e10vq

BROKER

Against

Abstain

NON-VOTE

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006


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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of November 1, 2006 was 33,624,483

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30,			March 31,
	2006			2006
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	66,655		$	78,192
Restricted cash		281			313
Accounts receivable, net of allowances of $3,589 at September 30, 2006 and $2,609 at March 31, 2006		45,434			42,774
Inventories		76,550			60,357
Prepaid expenses and other current assets		4,938			4,121
Deferred income taxes, net		10,423			25,049

Total current assets		204,281			210,806
Property, plant and equipment, net		44,912			40,049
Other assets		5,068			5,099
Deferred income taxes, net		16,808			16,552
Goodwill		7,481			7,481

Total assets	$	278,550		$	279,987

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capitalized lease obligations	$	2,538		$	2,255
Current portion of loans payable		1,128			973
Accounts payable		24,516			20,259
Accrued expenses and other current liabilities		26,455			24,889
Litigation reserve		6,971			43,615

Total current liabilities		61,608			91,991
Capitalized lease obligations, net of current portion		4,058			3,762
Long term loans, net of current portion		10,799			10,685
Pension liabilities		14,211			13,576

Total liabilities		90,676			120,014

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; 34,754,924 issued and 33,584,733 outstanding at September 30, 2006 and 34,677,834 issued and 34,152,343 outstanding at March 31, 2006		347			347
Additional paid-in capital		163,764			161,118
Less cost of treasury stock: 1,170,191 shares at September 30, 2006 and 525,491 shares at March 31, 2006		(10,130	)		(4,454	)
Note receivable from stockholder		—			(59	)
Retained earnings/(accumulated deficit)		27,470			(614	)
Accumulated other comprehensive income		6,423			3,635

Total stockholders’ equity		187,874			159,973

Total liabilities and stockholders’ equity	$	278,550		$	279,987

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

IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except net income per share)


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
	(unaudited)						(unaudited)
Net revenues	$	71,875		$	63,385		$	139,616		$	126,726
Cost of goods sold		49,755			42,154			95,612			84,350

Gross profit		22,120			21,231			44,004			42,376

Operating expenses:
Research, development and engineering		4,921			4,083			10,029			8,239
Selling, general and administrative		10,828			9,905			22,884			19,162
Litigation provision (credit)		183			—			(36,644	)		—

Total operating expenses		15,932			13,988			(3,731	)		27,401

Operating income		6,188			7,243			47,735			14,975
Other income (expense):
Interest income		734			477			1,508			802
Interest expense		(346	)		(122	)		(471	)		(137	)
Other (expense) income, net		(188	)		431			(1,681	)		546

Income before income tax		6,388			8,029			47,091			16,186
Provision for income tax		(2,600	)		(2,485	)		(19,007	)		(5,503	)

Net income	$	3,788		$	5,544		$	28,084		$	10,683


Net income per share—basic	$	0.11		$	0.17		$	0.82		$	0.32

Weighted average shares used in per share calculation — basic		33,929			33,525			34,051			33,470

Net income per share—diluted	$	0.11		$	0.16		$	0.79		$	0.30

Weighted average shares used in per share calculation — diluted		35,124			35,758			35,326			35,871

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)


	Six Months Ended
	September 30,
	2006			2005
	(unaudited)
Cash flows from operating activities:
Net income	$	28,084		$	10,683
Adjustments to reconcile net income to net cash (used in ) provided by operating activities:
Depreciation and amortization		5,080			4,586
Provision for receivables allowances		4,881			2,828
Movement in inventory reserves		1,757			928
Movement in litigation provision		(36,644	)		—
Stock compensation		1,092			—
Foreign currency translation on intercompany transactions		139			(915	)
Deferred income taxes		15,482			(5	)
(Gain) on investments		(282	)		—
Changes in operating assets and liabilities:
Accounts receivable and other receivable		(6,709	)		(2,498	)
Inventories		(16,324	)		749
Prepaid expenses and other current assets		(430	)		454
Other assets		106			683
Accounts payable		3,576			(90	)
Accrued expenses and other liabilities		905			6,968
Pension liabilities		(137	)		(472	)

Net cash provided by operating activities		576			23,899


Cash flows from investing activities:
Change in restricted cash		31			44
Purchase of investments		(100	)		—
Proceeds from sale of investments		328			—
Purchase of plant and equipment		(6,619	)		(15,822	)

Net cash used in investing activities		(6,360	)		(15,778	)


Cash flows from financing activities:
Principal payments on capital lease obligations		(1,810	)		(1,630	)
Proceeds from loans		—			12,061
Repayment of loans		(426	)		—
Purchase of treasury stock		(5,676	)		(2,531	)
Proceeds from equity plans		433			2,149
Collection on note from stockholders		59			306

Net cash (used in) provided by financing activities		(7,420	)		10,355

Effect of foreign exchange rate fluctuations on cash and cash equivalents		1,667			(1,043	)

Net (decrease) increase in cash and cash equivalents		(11,537	)		17,433
Cash and cash equivalents at beginning of period		78,192			58,144

Cash and cash equivalents at end of period	$	66,655		$	75,577

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, goodwill, and intangible assets, revenue recognition, legal contingencies, income tax and pension liabilities. 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. The condensed balance sheet as of March 31, 2006 has been derived from the Company’s audited balance sheet as of that date. 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, 2006 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.

2. Accounting for Stock-Based Compensation

Stock Purchase and Stock Option Plans:

Stock Option

IXYS has the 1999 Equity Incentive Plan and the 1999 Non-Employee Directors’ Equity Incentive Plan (the “Plans”) under which stock options may be granted for not less than 85% of fair market value at the time of grant. The options, once granted, expire ten years from the date of grant. Options granted to employees under the 1999 Equity Incentive Plan typically vest over four years. The initial option grants under the 1999 Non-Employee Directors’ Equity Incentive Plan typically vest over four years and subsequent annual grants vest over one year. The Board of Directors has the, full power to determine the provisions of each option issued under the Plans. No options have been granted below fair market value. The Company also grants Net Exercise Options. These options generally vest over a period of four years. In a net exercise option, the number of shares obtained by exercising the stock option is net of the number of shares subject to the option that the Company cancels to cover the aggregate exercise price.

Since inception, the cumulative amount authorized for the 1999 Equity Incentive Plan was approximately 10.6 million shares. The 1999 Equity Incentive Plan has an evergreen feature that adds up to 1,000,000 shares to the total shares authorized each year at the discretion of the board. The 1999 Non-Employee Directors’ Equity Incentive Plan had a total of 500,000 shares authorized at its inception date.

Employee Stock Purchase Plan

In May 1999, IXYS approved the 1999 Employee Stock Purchase Plan (“Purchase Plan”) and reserved 500,000 shares of common stock for issuance under the Purchase Plan. Under the Purchase Plan, substantially all employees may purchase the Company’s common stock at a price equal to 85.0% of the lower of the fair market value at the beginning or the end of each specified six-month offering period. Stock purchases are limited to 15.0% of an employee’s eligible compensation. No shares were purchased during the quarter ended September 30, 2006, leaving about 110,000 shares available for purchase under the plan in the future.

