entered a permanent injunction barring IXYS from making, using, offering to sell or selling in, or importing into, the United States, MOSFETs (including IGBTs) covered by the subject patents and ruled that International Rectifier should be awarded damages of $9.1 million for IXYS’s alleged infringement of International Rectifier’s patents. In addition, the U.S. District Court ruled that IXYS had been guilty of willful infringement. Subsequently, the U.S. District Court increased the damages to a total of $27.2 million, plus attorney fees.

IXYS appealed and on March 19, 2004 the United States Court of Appeals for the Federal Circuit reversed or vacated all findings of patent infringement previously issued against IXYS by the U.S. District Court, and vacated the permanent injunction. On August 9, 2004, the Federal Circuit Court vacated the damages award. The case was remanded to the U.S. District Court for further proceedings. The case has been set for trial to commence on September 6, 2005.

There can be no assurance of a favorable outcome in the International Rectifier suit. In the event of an adverse outcome, damages or injunctions awarded by the U.S. District Court would be materially adverse to IXYS’s financial condition, results of operations and cash flows. Management has not accrued any amounts for damages in the accompanying balance sheets for the International Rectifier matter described above.

On April 10, 2003, LoJack Corporation (“LoJack”) filed a suit against Clare, Inc. in the Superior Court of Norfolk County, Massachusetts claiming breach of contract, unjust enrichment, breach of the implied covenant of good faith and fair dealing, failure to perform services and violation of a Massachusetts statute prohibiting unfair and deceptive acts and practices, all purportedly resulting from Clare’s alleged breach of a contract to develop custom integrated circuits and a module assembly.

In its complaint, LoJack sought damages in an amount to be determined at trial, an $890,000 refund of payments it made under the contract, all work product resulting from any work prepared by Clare and its attorneys’ fees in the suit. LoJack also sought to have its damages trebled under the Massachusetts statute.

Clare answered the complaint denying any liability and counterclaiming for breach of contract, unjust enrichment, breach of the implied covenant of good faith and fair dealing, violation of the Massachusetts statute, promissory estoppel and negligent misrepresentation. Discovery in the litigation is largely complete. Motions for summary judgment have been briefed but not yet heard. A trial date of October 11, 2005 has been set.

There can be no assurance of a favorable outcome in the LoJack suit. In the event of an adverse outcome, damages awarded by the court could be materially adverse to the Company’s financial condition, results of operations and cash flows. Management has not accrued any amounts of damages in the accompanying balance sheets for the LoJack matter described above.

Other Commitments and Contingencies

The Company does not provide any product or similar guarantees or warranties. However, the Company does provide in the normal course of business indemnification to its officers, directors and selected parties.

10. Subsequent Event

On August 9, 2005, IXYS purchased the 27,000 square foot facility used by its Clare Micronix Integrated Systems, Inc. subsidiary in Aliso Viejo, California for $5.1 million.

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

This discussion contains forward-looking statements, which are subject to certain risks and uncertainties, including, without limitation, those described elsewhere in this Item 2. Actual results may differ materially from the results discussed in the forward-looking statements. For a discussion of risks that could affect future results, see “Risk Factors” below. All forward-looking statements included in this document are made as of the date hereof, based on the information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.

Overview

We are a multi-market integrated semiconductor company specialized in the design, development, manufacture and marketing of high power, high performance power semiconductors. Our three principal product groups are: power semiconductors; integrated circuits; and systems and RF power semiconductors.

Our power semiconductors improve system efficiency and reliability by converting electricity at relatively high voltage and current levels into the finely regulated power required by electronic products. We focus on the market for power semiconductors that are capable of processing greater than 500 watts of power.

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

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

Critical Accounting Policies and Significant Management Estimates

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

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

Revenue recognition. We sell to distributors and original equipment manufacturers. Approximately 38% of our revenues in the first three months of fiscal 2006 and 37% of our revenues in the first three months of fiscal 2005 were from distributors, respectively. We provide our distributors with the following programs: stock rotation and ship and debit. Ship and debit is a form of price protection. We recognize revenue from product sales upon shipment provided that we have received an executed purchase order, the price is fixed and determinable, the risk of loss has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Reserves for allowances are also recorded at the time of shipment. We are able to track inventory at our distributors to assist in reserve calculations. Our management must make estimates of potential future product returns and so called “ship and debit” transactions related to current period product revenue. Our management analyzes historical returns and ship and debit transactions, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and allowances. Significant management judgments and estimates must be made and used in connection with establishing the allowances in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.

For our nonrecurring engineering, or NRE, related to engineering work performed by our Clare Micronix division to design chip prototypes that will later be used to produce required units, customers enter into arrangements with Clare Micronix to perform engineering work for a fixed fee. Clare Micronix records fixed-fee payments during the development phase from customers in accordance with Statement of Financial Accounting Standards No. 68, “Research and Development Arrangements” Amounts offset against research and development costs totaled approximately $111,000 in the first three months of fiscal 2006 and $43,000 in the first three months of fiscal 2005.

Allowance for sales returns. We maintain an allowance for sales returns for estimated product returns by our customers. We estimate our allowance for sales returns based on our historical return experience, current economic trends, changes in customer demand, known returns we have not received and other assumptions. If we make different judgments or utilize different estimates, the amount and timing of our revenue could be materially different. Given that our revenues consist of a high volume of relatively similar products, our actual returns and allowances have not fluctuated significantly from period to period to date, and our returns provisions have historically been reasonably accurate. This allowance is included as part of the accounts receivable allowance on the balance sheet and as a reduction to gross revenues in the calculation of net revenues on the statement of operations.

Allowance for stock rotation. We also provide “stock rotation” to select distributors. The rotation allows distributors to return a percentage of the previous six months’ sales. In the first three months of fiscal 2006 and of fiscal 2005, approximately $42,000 and $253,000, respectively, of products were returned to us under the program. This allowance is included as part of the accounts receivable allowance on the balance sheet and as a reduction to gross revenues in the calculation of net revenues on the statement of operations. We establish the allowance based upon maximum allowable rotations, which is consistent with our historical experience.

Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments. We evaluate our allowance for doubtful accounts based on the aging of our accounts receivable, the financial condition of our customers and their payment history, our historical write-off experience and other assumptions. If we were to make different judgments of the financial condition of our customers or the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. This allowance is reported on the balance sheet as part of the accounts receivable allowance and is included on the statement of operations as part of selling, general and administrative expense. This allowance is based on historical losses and management’s estimates of future losses.

Allowance for ship and debit. Ship and debit is a program designed to assist distributors in meeting competitive prices in the marketplace on sales to their end customers. Ship and debit requires a request from the distributor for a pricing adjustment for a specific part for a customer sale to be shipped from the distributor’s stock. We have no obligation to accept this request. However, it is our historical practice to allow some companies to obtain sales discounts for inventory held. Our distributors had approximately $4.2 million in inventory of our products on hand at June 30, 2005. Ship and debit authorizations may cover current and future distributor activity for a specific part for sale to the distributor’s customer. In accordance with Staff Accounting Bulletin No. 104 Topic 13, “Revenue Recognition,” at the time we record sales to the distributors, we provide an allowance for the estimated future distributor activity related to such sales since it is probable that such sales to distributors will result in ship and debit activity. The sales allowance requirement is based on sales during the period, credits issued to distributors, distributor inventory levels, historical trends, market conditions, pricing trends we see in our direct sales activity with original equipment manufacturers and other customers, and input from sales, marketing and other key management. We receive periodic statements regarding our products held by our distributors. These procedures require the exercise of significant judgments. We believe that they enable us to make reliable estimates of future credits under the ship and debit program. Our actual results to date have approximated our estimates. At the time the distributor ships the part from stock, the distributor debits us for the authorized pricing adjustment. This allowance is included as part of the accounts receivable allowance on the balance sheet and as a reduction to gross revenues in the calculation of net revenues on the statement of operations. If competitive pricing were to decrease sharply and unexpectedly, our estimates would be insufficient, which could significantly adversely affect results.