Restricted Stock Units

On May 12, 2006, the Board of Directors of the Company amended the Company’s 1999 Equity Incentive Plan to provide for the grant of Restricted Stock Unit Awards (“RSUs”). Pursuant to an award, the Company will, in the future, deliver shares of the Company’s common stock if certain requirements, including continued performance of services, are met. RSUs typically vest over four years. When vested, each RSU will entitle the holder of the RSU award to one share of the Company’s common stock. The Company continued issuing restricted stock units to employees and directors under the plan during the quarter ended September 30, 2006.

Stock Bonuses

Under the Plans, IXYS may also award shares of common stock as stock bonuses.

Stock Compensation:

Effective April 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123(R). SFAS No. 123(R) requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method and requires the use of an option pricing model for estimating fair value. Accordingly, share-based compensation is measured at grant date, based on the fair value of the award. The company previously accounted for awards granted under its equity incentive plans under the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and provided the required pro forma disclosures prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended. Accordingly, no share-based compensation, other than acquisition-related compensation, was recognized in the financial statements through fiscal 2006.

Under the modified prospective method of adoption for SFAS No. 123(R), the compensation cost recognized by the Company beginning in fiscal 2007 includes (a) compensation cost for all equity incentive awards granted prior to, but not yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all equity incentive awards granted subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Company uses the straight-line attribution method to recognize share-based compensation costs over the service period of the award.

The fair value of issuances under the Company’s Purchase Plan is estimated on the issuance date by applying the principles of Financial Accounting Standards Board, or FASB, Technical Bulletin 97-1 (“FTB 97-1”), Accounting under Statement 123 for Certain Employee Stock Purchase Plan with a Look Back Option, and using the Black-Scholes-Merton options pricing model.

Share-based compensation recognized in the three and six months period ended September 30, 2006 as a result of the adoption of SFAS No. 123(R) as well as pro forma disclosures according to the original provisions of SFAS No. 123 for periods prior to the adoption of SFAS No. 123(R) use the Black-Scholes option pricing model for estimating fair value of options granted under the Plans and rights to acquire stock under the Purchase Plan.

The following table summarizes the effects of share-based compensation recognized on our consolidated statement of income resulting from the application of SFAS No. 123(R) to options granted under the company’s equity incentive plans and rights to acquire stock granted under the company’s employee Purchase Plan:

Income Statement Classifications


	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
	(In thousands except per share amounts)
Selling, general and administrative expenses	$	555		—	$	1,092		—

Share-based compensation effect in income before taxes		555		—		1,092		—
Income taxes ¹		217		—		426		—

Net share-based compensation effects in net income	$	338		—	$	666		—

Share-based compensation effect on basic earnings per share	$	0.01		—	$	0.02		—

Share-based compensation effect on diluted earnings per share	$	0.01		—	$	0.02		—

Share-based compensation effect on cash flow from operations	$	—		—	$	—		—

Share-based compensation effect on cash flow from financing activities	$	—		—	$	—		—


1		Estimated at a statutory income tax rate of 39%

During the three and six months ended September 30, 2006, no tax benefit was realized for the tax deduction from option exercises and other awards. As of September 30, 2006, there were $2.7 million of total unrecognized compensation costs related to stock options granted under the Plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.8 years.

Pro forma information required under SFAS No. 123 for periods prior to fiscal 2007 as if the Company had applied the fair value recognition provisions of SFAS No. 123, to options granted under the Plans and rights to acquire stock granted under the Purchase Plan, was as follows:


	Three Months			Six Months
	Ended			Ended
	September 30, 2005
	(In thousands except per share amounts)
Net income, as reported	$	5,544		$	10,683
Less: Total stock-based compensation determined under fair value based methods for all awards to employees, net of tax		(4,390	)		(4,610	)

Pro forma net income	$	1,154		$	6,073

Reported basic net income per share	$	0.17		$	0.32

Pro forma basic net income per share	$	0.03		$	0.18

Reported diluted net income per share	$	0.16		$	0.30

Pro forma diluted net income per share	$	0.03		$	0.17

The weighted average estimated values of employee stock option grants and rights granted under the Purchase Plan, as well as the weighted average assumptions that were used in calculating such values during the second quarter of fiscal 2006 and 2005, and the first half of 2006 and 2005, were based on estimates at the date of grant as follows:


	Stock Options												Purchase Plan²
	Three months ended						Six months ended						Six months ended
	September 30,						September 30,						September 30,
	2006			2005¹			2006			2005¹			2006			2005¹
Weighted average estimated per share fair value of grant	$	3.92		$	5.33		$	4.21		$	6.68		$	2.40		$	3.30
Risk-free interest rate		4.8	%		4.1	%		4.9	%		3.9	%		4.2	%		2.0	%
Expected term (in years)		3.7			4.0			3.7			4.0			0.5			0.5
Volatility		52.0	%		63.0	%		54.0	%		63.0	%		56.0	%		57.0	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%


1		Assumptions used in the calculation of fair value according to original provisions of SFAS No. 123.

2		Under the stock purchase plan, rights to purchase shares are only granted during the first and third quarters of each fiscal year.

The Company estimates the expected term of options granted based on the historical average period over which the options are exercised by employees. The Company estimates the volatility of our common stock on historical volatility measures. The Company bases the risk-free interest rate that it uses in the option valuation model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

The Company recognizes the estimated compensation cost of restricted stock over the vesting term. The estimated compensation cost is based on the fair value of IXYS’s common stock on the date of grant. A total of 48,000 and 151,000 restricted stock units were granted during the three and six month periods ended September 30, 2006 respectively. The weighted average fair value of the restricted stock granted in the three and six months period ended September 30, 2006 was $8.96 and $9.48, respectively.

The Company recognizes the compensation cost relating to stock bonuses on the date of grant based on the fair value of IXYS’s common stock on the date of grant, as such stock bonuses are vested immediately. A total of 5,000 and 10,000 shares were granted as stock bonus during the three and six month periods ended September 30, 2006 respectively. The weighted average fair value of the stock bonus granted in the three and six months period ended September 30, 2006 was $8.94 and $9.34, respectively.

Stock option activity under the Company’s equity incentive plans for the quarter ended September 30, 2006 is summarized below:


	Shares			Options Outstanding							Weighted Average
	Available for			Number of			Exercise Price		Intrinsic		Exercise Price Per
	Grant			Shares			Per Share		Value¹		Share
									(000)
Balances, March 31, 2006		4,136,916			4,844,492		$	1.69 - $36.24			$	8.09
New shares authorized		1,000,000
Net exercise options granted		(30,000	)		30,000		$	8.98- $9.73			$	9.36
Options exercised		—			(26,303	)	$	3.625- $6.75	$	143	$	3.69
Options cancelled		—			—							—
Options expired		1,058			(98,842	)	$	2.161- $21.36			$	3.58

Total, September 30, 2006		5,107,974			4,749,347		$	1.69 - $36.24	$	9,505	$	7.96
Exercisable, September 30, 2006					4,169,613				$	9,241	$	8.15

Restricted stock units		(151,000	)		151,000			—
Stock bonus granted		(10,000	)		—			—

Balance, September 30, 2006		4,946,974


1		Except for options exercised, these amounts represent the difference between the exercise price and $8.39, the closing price of IXYS stock on September 30, 2006 as reported on the Nasdaq Stock Market, for all in-the-money options outstanding and exercisable options. For options exercised during the six months, this is the actual intrinsic value on the date of exercise.

The weighted average remaining contractual life of options outstanding and options exercisable at September 30, 2006 is 5.82 years and 5.38 years, respectively.

The restricted stock units granted in the six months ending September 30, 2006 vest over four years, and no shares were vested at that date.

3. Inventories

Inventories consist of the following (in thousands):


	September 30, 2006		March 31, 2006
	(unaudited)
Raw materials	$	22,408	$	16,648
Work in process		38,628		28,583
Finished goods		15,514		15,126

Total	$	76,550	$	60,357

4. Other assets

At September 30, 2006, other assets include equity securities held as available for sale of $2.6 million, long term equity investments of $ 1.4 million and intangible assets acquired in prior acquisitions of $524,000. Investments available for sale have been stated at their fair value as at September 30, 2006. The gain on sale of these investments for the three and six months ended September 30, 2006 was $ 80,000. Long term equity investments are accounted for under the equity method of accounting. At March 31, 2006, other assets included $2.4 million of investments available for sale, $1.1 million of long term equity investments and intangible assets acquired in prior acquisitions of $782,000.

5. 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				Six Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
	(unaudited)				(unaudited)
BASIC:
Weighted average shares outstanding for the period		33,929		33,525		34,051		33,470
Net income available for common stockholders	$	3,788	$	5,544	$	28,084	$	10,683

Net income available for common stockholders per share	$	0.11	$	0.17	$	0.82	$	0.32


DILUTED:
Weighted average shares outstanding for the period		33,929		33,525		34,051		33,470
Net effective dilutive stock options based on treasury stock method using average market price		1,195		2,233		1,275		2,401

Shares used in computing per share amounts		35,124		35,758		35,326		35,871


Net income available for common stockholders	$	3,788	$	5,544	$	28,084	$	10,683

Net income per share available for common stockholders	$	0.11	$	0.16	$	0.79	$	0.30


Total common stock equivalents excluded for the computation of earnings per share as their effect was anti-dilutive		1,621		1,034		1,407		931

Basic earnings per common share is computed using net income and the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed using net income and the weighted average number of common shares outstanding, assuming dilution. Weighted average common shares outstanding, assuming dilution includes potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of stock options, assumed vesting of restricted stock units and assumed issuance of stock under the stock purchase plan using the treasury stock method. If the exercise price of an outstanding stock option was equal to or greater than the average market value of the shares of common stock, it was excluded from the computation. These options could be included in the calculation in the future if the average market value of the common shares increases and is greater than the exercise price of these options.

6. Borrowing Arrangements

In fiscal 2006, IXYS Semiconductor GmbH, a German subsidiary of IXYS, borrowed €10.0 million, or about $12 million, from IKB Deutsche Industriebank for a term of 15 years.

The interest rate on the loan is determined by adding the then effective three month Euribor rate to 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 September 30, 2006 was 4.1%.

Each fiscal quarter during the first five years of the loan, a principal payment of €167,000, or about $212,000, and a payment of accrued interest will be required. Thereafter, the amount of the payment will be recomputed.

Financial covenants for a ratio of indebtedness to cash flow, a ratio of equity to total assets and a minimum stockholders’ equity, in each case, 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. At September 30, 2006, the Company had complied with the financial covenants. The loan is partially collateralized by a security interest in the facility owned by IXYS in Lampertheim, Germany.

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						Six Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
(In thousands)	(unaudited)						(unaudited)
Service cost	$	225		$	212		$	424		$	432
Interest cost on projected benefit obligation		469			413			927			842
Expected return on plan assets		(397	)		(297	)		(785	)		(606	)
Curtailment or settlement (gain)		—			—			—			(172	)
Recognized actuarial loss		7			18			16			31

Net periodic pension expense	$	304		$	346		$	582		$	527

IXYS expects to make contributions to the plans of approximately $957,000 in the fiscal year ended March 31, 2007. This contribution is primarily contractual.

8. Segment Information

IXYS has a single operating segment. Our operating segment is 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. While the Company has separate businesses with discrete financial information, the Company has a single operating decision maker and each of the businesses are highly integrated and have similar economic characteristics. IXYS’s sales by major geographic area (based on destination) were as follows (in thousands):


	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
	(unaudited)				(unaudited)
United States	$	19,867	$	20,723	$	41,285	$	40,818
Europe and the Middle East
Germany		9,016		7,348		17,628		14,291
Italy		1,262		1,169		2,978		2,989
United Kingdom		6,345		4,740		11,242		8,676
Other		9,530		7,166		17,863		15,782
Asia Pacific Korea		6,622		8,212		10,971		17,319
China		7,752		6,436		16,301		11,555
Japan		2,529		1,646		4,580		3,341
Other		5,911		2,735		10,714		5,456
Rest of the World		3,041		3,210		6,054		6,499

Total	$	71,875	$	63,385	$	139,616	$	126,726

The following table sets forth net revenues for each of IXYS’s product groups for the three and six months periods ended September 30, 2006 and 2005 (in thousands):


	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
	(unaudited)				(unaudited)
Power Semiconductors	$	50,349	$	48,182	$	100,490	$	96,010
ICs		15,678		9,848		28,757		20,383
RF Power Semiconductors and Systems		5,848		5,355		10,369		10,333

Total	$	71,875	$	63,385	$	139,616	$	126,726

9. Commitments and Contingencies

Legal Proceedings:

We are currently 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 our financial condition, results of operations or cash flows.

International Rectifier

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 had been and continued to be willful and deliberate. Subsequently, the U.S. District Court decided that certain of IXYS’s power MOSFETs and IGBTs infringed 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. Trial commenced in the U.S. District Court on September 6, 2005. On September 15, 2005, the jury specifically found that IXYS was not guilty of willful infringement.

International Rectifier had accused IXYS of infringing its 4,959,699 (“699”), 5,008,725 (“725”) and 5,130,767 (“767”) patents. The claims of these patents fall into two groups. The jury ruled that one of the groups of claims was infringed by the doctrine of equivalents; however, the claims in this group are minor claims and are not expected to have a material financial impact on IXYS.