Additions to the ship and debit allowance are estimates of the amount of expected future ship and debit activity related to sales during the period and reduce revenues and gross profit in the period. Sales to distributors represented 38.0% of net revenues during the three months ended June 30, 2005 as compared to 37% of net revenues during the three months ended June 30, 2004. The following table sets forth the beginning and ending balances of, additions to, and deductions from, our allowance for ship and debit during the three months ended June 30, 2005:


Balance March 31, 2005	$	553
Additions		521
Deductions		(570	)

Balance June 30, 2005.	$	504

Inventories. Inventories are recorded at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market value. Consistent with Statement 3 of Accounting Research Bulletin 43, or ARB 43, our accounting for inventory costing is based on the applicable expenditure incurred, directly or indirectly, in bringing the inventory to its existing condition. Such expenditures include acquisition costs, production costs and other costs incurred to bring the inventory to its use. In accordance with Statement 4 of ARB 43, as it is impractical to track inventory from the time of purchase to the time of sale for the purpose of specifically identifying inventory cost, our inventory is therefore valued based on a standard cost, given that the materials purchased are identical and interchangeable at various production process. We review our standard costs on an as-needed basis but in any event at least once a year, and update them as appropriate to approximate actual costs.

We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. The value of our inventories is dependent on our estimate of future demand as it relates to historical sales. If our projected demand is over-estimated, we may be required to reduce the valuation of our inventories below cost. We regularly review inventory quantities on hand and record an estimated provision for excess inventory based primarily on our historical sales. We perform an analysis of inventories and compare the sales for the preceding two years. To the extent we have inventory in excess of the greater of two years’ historical sales, twice the most recent year’s historical sales or backlog, we recognize a reserve for excess inventories. However, for new products, we do not consider whether there is excess inventory until we develop sufficient sales history or experience a significant change in expected product demand based on backlog. Actual demand and market conditions may be different from those projected by our management. This could have a material effect on our operating results and financial position. If we make different judgments or utilize different estimates, the amount and timing of our write-down of inventories may be materially different.

Excess inventory frequently remains saleable. When excess inventory is sold, it yields a gross profit margin of up to 100%. Sales of excess inventory have the effect of increasing the gross profit margin beyond that which would otherwise occur, because of previous write-downs. Once we have written-down inventory below cost, we do not write it up. We do not physically segregate excess inventory and assign unique tracking numbers to it in our accounting systems. Consequently, we cannot isolate the sales prices of excess inventory from the sales prices of non-excess inventory. Therefore, we are unable to report the amount of gross profit resulting from the sale of excess inventory or quantify the favorable impact of such gross profit on our gross profit margin.

The following table provides information on our excess inventory at cost (which has been fully reserved in our financial statements), including the sale of excess inventory valued at cost (in thousands):


Balance at March 31, 2005	$	21,241
Sale of excess inventory		(131	)
Scrap of excess inventory		(179	)
Additional accrual of excess inventory		578

Balance at June 30, 2005	$	21,509

The practical efficiencies of wafer fabrication require the manufacture of semiconductor wafers in minimum lot sizes. Often, when manufactured, we do not know whether or when all the semiconductors resulting from a lot of wafers will sell. With more than 9,000 different part numbers for semiconductors, excess inventory resulting from the manufacture of some of those semiconductors will be continual and ordinary. Because the cost of storage is minimal when compared to potential value and because our products do not quickly become obsolete, we expect to hold excess inventory for potential future sale for years. Consequently, we have no set time line for the sale or scrapping of excess inventory.

In addition, in accordance with the guidance in Statements 6 and 7 of ARB 43, our inventory is also being written down to lower of cost or market or net realizable value. We review our inventory listing on a quarterly basis for an indication of losses being sustained for costs that exceed selling prices less direct costs to sell. When it is evident that our selling price is lower than current cost, the inventory is marked down accordingly. At June 30, 2005, our lower of cost or market reserve was $209,000.

Furthermore, we perform an annual inventory count and periodic cycle counts for specific parts that have a high turnover. We also periodically consider any inventory that is no longer usable and write it off as scrap.

Valuation of property, plant, equipment, and intangible assets. We regularly evaluate the recoverability of our property, plant, equipment and intangible assets in accordance with Statement of Financial Accounting Standards No. 144, or SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Actual useful lives and cash flows could be different from those estimated by our management. This could have a material effect on our operating results and financial position. Reviews are regularly performed to determine whether facts and circumstances exist indicating that the carrying amount of assets may not be recoverable or that the useful life is shorter than originally estimated. We assess the recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. If assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the net book value of the assets is depreciated over the newly determined remaining useful lives.

Legal contingencies. We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. SFAS No. 5, “Accounting for Contingencies,” requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be

reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position, results of operations and cash flows.

Goodwill. We regularly evaluate whether events and circumstances have occurred that indicate a possible impairment of goodwill and, in any event, we conduct such evaluation at least annually as of December 31. In the quarter, we had no such trigger events or circumstances. In determining whether there is an impairment of goodwill, we calculate the estimated implied fair value of our company by comparing the fair value of the reporting unit with its carrying amount, including goodwill. Then, if the carrying amount of the reporting unit exceeds its fair value, we perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. We believe that we operate as a single business unit. We have one reporting unit. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. We determine the implied fair value of goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, we report the excess as an impairment loss. We believe the methodology we use in testing impairment of goodwill provides us with a reasonable basis in determining whether an impairment charge should be taken. To date, our goodwill has not been considered to be impaired based on the results of our analysis.

Income tax. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We 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 establish a valuation allowance. A valuation allowance reduces our deferred tax assets to the amount that is more likely than not to be realized. In determining the amount of the valuation allowance, we consider estimated future taxable income as well as feasible tax planning strategies in each taxing jurisdiction in which we operate. If we determine that we will not realize all or a portion of our remaining deferred tax assets, we will increase our valuation allowance with a charge to income tax expense. Conversely, if we determine that we will ultimately be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be released to income as a credit to income tax expense. Significant management judgment is required in determining our provision for income taxes and potential tax exposures, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance, which could materially impact our financial position and results of operations. Our ability to utilize our deferred tax assets and the need for a related valuation allowance are monitored on an ongoing basis.

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

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” which addresses the accounting for share-based payment transactions. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using APB No. 25, and generally requires instead that such transactions be accounted and recognized in the statement of income based on their fair value. SFAS No. 123R will be effective for public companies as of the first fiscal year that begins after June 15, 2005. We will adopt SFAS No. 123R for our fiscal year beginning April 1, 2006. SFAS No. 123R offers us alternative methods of adopting this standard. At the present time, we have not yet determined which alternative method we will use and the resulting impact on our financial position or results of operations. We do not expect this accounting change to materially affect our liquidity, as equity-based compensation is a non-cash expense. The effect of expensing stock options on our results of operations and earnings per share using the Black-Scholes model is presented on a pro forma basis in the accompanying Note 2 to the Condensed Consolidated Financial Statements.

In March 2005, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 107, or SAB No. 107, “Share-Based Payment” , which expresses views of the Staff regarding the interaction between SFAS No. 123R, or SFAS No. 123R, Share-Based Payment and certain SEC rules and regulations. SAB No. 107 also provides the Staff’s views regarding the valuation of share-based payment arrangements for public companies. We will evaluate the requirements of SAB No. 107 in connection with our adoption of SFAS No. 123R.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The provisions of this Statement are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We will adopt SFAS No. 154 for our fiscal year beginning April 1, 2006.