As to the other group of claims, the jury found that IXYS did not infringe the 725 and 767 patents, but did infringe the 699 patent by the doctrine of equivalents. If upheld on appeal, this finding would have a material financial impact on IXYS. However, the jury also made a specific finding that IXYS’s devices do not infringe the 725 and 767 patents because they include an “annular source region,” which we believe is inconsistent with the conclusion that the 699 patent is infringed. The jury’s verdict awarded International Rectifier $6.2 million as damages for the infringement plus 6.5% of revenues from infringing products, by implication, after September 30, 2005. The U.S. District Court entered a judgment reflecting the jury’s verdict and also issued a permanent injunction barring IXYS from selling or distributing the infringing products. Thereafter, IXYS appealed the judgment and the injunction to the Federal Circuit Court. Without addressing the substance of IXYS’s appeal, on July 14, 2006, the Federal Circuit Court vacated the judgment and the injunction and remanded the matter to U.S. District Court for “further proceedings as appropriate” in view of the

United States Supreme Court’s recent decision in eBay, Inc v. MercExchange, LLC. In September 2006, The U.S. District Court again entered another judgment reflecting the jury’s determination of damages and issued a permanent injunction barring IXYS from selling or distributing the infringing products. IXYS intends to appeal the judgment against it and the injunction barring IXYS from selling or distributing products. Counsel to IXYS inadvertently did not file the requisite notice of appeal following the entry of judgment within the required time period. However, because IXYS’s counsel has taken timely corrective measures, IXYS believes that it is unlikely that IXYS will be precluded from pursuing its appeal. In absence of a stay from the Federal Circuit, IXYS will have to either pay into escrow or bond the damages award and, in the event of an injunction issuing, cease sale of the purportedly infringing products.

There can be no assurance of a favorable final outcome in the International Rectifier suit. In the event of an adverse outcome, damages or the injunction 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 based on its conclusion that it is less than probable that IXYS will lose on appeal.

LoJack

On April 10, 2003, LoJack Corporation (“LoJack”) filed a suit against Clare, Inc., a subsidiary of IXYS, 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. The trial commenced on January 30, 2006. On February 8, 2006, the jury awarded LoJack $36.7 million in damages. On July 20, 2006, the Superior Court reduced LoJack’s damages to $4 million.

Under Massachusetts law, a damage award is increased for pre-judgment interest. Pre-judgment interest was determined to be $2.1 million at the time of the entry of the judgment on July 25, 2006. In addition, the Superior Court determined the attorneys’ fees and costs payable by Clare to be $708,000. Post-judgment interest accrues on the total judgment, inclusive of the pre-judgment interest, attorneys’ fees and costs, at the rate of 12% per annum simple interest.

In August 2006, LoJack filed a notice with the Superior Court of a motion to reconsider the judgment for the purpose of reinstating the full amount of the jury’s damage award. In September 2006, the Court ruled against LoJack’s motion. LoJack and IXYS have each filed a notice of appeal. The enforcement of the judgment will be stayed pending appeal without the necessity of filing any bond. Post-judgment proceedings and/or appeals may take from several months to one or more years to conclude. Payment of an award, if ever, will only occur at the conclusion of this process.

IXYS cannot predict the outcome of the litigation. An adverse outcome would be materially adverse to its financial condition, results of operations and cash flows. IXYS released $36.6 million from the litigation provision, net of interest accrual, during the six months ended September 30, 2006 to reflect a net accrual of $7.0 million at that date, which amount includes interest and attorneys’ fees in addition to the reduced damage award. There can be no assurance that this amount is sufficient for any actual losses that may be incurred as a result of this litigation.

Other Commitments and Contingencies:

The Company does not provide product guarantees or warranties. On occasion, the Company provides limited indemnification to customers against intellectual property infringement claims related to the Company’s products. To date, the Company has not experienced significant activity or claims related to such indemnifications. The Company does provide in the normal course of business indemnification to its officers, directors and selected parties. The Company is unable to estimate any potential future liability, if any; therefore, no liability for these indemnification agreements has been recorded as of September 30, 2006 and 2005.

10. Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board, or FASB, ratified Emerging Issues Task Force, or EITF, Issue No. 06-03 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)” (“Issue No. 06-03”). Under Issue No. 06-03, a company must disclose its accounting policy regarding the gross or net presentation of certain taxes. If taxes included in gross revenues are significant, a company must disclose the amount of such taxes for each period for which an income statement is presented (i.e., both interim and annual periods). Taxes within the scope of this Issue are those that are imposed on and concurrent with a specific revenue-producing transaction. Taxes assessed on an entity’s activities over a period of time, such as gross receipts taxes, are not within the scope of the issue. Issue No. 06-03 is effective for the first annual or interim reporting period beginning after December 15, 2006. The adoption of EITF Issue No. 06-03 did not have a material effect on the Company’s Unaudited Condensed Consolidated Financial Statements.

In July 2006, the FASB issued FASB Interpretation No. 48 “Accounting For Uncertain Tax Positions” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109 “Accounting for Income Taxes”. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 to our financial position and results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards, (SFAS) No. 157 “Fair Value Measurements” (“SFAS 157”). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. The statement is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 157 to our financial position and results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). This Statement improves financial reporting by requiring an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. Applying SFAS 158 at March 31, 2006, the additional liability that would be recognized was approximately $1.6 million. The additional liability would be recorded with a corresponding effect, net of taxes, to Accumulated Other Comprehensive Income in Shareholders’ equity.

In September 2006, the SEC published Staff Accounting Bulletin (SAB) No 108. SAB 108 expresses the staff views regarding the process of quantifying financial statement misstatements. The bulletin prescribes the use of the “rollover” and “iron curtain” approaches in quantifying misstatements. The “Rollover” approach quantifies a misstatement based on the amount of the error originating in the current year income statement. The “Iron curtain” approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the year, irrespective of the misstatement’s year(s) of origination. The statement is effective immediately. The adoption of SAB 108 did not have a material effect on the Company’s Unaudited Condensed Consolidated Financial Statements.

11. Accounting Pronouncements Adopted in the Period

Beginning April 2006, the Company adopted SFAS No. 151, “Inventory Costs—an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 requires certain abnormal expenditures to be recognized as expenses in the current period versus being capitalized in inventory. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facilities. The adoption of this statement did not have a material effect on the Company’s Unaudited Condensed Consolidated Financial Statements.

In the first quarter of fiscal 2007, the Company adopted SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes a retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. The adoption of this Statement did not affect the Company’s Unaudited Condensed Consolidated Financial Statements in the period of adoption. Its effects on future periods will depend on the nature and significance of any future accounting changes subject to this statement.

Effective April 1, 2006, the Company adopted SFAS No. 123 (R), which requires the Company to measure the cost of employee services received in exchange for all equity awards. See Note 2 to the Unaudited Condensed Consolidated Financial Statements for further discussion.

The Company adopted SAB 108, as mentioned above, to quantify misstatement pertaining to prior periods in the quarter ended September 30, 2006.

The Company adopted EITF Issue No. 06-03 and has disclosed the accounting policy regarding recording of revenues, net of taxes.

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 Item 1A of Part II of this Form 10-Q. 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” in Item 1A of Part II of this Form 10-Q. 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. 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 200 watts of power.

We also design, manufacture and sell integrated circuits, or ICs, for a variety of applications. Our analog and mixed signal 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 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.

Over the past two quarters, our revenues from the sale of integrated circuits have increased significantly in percentage terms, while our revenues from the sale of power semiconductors have increased more modestly. Distribution revenues increased during the past two quarters as revenues shifted to applications that are traditionally bought through distributors, such as industrial and commercial applications, while our revenues from power semiconductors for the consumer products market, which are typically purchased directly from us, moderated. Research and development expenses increased in the six months ended September 30, 2006, with an increased emphasis on new product development, and are expected to remain in this range over the next few quarters. Selling, general and administrative expenses increased in the six months ended September 30, 2006 as compared to the comparable period in the prior year, in large part due to stock compensation expense pursuant to adoption of SFAS 123R on April 1, 2006 and litigation expenses. We are currently experiencing limits on our production capacity for some of the products. During the past two quarters, we increased inventory to become more responsive to customer demand for shorter lead times for the delivery of orders, in light of our customers’ desire to manage their inventories on a “just-in-time” basis.

Critical Accounting Policies and Significant Management Estimates

The discussion and analysis of our financial condition and results of operations are based upon our 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 materially from these estimates under different assumptions or conditions.

We believe the following critical accounting policies require that we make significant judgments and estimates in preparing our consolidated financial statements.

Revenue recognition. We sell to distributors and original equipment manufacturers. Approximately 45% of our revenues in the first six months of fiscal 2007 and 41% of our revenues in the first six months of fiscal 2006 were from distributors. We provide some of our distributors with the following programs: stock rotation and ship and debit. Ship and debit is a sales incentive program for products previously shipped to distributors. 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. Our shipping terms are generally FOB shipping point. Reserves for allowances are also recorded at the time of shipment. Our management must

make estimates of potential future product returns and so called “ship and debit” transactions related to current period product revenue. Our management analyzes historical returns and ship and debit transactions, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and allowances. Significant management judgments and estimates must be made and used in connection with establishing the allowances in any accounting period. Different judgments or estimates would result in material differences in the amount and timing of our revenue for any period.

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 $235,500 in the first six months of fiscal 2007 and $110,900 in the first six months of fiscal 2006.

We state our revenues, net of any taxes collected from customers that are required to be remitted to the various government agencies. The amount of taxes collected from customers and payable to government is included under accrued expenses and other current liabilities.

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 were to 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, to date our actual returns and allowances have not fluctuated significantly from period to period, and our returns provisions have historically been reasonably accurate. This allowance is included as part of the accounts receivable allowance 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 six months of fiscal 2007 and 2006 approximately $741,000 and $453,000, 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 management’s best estimate of future returns.

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 pricing adjustments for inventory held. Our distributors had approximately $6.3 million in inventory of our products on hand at September 30, 2006. 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. The following table sets forth the beginning and ending balances of, additions to, and deductions from, our allowance for ship and debit during the six months ended September 30, 2006 (in thousands):


Balance at March 31, 2006	$	453
Additions		1,536
Deductions		(1,142	)

Balance at June 30, 2006	$	847
Additions		1,053
Deductions		(1,057	)

Balance at September 30, 2006	$	843

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 processes. 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. Recently, we increased inventory to become more responsive to customer demand for shorter lead times for the delivery of orders, in light of our customers’ desire to manage their inventories on a “just-in-time” basis. The increase in inventory increases the possibility of obsolescence. 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 and expectations for future use. 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 were to make different judgments or utilize different estimates, the amount and timing of our write-down of inventories could 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 subsequently 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, 2006	$	19,377
Sale of excess inventory		(1,008	)
Scrap of excess inventory		(1,382	)
Additional accrual of excess inventory		2,155

Balance at June 30, 2006	$	19,142
Sale of excess inventory		(1,116	)
Scrap of excess inventory		(700	)
Additional accrual of excess inventory		1,875

Balance at September 30, 2006	$	19,201

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 generally 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 the 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 September 30, 2006, our lower of cost or market reserve was $477,000.

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

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 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 have two reporting units for which we have a balance in goodwill. 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. During the six months ended September 30, 2006, our goodwill has not been considered to be impaired based on the results of our analysis.

Legal contingencies. We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. SFAS No. 5, “Accounting for Contingencies,” requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position, results of operations or cash flows. We had reserves for litigation at September 30, 2006 of approximately $7.0 million related to our litigation with LoJack Corporation.

Income tax. As part of the process of preparing our condensed 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 reduce goodwill, intangible assets or 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.

Share-based compensation. On April 1, 2006, we adopted SFAS No. 123(R), which requires the measurement at fair value and recognition of compensation expense for all share-based payment awards. Total share-based compensation during the first six months of fiscal 2007 was $1.1 million.

Determining the appropriate fair-value model and calculating the fair value of share-based awards at the date of grant requires judgment. We use the Black-Scholes option pricing model to estimate the fair value of employee stock options and rights to purchase shares under stock participation plans, consistent with the provisions of SFAS No. 123(R). Option pricing models, including the Black-Scholes model, also require the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. We estimate stock volatility based on historical volatility. We estimated the expected life based on the historical data of option exercises. If we determined another method to estimate expected volatility or expected life was more reasonable than our current methods, or if another method for calculating these input assumptions was prescribed by authoritative guidance, the fair value calculated for share-based awards could change significantly. Higher volatility and expected lives result in a proportional increase to share-based compensation determined at the date of grant. The expected dividend rate and expected risk-free rate of return are not as significant to the calculation of fair value.

In addition, SFAS No. 123(R) requires us to develop an estimate of the number of share-based awards which will be forfeited. Differences between the estimated forfeiture rates and the actual forfeiture rates will require adjustments to be made in the financial statements. These adjustments will affect our selling, general and administrative expenses. The expense we recognize in future periods could also differ significantly from the current period and/or our forecasts due to adjustments in the assumed forfeiture rates.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board, or FASB, ratified Emerging Issues Task Force, or EITF, Issue No. 06-03 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)” (“Issue No. 06-03”). Under Issue No. 06-03, a company must disclose its accounting policy regarding the gross or net presentation of certain taxes. If taxes included in gross revenues are significant, a company must disclose the amount of such taxes for each period for which an income statement is presented (i.e., both interim and annual periods). Taxes within the scope of this issue are those that are imposed on and concurrent with a specific revenue-producing transaction. Taxes assessed on an entity’s activities over a period of time, such as gross receipts taxes, are not within the scope of the issue. Issue No. 06-03 is effective for the first annual or interim reporting period beginning after December 15, 2006. The adoption of EITF Issue No. 06-03 did not have a material effect on our Unaudited Condensed Consolidated Financial Statements.