Results of Operations — Three months Periods Ended June 30, 2005 and 2004

The following table sets forth selected consolidated statements of operations data for the fiscal periods indicated and the percentage change in such data from period to period. These historical operating results may not be indicative of the results for any future period.


	Three Months Ended
	June 30,
				% increase from
	2005			2004 to 2005			2004
		(000	)					(000	)
Net revenues	$	63,341			5.6	%	$	59,954
Cost of goods sold		42,196			(1.4	%)		42,779

Gross profit	$	21,145			23.1	%	$	17,175


Operating expenses:
Research, development and engineering	$	4,156			(8.7	%)	$	4,552
Selling, general and administrative		9,257			(1.3	%)		9,376

Total operating expenses	$	13,413			(3.7	%)	$	13,928

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


	Three Months Ended
	June 30,
	2005			2004
	% of Net			% of Net
	Revenues			Revenues
Net revenues		100.0	%		100.0	%
Cost of goods sold		66.6	%		71.4	%

Gross profit		33.4	%		28.6	%


Operating expenses:
Research, development and engineering		6.6	%		7.6	%
Selling, general and administrative		14.6	%		15.6	%

Total operating expenses		21.2	%		23.2	%


Operating income		12.2	%		5.4	%
Other income (expense), net		0.7	%		(.3	%)

Income before income tax		12.9	%		5.1	%
Provision for income tax		4.8	%		2.0	%

Net income		8.1	%		3.1	%

Net Revenues.

The 5.6% increase in net revenues in the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 reflects increased sales in power semiconductors. The increase in the power semiconductor group was due principally to an increase of $4.2 million in sales of power MOSFETs, partially offset by a net decline in the sales of other products. Revenues from the sale of integrated circuits and systems and RF power semiconductors in the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 were relatively flat, with integrated circuits increasing by $291,000 and systems and RF power semiconductors decreasing by $231,000.

For the quarter ended June 30, 2005, sales to customers in the United States represented approximately 31.7% and sales to international customers represented approximately 68.3% of our net revenues. Of our international sales, approximately 49.3% were

derived from sales in Europe and the Middle East, approximately 43.1% were derived from sales in Asia and approximately 7.6% were derived from sales in the rest of the world. By comparison, for the quarter ended June 30, 2004, sales to customers in the United States represented approximately 28.1% and sales to international customers represented approximately 71.9% of our net revenues. Of our international sales, approximately 47.7% were derived from sales in Europe and the Middle East, approximately 48.8% were derived from sales in Asia and approximately 3.5% were derived from sales in the rest of the world. Revenues increased in the United States in quarter ended June 30, 2005, as compared to the comparable period of the prior year, because of an increase in sales to the medical market.

In each of the periods, our revenues were reduced by allowances for sales returns, stock rotations and ship and debit. See “Critical Accounting Policies and Significant Management Estimates” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following tables set forth the revenue, average selling prices, or ASPs, and units for each of our product groups for the fiscal periods indicated:


	Three Months Ended June 30,
			% change in
			Revenues
Revenues	2005		2004 to 2005			2004
		(000)					(000)
Power Semiconductors	$	47,827		7.5	%	$	44,500
Integrated Circuits		10,536		2.8	%		10,245
Systems and RF Power Semiconductors		4,978		(4.4	%)		5,209


Total Revenues	$	63,341				$	59,954


	Three Months Ended June 30,
			% change in
			ASP from 2004
Average Selling Prices (ASPs)	2005		to 2005			2004
Power Semiconductors	$	2.40		3.0	%	$	2.33
Integrated Circuits	$	0.93		3.3	%	$	0.90
Systems and RF Power Semiconductors	$	11.58		(18.2	%)	$	14.15


	Three Months Ended June 30,
			% change in
			units from 2004
Units	2005		to 2005			2004
		(000)					(000)
Power Semiconductors		19,895		4.1	%		19,111
Integrated Circuits		11,388		0.3	%		11,350
Systems and RF Power Semiconductors		430		16.8	%		368


Total Units		31,713					30,829

The increases in the ASPs of power semiconductors and integrated circuits and the decrease in the ASP of systems and RF power semiconductors primarily occurred as a result of changes in the mix of products sold. Comparing the quarter ended June 30, 2004 to the quarter ended June 30, 2005, units increased principally due to increased shipments of semiconductors for plasma display panels; however, comparing the quarter ended March 31, 2005 to the quarter ended June 30, 2005, shipments of semiconductors for plasma display panels declined.

Gross Profit.

Gross profit margin increased to 33.4% in the three months ended June 30, 2005 from 28.6% in the three months ended June 30, 2004, principally because of the changes in the product mix and improved economies of scale. The increase in gross profit expressed in dollars in the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 is primarily the result of a shift towards products with higher gross margins, particularly in the medical market, and an increase in units sold.

In each of the periods, our gross profit and gross profit margin were increased by the sale of excess inventory, which had previously been written-down. See “Critical Accounting Policies and Significant Management Estimates — Inventories” elsewhere in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Research, Development and Engineering.

For the three months ended June 30, 2005 as compared to the three months ended June 30, 2004, research, development and engineering expenses decreased by $396,000, principally due to a 16% decline in research, development and engineering headcount from 58 people to 49 people.

Selling, General and Administrative.

For the three months ended June 30, 2005 as compared to the three months ended June 30, 2004, selling, general and administrative expenses were relatively flat in dollar terms but declined as a percentage of net revenues principally as a result of our continuing efforts to control costs.

Other Income (Expense), Net.

Other income, net in the quarter ended June 30, 2005 was $425,000, as compared to $203,000 of other expense, net in the quarter ended June 30, 2004. Other income, net during the quarter ended June 30, 2005 consisted principally of interest income, net. Other expense, net during the quarter ended June 30, 2004 consisted principally of gains and losses associated with changes in foreign currency rates.

Provision for Income Tax.

In the quarter ended June 30, 2005, the provision for income tax reflected an effective tax rate of 37.0%, as compared to an effective tax rate of 38.8% in the quarter ended June 30, 2004. The reduction in the effective tax rate is primarily the result of an increase in research and development credits.

Liquidity and Capital Resources

At June 30, 2005, cash and cash equivalents of $70.4 million were 21.1% greater than the $58.1 million at March 31, 2005. This was due to net cash provided by operating and financing activities, partially offset by net cash used in investing activities.

Net cash provided by operating activities in the three months ended June 30, 2005 was $10.7 million, as compared to $1.9 million in the three months ended June 30, 2004. Net accounts receivable declined $5.9 million, or 14.4%, from March 31, 2005 to June 30, 2005, primarily due to lower revenues and an improvement in collections resulting in lower days sales outstanding. Our net inventories at June 30, 2005 decreased $1.9 million, or 3.8%, from March 31, 2005.

We used $10.0 million in net cash for investing activities during the three months ended June 30, 2005, as compared to $1.3 million during the three months ended June 30, 2004. During the three months ended June 30, 2005, we spent $9.9 million in capital expenditures, including $9.0 million for the purchase of the Clare facility.

For the three months ended June 30, 2005, net cash provided by financing activities was $12.6 million as compared to $769,000 used in financing activities in the three months ended June 30, 2004.

On June 10, 2005, IXYS Semiconductor GmbH, our German subsidiary, borrowed Euro 10.0 million, or about $12.2 million, from IKB Deutsche Industriebank for a term of 15 years. The interest rate on the loan is determined by adding the then effective 3-month Euribor rate and a margin. The margin can range from 70 basis points to 125 basis points, depending on the calculation of a ratio of indebtedness to cash flow for the German subsidiary. During the first five years of the loan, if the Euribor rate exceeds 3.75%, the interest rate may not exceed 4.1%, and, if the Euribor rate falls below 2%, the interest rate may not be lower than 3%. Thereafter, the interest rate is recomputed annually. The interest rate at June 30, 2005 was 2.863%. Each fiscal quarter during the first five years of the loan, a principal payment of Euro 167,000, or about $200,000, will be required. Thereafter, the amount of the payment will be recomputed.