In July 2006, the FASB issued FASB Interpretation No. 48 “Accounting For Uncertain Tax Positions” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109 “Accounting for Income Taxes.” It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of FIN 48 to our financial position and results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS 157”). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. The statement is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact SFAS 157 to our financial position and results of operations.

In September 2006, the SEC published Staff Accounting Bulletin (SAB) No 108. SAB 108 expresses the staff views regarding the process of quantifying financial statement misstatements. The bulletin prescribes the use of the “rollover” and “iron curtain” approaches in quantifying misstatements. The “Rollover” approach quantifies a misstatement based on the amount of the error originating in the current year income statement. The “Iron curtain” approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the year, irrespective of the misstatement’s year(s) of origination. The statement is effective immediately. The adoption of SAB 108 did not have a material effect on our Unaudited Condensed Consolidated Financial Statements.

Accounting Pronouncements Adopted in the Period

Effective April 1, 2006, we adopted SFAS No. 151, “Inventory Costs—an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 requires certain abnormal expenditures to be recognized as expenses in the current period versus being capitalized in inventory. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facilities. The adoption of this statement did not have a material effect on our Unaudited Condensed Consolidated Financial Statements.

For the first quarter of 2007, we adopted SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes a retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. The adoption of this Statement did not affect our Unaudited Condensed Consolidated Financial Statements in the period of adoption. Its effects on future periods will depend on the nature and significance of any future accounting changes subject to this statement.

Effective April 1, 2006, we adopted SFAS No. 123 (R), which requires us to measure the cost of employee services received in exchange for all equity awards. See Part I, Item I, Note 2 to the Unaudited Condensed Consolidated Financial Statements for further discussion.

We adopted SAB 108, as mentioned above, to quantify misstatement pertaining to prior periods in quarter ended September 30, 2006.

We adopted EITF Issue No. 06-03 and have disclosed the accounting policy regarding recording of revenues, net of taxes.

Results of Operations — Three and six months ended September 30, 2006 and 2005

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									Six Months Ended
	September 30,									September 30,
				% change									% change
	2006			from			2005			2006			from			2005
		(000	)					(000	)		(000	)					(000	)
Net revenues	$	71,875			13.4	%	$	63,385		$	139,616			10.2	%	$	126,726
Cost of goods sold		49,755			18.0	%		42,154			95,612			13.4	%		84,350

Gross profit	$	22,120			4.2	%	$	21,231		$	44,004			3.8	%	$	42,376


Operating expenses:
Research, development and engineering	$	4,921			20.5	%	$	4,083		$	10,029			21.7	%	$	8,239
Selling, general and administrative		10,828			9.3	%		9,905			22,884			19.4	%		19,162
Litigation provision (credit)		183		nm				—			(36,644	)	nm				—

Total operating expenses	$	15,932			13.9	%	$	13,988		$	(3,731	)		-113.6	%	$	27,401


nm — represents not meaningful

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.


	% of Net Revenues
	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Net revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		69.2	%		66.5	%		68.5	%		66.6	%

Gross profit		30.8	%		33.5	%		31.5	%		33.4	%


Operating expenses:
Research, development and engineering		6.8	%		6.4	%		7.2	%		6.5	%
Selling, general and administrative		15.1	%		15.7	%		16.4	%		15.1	%
Litigation provision (credit)		0.3	%		—			-26.2	%		—

Total operating expenses		22.2	%		22.1	%		-2.6	%		21.6	%


Operating income		8.6	%		11.4	%		34.1	%		11.8	%
Other income (expense), net		0.3	%		1.2	%		-0.4	%		1.0	%

Income before income tax		8.9	%		12.6	%		33.7	%		12.8	%
Provision for income tax		3.6	%		3.9	%		13.6	%		4.4	%

Net income		5.3	%		8.7	%		20.1	%		8.4	%

Net Revenues.

The following tables set forth the revenue for each of our product groups for the fiscal periods indicated:

Revenues


	Three Months Ended September 30,							Six Months Ended September 30,
			% change in							% change in
			Revenues from							Revenues from
	2006		2005 to 2006			2005		2006		2005 to 2006			2005
	(000)					(000)		(000)					(000)
Power Semiconductors	$	50,349		4.5	%	$	48,182	$	100,490		4.7	%	$	96,010
ICs		15,678		59.2	%		9,848		28,757		41.1	%		20,383
System and RF Power Semiconductors		5,848		9.2	%		5,355		10,369		0.3	%		10,333


Total	$	71,875		13.4	%	$	63,385	$	139,616		10.2	%	$	126,726

The following tables set forth the units and average selling prices, or ASPs for the fiscal periods indicated:

Average Selling Prices (ASPs)


	Three Months Ended September 30,							Six Months Ended September 30,
			% change							% change in
			in ASP from							ASP from
	2006		2005 to 2006			2005		2006		2005 to 2006			2005
Power Semiconductors	$	1.87		-21.1	%	$	2.37	$	2.02		-15.5	%	$	2.39
ICs	$	0.50		-45.7	%	$	0.92	$	0.50		-45.7	%	$	0.92
System and RF Power Semiconductors	$	13.60		-8.5	%	$	14.87	$	12.23		-6.6	%	$	13.08

Units


	Three Months Ended September 30,							Six Months Ended September 30,
			% change in							% change in
			units from 2005							units from 2005
	2006		to 2006			2005		2006		to 2006			2005
	(000)					(000)		(000)					(000)
Power Semiconductors		26,907		32.3	%		20,339		49,823		23.8	%		40,234
ICs		31,361		191.8	%		10,746		57,593		160.2	%		22,134
System and RF Power Semiconductors		430		19.4	%		360		848		7.3	%		790


Total		58,698		86.7	%		31,445		108,264		71.4	%		63,158

The 13.4% increase in net revenues in the three months ended September 30, 2006 as compared to the three months ended September 30, 2005 reflects a significant increase in the sales of ICs, accompanied by an overall increase in other products. The increase in the ICs was primarily due to an increase in sales of application specific integrated circuits, or ASICs, of approximately $3.4 million, and an increase in sales to the telecom market of solid state relays or SSRs of $1.8 million and customer premise equipment, or CPEs, of $1.3 million. The increase in the power semiconductor group was primarily due to an increase of $3.4 million in sales of insulated gate bipolar transistors or IGBTs and of $1.8 million in the sales of rectifiers and thyristors, principally to industrial and commercial markets, partially offset by a decline of $2.2 million in sale of power MOSFETs, principally due to a reduction in the sale of power semiconductors for plasma displays. Revenues from the sale of systems and RF power semiconductors in the three months ended September 30, 2006 as compared to the three months ended September 30, 2005 increased by 9.2%

primarily due to an increase of $1.4 million in revenues from systems, offset by a reduction in revenues from RF power semiconductors.