In addition to cash flow from operations, another potential source of liquidity is borrowings under existing lines of credit. At June 30, 2005, we had available credit of $5.1 million.

At June 30, 2005, our debt, consisting of capital lease obligations and loans payable, was $18.5 million, representing 26.2% of our cash and cash equivalents and 10.9% of our stockholders equity.

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

RISK FACTORS

In addition to the other information in this Quarterly Report on Form 10-Q, the following risk factors should be considered carefully in evaluating our business and us. Additional risks not presently known to us or that we currently believe are not serious may also impair our business and its financial condition.

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

Given the nature of the markets in which we participate, we cannot reliably predict future revenues and profitability, and unexpected changes may cause us to adjust our operations. Large portions of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs. Thus, small declines in revenues could negatively affect our operating results in any given quarter. Our operating results may fluctuate significantly. For example, in comparing fiscal 2002 to fiscal 2001, net revenues fell by 25.6% and net income fell by 85.7%. Some of the factors that may affect our quarterly and annual results are:

	•		the reduction, rescheduling or cancellation of orders by customers;

	•		fluctuations in timing and amount of customer requests for product shipments;

	•		changes in the mix of products that our customers purchase;

	•		loss of key customers;

	•		the cyclical nature of the semiconductor industry;

	•		competitive pressures on selling prices;

	•		market acceptance of our products and the products of our customers;

	•		fluctuations in our manufacturing yields and significant yield losses;

	•		difficulties in forecasting demand for our products and the planning and managing of inventory levels;

	•		the availability of production capacity;

	•		the amount and timing of investments in research and development;

	•		changes in our product distribution channels and the timeliness of receipt of distributor resale information;

	•		the impact of vacation schedules and holidays, largely during the second and third fiscal quarters of our fiscal year; and

	•		the amount and timing of costs associated with product returns.

As a result of these factors, many of which are difficult to control or predict, as well as the other risk factors discussed in this Quarterly Report on Form 10-Q, we may experience materially adverse fluctuations in our future operating results on a quarterly or annual basis.

The semiconductor industry is cyclical, and an industry downturn could adversely affect our operating results.

Business conditions in the semiconductor industry may rapidly change from periods of strong demand and insufficient production to periods of weakened demand and overcapacity. The industry is characterized by:

	•		alternating periods of overcapacity and production shortages;

	•		cyclical demand for semiconductors;

	•		changes in product mix in response to changes in demand;

	•		significant price erosion;

	•		variations in manufacturing costs and yields;

	•		rapid technological change and the introduction of new products; and

	•		significant expenditures for capital equipment and product development.

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

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

Semiconductor manufacturing requires significant capital investment, leading to high fixed costs, including depreciation expense. We are limited in our ability to reduce fixed costs quickly in response to any shortfall in revenues. If we are unable to utilize our manufacturing, assembly and testing facilities at a high level, the fixed costs associated with these facilities will not be fully absorbed, resulting in higher average unit costs and lower gross margins. Increased competition and other factors may lead to price erosion, lower revenues and lower gross margins for us in the future.

IXYS could be harmed by litigation involving patents and other intellectual property rights.

As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. We have been sued on occasion for purported patent infringement and are currently defending against a number of such claims. For example, we have been sued by International Rectifier for purportedly infringing some of its patents covering power MOSFETs. After trial, the U.S. District Court awarded damages to International Rectifier of $27.2 million plus attorney fees and issued a permanent injunction against IXYS, effectively barring us from selling or distributing the allegedly infringing products. The United States Court of Appeals for the Federal Circuit vacated those rulings and remanded the litigation to the U.S. District Court for further action consistent with the opinion of the Federal Circuit. The litigation is expected to continue at the U.S. District Court and could result in another damages award and injunction. We continue to contest International Rectifier’s claims vigorously but the outcome of this litigation remains uncertain.

Additionally, in the future, we could be accused of infringing the intellectual property rights of International Rectifier or other third parties. We also have certain indemnification obligations to customers and suppliers with respect to the infringement of third party intellectual property rights by our products. We could incur substantial costs defending ourselves and our customers and suppliers from any such claim. Infringement claims or claims for indemnification, whether or not proven to be true, could harm our business.

In the event of any adverse ruling in any intellectual property litigation, including the pending power MOSFET litigation with International Rectifier, we could be required to pay substantial damages, cease the development, manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license from the third party claiming infringement with royalty payment obligations by us. An adverse decision in the International Rectifier power MOSFET litigation would, and in any other infringement action could, materially and adversely affect our financial condition, results of operations and cash flows.

Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, is costly and may divert the efforts and attention of our management and technical personnel from our core business operations.

We are dependent upon the success of our customers’ products.

Our semiconductors are incorporated into our customers’ products, and the demand for our semiconductors is dependent upon the demand for our customers’ products. Demand for our customers’ products may level or decline due to technological change in our customers’ industries, price or quality of their products or other competitive factors. If sales of our customers’ products level or fall,

our sales of semiconductors intended for such products will also likely level or decline. We have recently sold more semiconductors for inclusion in consumer products than was our historical practice. We believe that consumer products are subject to shorter product life cycles, because of technological change, consumer preferences, trendiness and other factors, than the products of many of our other customers. Shorter product life cycles result in more frequent design competitions for the inclusion of semiconductors in next generation consumer products, which may not result in design wins for us.

In particular, in recent years we have sold semiconductors for inclusion in the plasma display panels of a small number of manufacturers. Plasma display panels are one of several technologies for visual display in television. Should competition among the various visual display technologies for television adversely affect the sales of plasma display panels, our operating results could be adversely affected. Moreover, our operating results could be adversely affected if those plasma display panel manufacturers that have selected our semiconductors for inclusion in their products are not successful in their competition against other manufacturers of plasma display panels. As plasma display panels cycle into next generation products, we must achieve new design wins for our semiconductors to be included in the next generation plasma display panels. New design wins may not occur.

Our international operations expose us to material risks.

During fiscal 2005, our product sales by region were approximately 31.7% in the United States, approximately 33.7% in Europe and the Middle East, approximately 29.4% in Asia and approximately 5.2% in Canada and the rest of the world. We expect revenues from foreign markets to continue to represent a significant portion of total revenues. IXYS maintains significant operations in Germany and the United Kingdom and contracts with suppliers and manufacturers in South Korea, Japan and elsewhere in Europe and Asia. Some of the risks inherent in doing business internationally are:

	•		foreign currency fluctuations;

	•		changes in the laws, regulations or policies of the countries in which we manufacture or sell our products;

	•		trade restrictions;

	•		longer payment cycles;

	•		challenges in collecting accounts receivable;

	•		cultural and language differences;

	•		employment regulations;

	•		limited infrastructure in emerging markets;

	•		transportation delays;

	•		seasonal reduction in business activities;

	•		work stoppages;

	•		terrorist attack or war; and

	•		economic or political instability.

Our sales of products manufactured in our Lampertheim, Germany facility and our costs at that facility are denominated in Euros, and sales of products manufactured in our Chippenham, U.K. facility and our costs at that facility are primarily denominated in British pounds and Euros. Fluctuations in the value of the Euro and the British pound against the U.S. dollar could have a significant impact on our balance sheet and results of operations. We generally do not enter into foreign currency hedging transactions to control or minimize these risks. Fluctuations in currency exchange rates could cause our products to become more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. If we expand our international operations or change our pricing practices to denominate prices in other foreign currencies, we could be exposed to even greater risks of currency fluctuations.

In addition, the laws of certain foreign countries may not protect our products or intellectual property rights to the same extent as do U.S. laws regarding the manufacture and sale of our products in the U.S. Therefore, the risk of piracy of our technology and products may be greater when we manufacture or sell our products in these foreign countries.

We have material weaknesses in our internal control over financial reporting that could result in a material misstatement of our financial condition, results of operations and cash flows.

Our management assessed our internal control over financial reporting and concluded that five material weaknesses existed as of March 31, 2005:

	•		deficiencies in the number of accounting personnel trained in applying United States generally accepted accounting principles, or US GAAP, and in reporting financial information in accordance with the requirements of the Securities and Exchange Commission, or SEC;

	•		deficiencies in our control over costing and valuation of inventory;

	•		deficiencies in our control over the use of spreadsheets in our operations;

	•		deficiencies in the review of the consolidation process; and

	•		inadequate segregation of duties in the purchasing cycle.

The deficiencies in the number of accounting personnel have resulted in a number of designed controls not operating properly. The deficiencies in the number of accounting staff during the initial year of Sarbanes-Oxley compliance placed an extra burden upon the existing division controllers and their accounting staff, which led to controls not being performed properly.

The material weakness related to the costing and valuation of inventory resulted from the incorrect calculation of inventory yields and overhead absorption, causing erroneous production variances, at our facility in Lampertheim, Germany, errors in capitalized variances at our facilities in Chippenham, England and Lampertheim, Germany and errors in calculating inventory reserves in our facility in Fremont, California. The net effect of the corrections of these errors on our financial statements for the year ended March 31, 2005 was an increase in cost of goods sold on our statement of operations of $624,000, a decrease in inventory of $122,000 and $502,000 distributed over a number of other accounts.

The material weakness related to spreadsheets occurred when division controllers made modifications to the template spreadsheets for periodic reporting sent to them by corporate accounting personnel, and the modifications and the impact of the modifications were not identified by corporate accounting personnel when accounting information was submitted by the divisions. As a result of these items, reported income taxes and miscellaneous other matters changed approximately $105,000 and $332,000, respectively. In addition, the spreadsheets used to compute key financial statement items did not have adequate validation controls.

In part because a financial analyst resigned without notice, our controls relating to review of consolidations, inputs, foreign currency translations and recurring journal entries did not function properly. As a consequence of the unexpected departure of the financial analyst, our senior financial analyst, who is responsible for our consolidation process, had to do her work as well as that of the departed financial analyst. Thus, a layer of control in the consolidation process was eliminated. Due to a lack of personnel resources, supervisory review of the senior financial analyst’s work was inadequate. As a result of these deficiencies, our auditors found differences in our reports requiring a reduction in deferred tax assets and income tax payable of approximately $8.2 million and adjustments to foreign exchange totaling $145,000. These deficiencies were assessed to be a material weakness.

We have determined that a number of duties have not been segregated properly within our cycle of activities whereby we purchase and pay for goods and services. In particular, at several of our facilities, the same individual was able to update vendor files, control purchase orders and process vendor invoices. These deficiencies in segregation of duties constituted a material weakness. The material weakness arises from the limited number of accounting personnel at a number of our facilities and our historical practice of only having accounting personnel perform traditional accounting functions.

These material weaknesses were not remediated at June 30, 2005. Existence of these or other material weaknesses in our internal control could result in a material misstatement of our financial condition, results of operations and cash flows. Whether or not a misstatement occurs, the existence of one or more material weaknesses could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our controls over financial reporting, which ultimately could negatively impact the market price of our shares.

Our management determined that, as of June 30, 2005, our disclosure controls and procedures were not effective. See “Item 4 of Part I. Controls and Procedures,” elsewhere in this Quarterly Report on Form 10-Q.

Our efforts to correct the deficiencies in our disclosure and internal controls have required, and will continue to require, the commitment of significant financial and managerial resources. In addition, we anticipate the costs associated with the testing and evaluation of our internal controls will be significant and material in fiscal year 2006 and may continue to be material in future fiscal years as these controls are maintained and continually evaluated and tested.

We may not be successful in our acquisitions.

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

	•		diversion of management’s attention during the acquisition process;

	•		disruption of our ongoing business;

	•		the potential strain on our financial and managerial controls and reporting systems and procedures;

	•		unanticipated expenses and potential delays related to integration of an acquired business;

	•		the risk that we will be unable to develop or exploit acquired technologies;

	•		failure to successfully integrate the operations of an acquired company with our own;

	•		the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions;

	•		the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets;

	•		the risks of entering new markets in which we have limited experience;

	•		difficulties in expanding our information technology systems to accommodate the acquired businesses;

	•		failure to retain key personnel of the acquired business;

	•		the challenges inherent in managing an increased number of employees and facilities and the need to implement appropriate policies, benefits and compliance programs;

	•		customer dissatisfaction or performance problems with an acquired company;

	•		adverse effects on our relationships with suppliers;

	•		the reduction in financial stability associated with the incurrence of debt or the use of a substantial portion of our available cash;

	•		the costs associated with acquisitions, including in-process R&D charges and amortization expense related to intangible assets, and the integration of acquired operations; and

	•		assumption of known or unknown liabilities or other unanticipated events or circumstances.

We cannot assure you that we will be able to successfully acquire other businesses or product lines or integrate them into our operations without substantial expense, delay in implementation or other operational or financial problems.

In the normal course of business, we frequently engage in discussions with parties relating to possible acquisitions. As a result of such transactions, our financial results may differ from the investment community’s expectations in a given quarter. Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. If we do not realize the expected benefits or synergies of such transactions, our consolidated financial position, results of operations, cash flows, or stock price could be negatively impacted.

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

Of our revenues in fiscal 2005, 43% came from wafers manufactured for us by external foundries, respectively. Our dependence on external foundries may grow. We currently have arrangements with a number of wafer foundries, three of which produce the wafers for power semiconductors that we purchase from external foundries. Samsung Electronics’s facility in Kiheung, South Korea is our principal external foundry.

Our relationships with our external foundries do not guarantee prices, delivery or lead times, or wafer or product quantities sufficient to satisfy current or expected demand. These foundries manufacture our products on a purchase order basis. We provide these foundries with rolling forecasts of our production requirements; however, the ability of each foundry to provide wafers to us is limited by the foundry’s available capacity. At any given time, these foundries could choose to prioritize capacity for their own use or other customers or reduce or eliminate deliveries to us on short notice. If growth in demand for our products occurs, these foundries may be unable or unwilling to allocate additional capacity to our needs, thereby limiting our revenue growth. Accordingly, we cannot be certain that these foundries will allocate sufficient capacity to satisfy our requirements. In addition, we cannot be certain that we will continue to do business with these or other foundries on terms as favorable as our current terms. If we are not able to obtain additional foundry capacity as required, our relationships with our customers could be harmed and our revenues could be reduced or their growth limited. Moreover, even if we are able to secure additional foundry capacity, we may be required, either contractually or as a practical business matter, to utilize all of that capacity or incur penalties or an adverse effect on the business relationship. The costs related to maintaining foundry capacity could be expensive and could harm our operating results. Other risks associated with our reliance on external foundries include:

	•		the lack of control over delivery schedules;

	•		the unavailability of, or delays in obtaining access to, key process technologies;

	•		limited control over quality assurance, manufacturing yields and production costs; and

	•		potential misappropriation of our intellectual property.

Our requirements typically represent a small portion of the total production of the external foundries that manufacture our wafers and products. We cannot be certain these external foundries will continue to devote resources to the production of our wafers and products or continue to advance the process design technologies on which the manufacturing of our products is based. These circumstances could harm our ability to deliver our products on time or increase our costs.

We may not be able to acquire additional production capacity to meet the present and future demand for our products.