The increase of 10.2% in net revenues in the six months ended September 30, 2006 as compared to the comparable period of the prior year, was principally due to a 41.1% increase in revenues from ICs. The increase in ICs was comprised primarily of an increase of $4.9 million in the sale of ASICs to consumer markets and $2.6 million in the sale of SSRs to the telecom market. Revenues from power semiconductors increased by 4.7% for the six months ended September 30, 2006 as compared to the comparable period of the prior fiscal year, primarily due to an increase of $9.1 million in the sales of IGBTs and of $5.1 million in the sales of rectifiers and thyristors, to the industrial and commercial market, partially offset by a decrease in revenues from sale of power MOSFETs by $7.7 million. Revenues from systems and RF power semiconductors were relatively unchanged with increase of 0.3%; however there was an increase of $2.0 million in sale of systems offset by a decrease of $1.8 million in revenues from RF power semiconductors.

The decrease in the ASPs of power semiconductors, integrated circuits and systems and RF power semiconductors in the three and six months ended September 30, 2006 as compared to the comparable period of the prior fiscal year primarily occurred due to changes in the mix of products sold. Comparing the three months and six months ended September 30, 2006 to the comparable period of the prior fiscal year, the units increased principally due to increased shipments of ASICs for the consumer products market and power semiconductors for the industrial and commercial market.

For the quarter ended September 30, 2006, sales to customers in the United States represented approximately 27.6%, and sales to international customers represented approximately 72.4%, of our net revenues. Of our international sales, approximately 50.3% were derived from sales in Europe and the Middle East, approximately 43.9% were derived from sales in Asia and approximately 5.8% were derived from sales in the rest of the world. By comparison, for the quarter ended September 30, 2005, sales to customers in the United States represented approximately 32.7%, and sales to international customers represented approximately 67.3%, of our net revenues. Of our international sales, approximately 47.9% were derived from sales in Europe and the Middle East, approximately 44.6% were derived from sales in Asia and approximately 7.5% were derived from sales in the rest of the world.

For the six months period ended September 30, 2006, sales to customers in the United States represented approximately 29.6%, and sales to international customers represented approximately 70.4%, of our net revenues. Of our international sales, approximately 50.5% were derived from sales in Europe and the Middle East, approximately 43.3% were derived from sales in Asia and approximately 6.2% were derived from sales in the rest of the world. By comparison, for the six months ended September 30, 2005, sales to customers in the United States represented approximately 32.2%, and sales to international customers represented approximately 67.8%, of our net revenues. Of our international sales, approximately 48.6% were derived from sales in Europe and the Middle East, approximately 43.8% were derived from sales in Asia and approximately 7.6% were derived from sales in the rest of the world.

For the three and six months ended September 30, 2006 as compared to the comparable periods of the prior fiscal year, the revenues in the United States decreased, because of a decrease in sales to the medical market and the continuing shift by our U.S. based customers to manufacturing overseas.

Gross Profit.

Gross profit margin decreased to 30.8% in the three months ended September 30, 2006 from 33.5% in the three months ended September 30, 2005, principally because of the changes in the product mix, as revenues shifted to the lower margin consumer, industrial and commercial markets and away from the medical market. Gross profit margin decreased to 31.5% in the six months ended September 30, 2006 from 33.4% in the six months ended September 30, 2005, principally because of the changes in the product mix, as sales to the higher margin medical market decreased and sales to the industrial and commercial market increased. The increase in gross profit expressed in dollars in the first three and six months of 2006 as compared the same period of the prior year was primarily the result of a significant increase in number of units sold, although at a lower gross profit margin.

Research, Development and Engineering.

For the three and six months ended September 30, 2006 as compared to the three and six months ended September 30, 2005, research, development and engineering expenses increased by $838,000 and $1.8 million, respectively. The increase in both the three and six month periods is principally due to increased spending for design, layout and testing of integrated circuits and the addition of nine engineering personnel.

Selling, General and Administrative.

For the three months ended September 30, 2006 as compared to the three months ended September 30, 2005, selling, general and administrative expenses increased by $923,000, primarily due to an increase in litigation expenses of approximately $770,000 and to

stock compensation expenses of $555,000 due to adoption of SFAS 123R on April 1, 2006. For the six months ended September 30, 2006 as compared to six months ended September 30, 2005, selling, general and administrative expenses increased by $3.7 million, primarily due to an increase of $1.8 million in professional and consulting fees for regulatory compliance, $770,000 in litigation expenses and $1.1 million in stock compensation expense due to adoption of SFAS 123R.

Litigation Provision.

For the quarter ended September 30, 2006, we accrued $183,000 of interest on our pending LoJack matter in our litigation provision. For the six months ended September 30, 2006 we released $36.6 million, net of interest accruals, from our litigation provision. See Note 9 of the Notes to Unaudited Condensed Consolidated Financial Statements for a description of the current status of this litigation matter.

Other Income (Expense), Net.

Other income, net in the quarter ended September 30, 2006 was $200,000, as compared to $786,000, net in the quarter ended September 30, 2005. Other expense, net in the six months ended September 30, 2006 was $644,000, as compared to other income, net of $1.2 million in the six months ended September 30, 2005. For the three months ended September 30, 2006, other income, net consisted principally of interest income. For six months ended September 30, 2006, other expense, net consisted principally of losses associated with changes in foreign currency rates partially offset by interest income. For the three and six months ended September 30, 2005, other income, net consisted principally of interest income.

Provision for Income Tax.

In the quarter ended September 30, 2006, the provision for income tax reflected an effective tax rate of 40.7%, as compared to an effective tax rate of 31.0% in the quarter ended September 30, 2005. In the six months ended September 30, 2006, the provision for income tax reflected an effective tax rate of 40.4%, as compared to an effective tax rate of 34.0% in the six months ended September 30, 2005. The increase in the effective tax rate for both the three and six month periods ended September 30, 2006 is largely due to a reduction in research and development and other tax credits available.

Liquidity and Capital Resources

At September 30, 2006, cash and cash equivalents of $66.7 million were 14.7% less than the $78.2 million at March 31, 2006.

Net cash provided by operating activities in the six months ended September 30, 2006 was $576,000, as compared to $23.9 million in the six months ended September 30, 2005. Our net inventories at September 30, 2006 increased $16.2 million, or 26.8%, from March 31, 2006 principally to meet our customers’ demands for shorter lead times. Net accounts receivable increased by $2.7 million, or 6.2%, from March 31, 2006 to September 30, 2006, primarily due to the increase in revenues. Our accounts payable at September 30, 2006 increased by $4.3 million, or 21.0%, from accounts payable at March 31, 2006, primarily because of the increase in inventories. Accrued expenses and other current liabilities increased by $1.6 million, or 6.3%, from March 31, 2006 to September 30, 2006, primarily due to an increase in income tax liabilities

We used $6.4 million in net cash for investing activities during the six months ended September 30, 2006, as compared to $15.8 million during the six months ended September 30, 2005. The principal use of cash for investing activities is capital expenditures. During the six months ended September 30, 2006, we spent $8.7 million on capital expenditures, including $2.1 million acquired through capital leases, to increase our capacity and replace older equipment. During the six months ended September 30, 2005, we spent $15.8 million in capital expenditures, including $14.1 million for the purchase of the Clare and Micronix facilities.