The semiconductor industry has been characterized by periodic limitations on production capacity. Although we may be able to obtain the capacity necessary to meet present demand, if we are unable to increase our production capacity to meet possible future demand, some of our customers may seek other sources of supply or our future growth may be limited.

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

We manufacture our products in facilities that are owned and operated by us, as well as in external wafer foundries and independent subcontract assembly facilities. The fabrication of semiconductors is a highly complex and precise process, and a substantial percentage of wafers could be rejected or numerous die on each wafer could be nonfunctional as a result of, among other factors:

	•		contaminants in the manufacturing environment;

	•		defects in the masks used to print circuits on a wafer;

	•		manufacturing equipment failure; or

	•		wafer breakage.

For these and other reasons, we could experience a decrease in manufacturing yields. Additionally, as we increase our manufacturing output, we may also experience a decrease in manufacturing yields. As a result, we may not be able to cost effectively expand our production capacity in a timely manner.

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

The markets for our products are characterized by:

•

changing technologies;

	•		changing customer needs;

	•		frequent new product introductions and enhancements;

	•		increased integration with other functions; and

	•		product obsolescence.

To develop new products for our target markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to expand our technical and design expertise. Failure to do so could cause us to lose our competitive position and seriously impact our future revenues.

Products or technologies developed by others may render our products or technologies obsolete or noncompetitive. A fundamental shift in technologies in our product markets would have a material adverse effect on our competitive position within the industry.

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

Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts, we cannot be certain that the steps we take to protect our proprietary information will be adequate to prevent misappropriation of our technology, or that our competitors will not independently develop technology that is substantially similar or superior to our technology. More specifically, we cannot assure you that our pending patent applications or any future applications will be approved, or that any issued patents will provide us with competitive advantages or will not be challenged by third parties. Nor can we assure you that, if challenged, our patents will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do business. We may also become subject to or initiate interference proceedings in the U.S. Patent and Trademark office, which can demand significant financial and management resources and could harm our financial results. Also, others may independently develop similar products or processes, duplicate our products or processes or design their products around any patents that may be issued to us.

Our revenues are dependent upon our products being designed into our customers’ products.

Many of our products are incorporated into customers’ products or systems at the design stage. The value of any design win largely depends upon the customer’s decision to manufacture the designed product in production quantities, the commercial success of the customer’s product and the extent to which the design of the customer’s electronic system also accommodates incorporation of components manufactured by our competitors. In addition, our customers could subsequently redesign their products or systems so that they no longer require our products. The development of the next generation of products by our customers generally results in new design competitions for semiconductors, which may not result in design wins for us, potentially leading to reduced revenues and profitability. We may not achieve design wins or our design wins may not result in future revenues.

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

The time from initiation of design to volume production of new semiconductors often takes 18 months or longer. We first work with customers to achieve a design win, which may take nine months or longer. Our customers then complete the design, testing and evaluation process and begin to ramp up production, a period which may last an additional nine months or longer. As a result, a significant period of time may elapse between our research and development efforts and our realization of revenues, if any, from volume purchasing of our products by our customers.

Our backlog may not result in future revenues.

Customer orders typically can be cancelled or rescheduled without penalty to the customer. As a result, our backlog at any particular date is not necessarily indicative of actual revenues for any succeeding period. A reduction of backlog during any particular period, or the failure of our backlog to result in future revenues, could harm our results of operations.

The markets in which we participate are intensely competitive.

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

	•		proper new product definition;

	•		product quality, reliability and performance;

	•		product features;

	•		price;

	•		timely delivery of products;

	•		breadth of product line;

	•		design and introduction of new products;

	•		market acceptance of our products and those of our customers; and

	•		technical support and service.

In addition, our competitors or customers may offer new products based on new technologies, industry standards or end-user or customer requirements, including products that have the potential to replace our products or provide lower cost or higher performance alternatives to our products. The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable.

Our primary power semiconductor competitors include Advanced Power Technology, Fairchild Semiconductor, Fuji, Infineon, International Rectifier, On Semiconductor, Powerex, Renesas Technology, Semikron International, STMicroelectronics, Siemens and Toshiba. Our IC products compete principally with those of Agere Systems, Legerity, NEC and Silicon Labs. Our RF power semiconductor competitors include RF Micro Devices and RF Monolithics. Many of our competitors have greater financial, technical, marketing and management resources than we have. Some of these competitors may be able to sell their products at prices below which it would be profitable for us to sell our products or benefit from established customer relationships that provide them with a competitive advantage. We cannot assure you that we will be able to compete successfully in the future against existing or new competitors or that our operating results will not be adversely affected by increased price competition.

We rely on our distributors and sales representatives to sell many of our products.

A substantial majority of our products are sold to distributors and through sales representatives. Our distributors and sales representatives could reduce or discontinue sales of our products. They may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect. In addition, we depend upon the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital. These distributors and sales representatives, in turn, depend substantially on general economic conditions and conditions within the semiconductor industry. We believe that our success will continue to depend upon these distributors and sales representatives.

At March 31, 2005, no distributor accounted for greater than 10% of our outstanding receivables. Nonetheless, if any significant distributor or sales representative experiences financial difficulties, or otherwise becomes unable or unwilling to promote and sell our products, our business could be harmed.

Our future success depends on the continued service of management and key engineering personnel and our ability to identify, hire and retain additional personnel.

Our success depends upon our ability to attract and retain highly-skilled technical, managerial, marketing and finance personnel, and, to a significant extent, upon the efforts and abilities of Nathan Zommer, Ph.D., our president and chief executive officer, and other members of senior management. The loss of the services of one or more of our senior management or other key employees could adversely affect our business. We do not maintain key person life insurance on any of our officers, employees or consultants. There is intense competition for qualified employees in the semiconductor industry, particularly for highly skilled design, applications and test engineers. We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified individuals who could leave us at any time in the future. If we grow, we expect increased demands on our resources, and growth would likely require the addition of new management and engineering staff as well as the development of additional expertise by existing management employees. If we lose the services of or fail to recruit key engineers or other technical and management personnel, our business could be harmed.

Growth and expansion place a significant strain on our resources, including our information systems and our employee base.

Presently, because of past acquisitions, we are operating a number of different information systems that are not integrated. In part because of this, we use spreadsheets, which are prepared by individuals rather than automated systems, in our accounting. Consequently, in our accounting, we perform many manual reconciliations and other manual steps, which result in a high risk of errors. For a further discussion of issues relating to spreadsheets, see Item 4 of Part I “Controls and Procedures.”

If we do not adequately manage and evolve our financial reporting and managerial systems and processes, our ability to manage and grow our business may be harmed. Our ability to successfully implement our goals and comply with regulations, including Sarbanes-Oxley Act of 2002, requires an effective planning and management system and process. We will need to continue to improve existing, and implement new operational and financial systems, procedures and controls to manage our business effectively in the future.

In improving our operational and financial systems, procedures and controls, we would expect to periodically implement new software and other systems that will affect our internal operations regionally or globally. The conversion process from one system to another is complex and requires, among other things, that data from the existing system be made compatible with the upgraded system. During any transition, we could experience errors, delays and other inefficiencies, which could adversely affect our business. Any delay in the implementation of, or disruption in the transition to, any new or enhanced systems, procedures or controls, could harm our ability to forecast sales demand, manage our supply chain, achieve accuracy in the conversion of electronic data and record and report financial and management information on a timely and accurate basis. In addition, as we add additional functionality, new problems could arise that we have not foreseen. Such problems could adversely impact our ability to do the following in a timely manner: provide quotes; take customer orders; ship products; provide services and support to our customers; bill and track our customers; fulfill contractual obligations; and otherwise run our business. Failure to properly or adequately address these issues could result in the diversion of management’s attention and resources, impact our ability to manage our business and our results of operations, cash flows, and stock price could be negatively impacted.

Any future growth would also require us to successfully hire, train, motivate and manage new employees. In addition, continued growth and the evolution of our business plan may require significant additional management, technical and administrative resources. We may not be able to effectively manage the growth and evolution of our current business.

Our stock price is volatile.

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

	•		variations in our actual or expected quarterly operating results;

	•		announcements or introductions of new products;

	•		technological innovations by our competitors or development setbacks by us;

	•		conditions in the communications and semiconductor markets;

	•		the commencement or adverse outcome of litigation;

	•		changes in analysts’ estimates of our performance or changes in analysts’ forecasts regarding our industry, competitors or customers;

	•		announcements of merger or acquisition transactions or a failure to achieve the expected benefits of an acquisition as rapidly or to the extent anticipated by financial analysts;

	•		terrorist attack or war;

	•		sales of our common stock by one or more members of management, including Nathan Zommer, Ph.D., our President and Chief Executive Officer; or

	•		general economic and market conditions.

In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, including semiconductor companies. These fluctuations have often been unrelated or disproportionate to the operating performance of companies in our industry, and could harm the market price of our common stock.

Our dependence on independent subcontractors to assemble and test our products subject us to a number of risks, including an inadequate supply of products and higher materials costs.

We depend on independent subcontractors for the assembly and testing of our products. The majority of our products are assembled by independent subcontractors located outside of the United States. Our reliance on these subcontractors involves the following significant risks:

	•		reduced control over delivery schedules and quality;

	•		the potential lack of adequate capacity during periods of excess demand;

	•		difficulties selecting and integrating new subcontractors;

	•		limited or no warranties by subcontractors or other vendors on products supplied to us;

	•		potential increases in prices due to capacity shortages and other factors;

	•		potential misappropriation of our intellectual property; and

	•		economic or political instability in foreign countries.

These risks may lead to delayed product delivery or increased costs, which would harm our profitability and customer relationships.

In addition, we use a limited number of subcontractors to assemble a significant portion of our products. If one or more of these subcontractors experiences financial, operational, production or quality assurance difficulties, we could experience a reduction or interruption in supply. Although we believe alternative subcontractors are available, our operating results could temporarily suffer until we engage one or more of those alternative subcontractors.

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

Our operating expenses are relatively fixed, and, therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls. Consequently, our operating results will be harmed if our revenues do not meet our revenue projections.

We also typically plan our production and inventory levels based on our own expectations for customer demand. Actual customer demand, however, can be highly unpredictable and can fluctuate substantially. From time to time, in response to anticipated long lead times to obtain inventory and materials from our external suppliers and foundries, we may order materials or production in advance of anticipated customer demand. This advance ordering may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize.

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

We purchase the bulk of our silicon wafers from three vendors with whom we do not have long-term supply agreements. Any of these suppliers could reduce or terminate our supply of wafers at any time. Our reliance on a limited number of suppliers involves several risks, including potential inability to obtain an adequate supply of silicon wafers and reduced control over the price, timely delivery, reliability and quality of the silicon wafers. We cannot assure that problems will not occur in the future with suppliers.

Our ability to access capital markets could be limited.

From time to time we may need to access the capital markets to obtain long-term financing. Although we believe that we can continue to access the capital markets on acceptable terms and conditions, our flexibility with regard to long-term financing activity could be limited by our existing capital structure, our credit ratings, and the health of the semiconductor industry. In addition, many of the factors that affect our ability to access the capital markets, such as the liquidity of the overall capital markets and the current state of the economy, are outside of our control. There can be no assurances that we will continue to have access to the capital markets on favorable terms.

Geopolitical instability, war, terrorist attacks, terrorist threats, and government responses thereto, may negatively affect all aspects of our operations, revenues, costs and stock prices.

Any such event may disrupt our operations or those of our customers or suppliers. Our markets currently include South Korea, Taiwan and Israel, which are experiencing political instability. Additionally, our principal external foundry is located in South Korea.

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

Our operations and those of our suppliers are vulnerable to interruption by fire, earthquake and other natural disasters, as well as power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan and do not have backup generators. Our facilities in California are located near major earthquake faults and have experienced earthquakes in the past. If any of these events occurs, our ability to conduct our operations could be seriously impaired, which could harm our business, financial condition and results of operations and cash flows. We cannot be sure that the insurance we maintain against general business interruptions will be adequate to cover all our losses.

We may be affected by environmental laws and regulations.

We are subject to a variety of laws, rules and regulations in the United States, England and Germany related to the use, storage, handling, discharge and disposal of certain chemicals and gases used in our manufacturing process. Any of those regulations could require us to acquire expensive equipment or to incur substantial other expenses to comply with them. If we incur substantial additional expenses, product costs could significantly increase. Our failure to comply with present or future environmental laws, rules and regulations could result in fines, suspension of production or cessation of operations.

Our tax liability has been in dispute from time to time.

From time to time, we have received notices of tax assessments from certain governments of countries in which we operate. These governments or other government entities may serve future notices of assessments on us and the amounts of these assessments or our failure to favorably resolve such assessments may have a material adverse effect on our financial condition or results of operations.

We face the risk of financial exposure to product liability claims alleging that the use of products that incorporate our semiconductors resulted in adverse effects.

Approximately 10.1% of our net revenues in fiscal 2005 were derived from sales of products used in medical devices such as defibrillators. Product liability risks may exist even for those medical devices that have received regulatory approval for commercial sale. We cannot be sure that the insurance that we maintain against product liability will be adequate to cover our losses. Any defects in our semiconductors used in these devices, or in any other product, could result in significant replacement, recall or product liability costs to us.

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

Nathan Zommer, Ph.D., our president and chief executive officer, beneficially owned, as of August 3, 2005, approximately 20% of the outstanding shares of our common stock. As a result, Dr. Zommer can exercise significant control over all matters requiring stockholder approval, including the election of the board of directors. His holdings could result in a delay of, or serve as a deterrent to, possible changes in control of IXYS, which may reduce the market price of our common stock.

Regulations may adversely affect our ability to sell our products.

Power semiconductors with operating voltages above 40 volts are subject to regulations intended to address the safety, reliability and quality of the products. These regulations relate to processes, design, materials and assembly. For example, in the United States some high voltage products are required to pass Underwriters Laboratory recognition for voltage isolation and fire hazard tests. Sales of power semiconductors outside of the United States are subject to international regulatory requirements that vary from country to country. The process of obtaining and maintaining required regulatory clearances can be lengthy, expensive and uncertain. The time required to obtain approval for sale internationally may be longer than that required for U.S. approval, and the requirements may differ.

In addition, approximately 10.1% of our revenues in fiscal 2005 were derived from the sale of products included in medical devices that are subject to extensive regulation by numerous governmental authorities in the United States and internationally, including the U.S. Food and Drug Administration, or FDA. The FDA and certain foreign regulatory authorities impose numerous requirements for medical device manufacturers to meet, including adherence to Good Manufacturing Practices, or GMP, regulations and similar regulations in other countries, which include testing, control and documentation requirements. Ongoing compliance with

GMP and other applicable regulatory requirements is monitored through periodic inspections by federal and state agencies, including the FDA, and by comparable agencies in other countries. Our failure to comply with applicable regulatory requirements could prevent our products from being included in approved medical devices.

Our business could also be harmed by delays in receiving or the failure to receive required approvals or clearances, the loss of previously obtained approvals or clearances or the failure to comply with existing or future regulatory requirements.

The anti-takeover provisions of our certificate of incorporation and of the Delaware General Corporation Law may delay, defer or prevent a change of control.

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control because the terms of any issued preferred stock could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction, without the approval of the holders of the outstanding shares of preferred stock. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders.

Our stockholders must give substantial advance notice prior to the relevant meeting to nominate a candidate for director or present a proposal to our stockholders at a meeting. These notice requirements could inhibit a takeover by delaying stockholder action. The Delaware anti-takeover law restricts business combinations with some stockholders once the stockholder acquires 15% or more of our common stock. The Delaware statute makes it more difficult for us to be acquired without the consent of our board of directors and management.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk has not changed materially from the market risk disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2005, except in respect of our borrowing on June 10, 2005 of Euro 10.0 million, or about $12.2 million. A decline of the U.S. dollar against the Euro will cause an increase in our obligation when expressed in U.S. dollars. The loan proceeds are currently held in Euros. So long as the loan proceeds are held in Euros, the net effect of exchange rate fluctuations on net income is immaterial. However, we may convert the loan proceeds to U.S. dollars at any time. If any portion of the loan proceeds is converted to U.S. dollars and a decline of the U.S. dollar against the Euro occurs, an adverse impact on our net income will occur.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act) as of June 30, 2005. This evaluation included various processes that were carried out in an effort to ensure that information required to be disclosed in our Securities and Exchange Commission, or SEC, reports is recorded, processed, summarized and reported within the time periods specified by the SEC. In this evaluation, the Chief Executive Officer and the Chief Financial Officer considered whether our disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. This evaluation also included consideration of certain aspects of our internal controls and procedures for the preparation of our financial statements. Our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2005, our disclosure controls and procedures were not effective. Material weaknesses in internal control over financial reporting that led to the conclusion are discussed below.

Material Weaknesses

In conducting its assessment of the effectiveness of our internal control over financial reporting as of March 31, 2005, our management concluded that five material weaknesses existed as of March 31, 2005:

	•		deficiencies in the number of accounting personnel trained in applying US GAAP and in reporting financial information in accordance with the requirements of the SEC;

	•		deficiencies in our control over costing and valuation of inventory;

	•		deficiencies in our control over the use of spreadsheets in our operations;

	•		deficiencies in the review of the consolidation process; and

	•		inadequate segregation of duties in the purchasing cycle.

These material weaknesses were not remedied at June 30, 2005.

In part because a financial analyst resigned without notice, our controls relating to review of consolidations, inputs, foreign currency translations and recurring journal entries did not function properly. As a consequence of the unexpected departure of the financial analyst, our senior financial analyst, who is responsible for our consolidation process, had to do the work of the departed financial analyst as well as her own. Thus, a layer of control in the consolidation process was eliminated. Due to a lack of personnel resources, supervisory review of the senior financial analyst’s work was inadequate. As a result of these deficiencies, our auditors found differences in our reports requiring a reduction in deferred tax assets and income tax payable of approximately $8.2 million and adjustments to foreign exchange totaling $145,000. These deficiencies were assessed to be a material weakness.

Our Audit Committee is aware of these material weaknesses.

Changes in Internal Control over Financial Reporting

We plan to remedy the deficiencies in the number of accounting personnel by filling a number of positions, some of which are newly designated. We plan to hire an accountant trained in US GAAP at both our European and Fremont, California facilities. We intend to employ a compliance manager at the corporate level who will be responsible for guiding the application of US GAAP and our SEC reporting. We also intend to hire a corporate controller. We employed another financial analyst as a replacement for the individual who resigned. We have engaged a professional to oversee and further implement our internal control over financial reporting. We believe that the material weakness will be remediated when these positions are filled and the new personnel are properly trained in their duties. We will seek to fill these positions and complete training by December 31, 2005.

Regarding the inventory material weakness, we have addressed the yield calculation error in Lampertheim, Germany by changing the procedure to calculate yield, and by the end of December 2005, we intend to conduct a thorough review of the standard costs in Lampertheim, Germany to verify that proper United States accounting practices are followed. In addition, one of the accounting personnel hired will be based in our Fremont facility and will provide additional resources for the preparation of inventory costing and valuation. His work will allow time for more supervisory review by the division controller. We have issued a financial policy regarding inventory valuation to all of our operating entities. We plan to review and possibly supplement this policy by the end of the third quarter of fiscal year 2006. We expect that the implementation of the foregoing will remediate the inventory material weakness. It is our objective to complete these remediation activities by December 31, 2005.

In June 2005, we concluded that a material weakness in our control over the use of spreadsheets existed at March 31, 2005. Our information technology steering committee is currently reviewing alternatives to address the material weakness. We have yet to determine the actions to be undertaken to mitigate or remediate this material weakness. Consequently, we are not yet able to assess when the material weakness will be adequately addressed.

In remediation of the material weakness in our consolidation process, we hired a new financial analyst, and we expect to hire a new corporate controller and a compliance manager for SEC reporting and GAAP accounting. When these personnel are hired, we will have the people necessary for appropriate review of the consolidation process. We also expect to review the design of our consolidation process controls for adequacy. Our goal is to complete these remediation activities by December 31, 2005.

We expect to address our material weakness in segregation of duties in our purchasing cycle through the aforementioned hiring of additional accounting personnel, the redistribution of duties among existing accounting personnel and the assignment of some duties to non-accounting personnel. We expect that controls will be redesigned to reflect the redistribution of duties and the involvement of non-accounting personnel. Our objective is to finish the actions in remediation of this material weakness by December 31, 2005.

Our Audit Committee is currently reviewing our need to establish an internal audit function, in part to enhance our monitoring of remediation of these material weaknesses. The Audit Committee intends to complete its review of internal audit requirements by December 31, 2005.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our procedures or our internal controls will prevent or detect all error and all fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of our controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We currently are involved in a variety of legal matters that arise in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters, including the matters described by reference below, will have a material adverse effect on our financial condition, results of operations and cash flows. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs.

The information set forth in Note 9 of Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 hereof is hereby incorporated by reference into this Item 1 of Part II.

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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

EXHIBIT INDEX


Exhibit
No.		Description
10.1		Purchase and Sale Agreement dated April 29, 2005 by and between John J. Flatley and Gregory D. Stoyle, Trustees of the Flatley Family Trust under Declaration of Trust dated September 27, 1993 and Clare, Inc.

10.2		Loan Agreement dated June 2, 2005 by and between IXYS Semiconductor GmbH and IKB Deutsche Industriebank AG.

10.3		Collateral Agreement dated July 14, 2005 by and among IXYS Corporation, IXYS Semiconductor GmbH and IKB Deutsche Inidustriebank AG.

10.4		Agreement for Purchase of Real Estate dated June 17, 2005 by and between Clare Micronix Integrated Systems, Inc. and 145 Family Limited Partnership.

10.5		Bonus Criteria for Nathan Zommer for the fiscal year ended March 31, 2006.

31.1		Certificate of Chief Executive Officer required under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certificate of Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification required under Section 906 of the Sarbanes-Oxley Act of 2002. (1)


(1)		This exhibit is furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1933, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities and Exchange Act of 1993, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.


	Number of
Name	Shares Vested		Exercise Price
Peter Ingram		30,000	$	14.37
Kevin McDonough		20,800	$	14.37
Uzi Sasson		75,000	$	14.37
Nathan Zommer		100,000	$	15.81


		IXYS CORPORATION

		By: /s/ Uzi Sasson

		Uzi Sasson, Vice President of Finance and
		Chief Financial Officer (Principal Financial Officer)

Date: August 12, 2005

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	INDEX	Page
PART I — FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
	UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS	3
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	4
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	5
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	6
	NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	31
ITEM 4.	CONTROLS AND PROCEDURES	31
PART II — OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	33
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	33
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	33
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	33
ITEM 5.	OTHER INFORMATION	34
ITEM 6.	EXHIBITS	34
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1