For the six months ended September 30, 2006, net cash used for financing activities was $7.4 million as compared to net cash provided by financing activities of $10.4 million in the six months ended September 30, 2005. During the six months ended September 30, 2006, the cash was used principally for purchasing treasury stock. In June 2005, we borrowed about $12 million. We borrowed these funds to improve our liquidity in light of the funds spent to purchase our Clare and Micronix facilities.

In addition to cash flow from operations, another potential source of liquidity is borrowings under existing lines of credit. At September 30, 2006, we had available credit of $1.7 million.

At September 30, 2006, our debt, consisting of short term and long term, capital lease obligations and loans payable, was $18.5 million, representing 27.8% of our cash and cash equivalents and 9.8% of our stockholders equity.

As of September 30, 2006, we had $66.7 million in cash and cash equivalents. We believe that our cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our anticipated cash requirement for the next 12 months. Our

liquidity could be negatively affected by decline in demand for our products, the need to invest in new product development, one or more acquisitions or the payment of damages and related interest and attorneys’ fees, including the jury’s damage award of at least $6.2 million awarded to International Rectifier and the potential loss of $7.0 million or more in the LoJack litigation. 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.

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, 2006.

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 September 30, 2006. 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 September 30, 2006, our disclosure controls and procedures were not effective. A material weakness in internal control over financial reporting that led to the conclusion is discussed below.

Material Weaknesses

In conducting its assessment, our management concluded that one material weakness existed as of March 31, 2006 as a result of the absence of a financial accounting professional with sufficient skills and experience to make estimates and judgments about non-routine transactions consistent with accounting principles generally accepted in the United States of America (“US GAAP”) during the closing process. This material weakness was not remedied at September 30, 2006.

During the closing process, we were unable to support some of our estimates and judgments about non-routine transactions with appropriate analysis. Our initial analysis of goodwill under SFAS 142 was not sufficiently robust to support our conclusions. We drew an inappropriate conclusion regarding the presentation of a non-cash related item of $15.3 million in the cash flow from operating activities of our consolidated statements of cash flows. In connection with the settlement of litigation after the end of a period but prior to filing financial statements with the SEC, we inappropriately concluded that aspects of the settlement should be recorded in a future period, as opposed to being accounted for as a subsequent event that should be reflected in the current period financial statements. As a result of the errant judgment, we understated our accounts payable at March 31, 2006 by $560,000 and overstated our income before income taxes for the quarter ended March 31, 2006 by $560,000.

Changes in Internal Control over Financial Reporting

We plan to remedy the material weakness at March 31, 2006 by engaging or employing an additional financial accounting professional with the requisite skills and experience to make estimates and judgments about non-routine transactions consistent with US GAAP during the closing process. We have made offers to fill this position, which have not been accepted. We expect to continue to work to identify an appropriate individual to fill the role. In the interim, we intend to mitigate the material weakness by implementing internal controls for additional secondary reviews of key estimates and judgments relating to non-routine transactions.

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 errors 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 1A. 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 seriously negatively affect our operating results in any given quarter. Our operating results may fluctuate significantly from quarter to quarter and year to year. For example, comparing fiscal 2002 to fiscal 2001, net revenues fell by 25.6% and net income fell by 85.7%. Further, from fiscal 2002 to fiscal 2003 and from fiscal 2005 to fiscal 2006, net income in one year shifted to net loss in the next year. 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;

	•		damage awards or injunctions as the result of litigation;

	•		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.

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.

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 such a claim. For example, we were sued by International Rectifier for purportedly infringing some of its patents covering power MOSFETs. The U.S. District Court awarded damages to International Rectifier of $6.2 million plus 6.5% of revenues from infringing products. In addition, a permanent injunction against IXYS, effectively barring us from selling or distributing the allegedly infringing products, was issued by the U.S. District Court. We intend to appeal the damage award and the injunction. Our counsel inadvertently did not file the requisite notice of appeal following the entry of judgment within the required period. Although we believe that it is unlikely that we will be precluded from pursuing our appeal, we could be denied the opportunity to pursue our appeal. 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, may divert the efforts and attention of our management and technical personnel from our core business operations and could otherwise harm our business.

In the event of an adverse outcome 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 outcome 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.

In addition, our subsidiary, Clare, Inc. was sued in a Superior Court in the state of Massachusetts in 2003 over a dispute between it and LoJack Corporation relating to a contract for the design, development and purchase of application specific integrated circuits and assemblies. On February 8, 2006, the jury found that Clare was liable for damages in the amount of $36.7 million. On July 20, 2006, the Superior Court reduced the damages award to $4 million.

Under Massachusetts law, a jury’s award is increased for pre-judgment interest. Pre-judgment interest was determined to be $2.1 million at the time of the entry of judgment on July 25, 2006. In addition, the Superior Court determined the attorney’s fees and costs payable by Clare to be $708,000. Post-judgment interest accrues on the total judgment, inclusive of the pre-judgment interest, attorneys fees and costs, at the rate of 12% per annum simple interest.

In August 2006, LoJack filed a notice with the Superior Court of motion to reconsider the judgment for the purpose of reinstating the full amount of the jury’s damage award. In September 2006, the Court ruled against LoJack’s motion. LoJack and we have each filed a notice of appeal. The enforcement of the judgment will be stayed pending appeal without the necessity of filing any bond. Post-judgment proceedings and/or appeals may take several months or even years to conclude. Payment of an award, if ever, will only occur at the conclusion of this process.

We cannot predict the final outcome of this litigation matter. An adverse outcome would materially and adversely affect our financial condition, results of operations and cash flows. There can be no assurance that our aggregate accrual of $7.0 million is sufficient for any actual losses that may be incurred as a result of this litigation.

Semiconductors for inclusion in consumer products have short product life cycles.

We believe that consumer products are subject to shorter product life cycles, because of technological change, consumer preferences, trendiness and other factors, than other types of products sold by our 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 used for visual display in television. Should competition among the various visual display technologies for television adversely affect the sales of plasma display panels that incorporate our products, 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 2006, our product sales by region were approximately 31.5% in the United States, approximately 33.2% in Europe and the Middle East, approximately 30.3% in Asia and approximately 5.0% 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 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. We are currently experiencing limits on production capacity for some of the products we fabricate. 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.

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 in general 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 operating expenses are relatively fixed, and we order materials and commence production 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 we 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 significantly. In response to anticipated long lead times to obtain inventory and materials, we order materials and 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. This risk has increased in recent periods. As our customers have increasingly demanded “just-in-time” deliveries that cannot be accommodated in the time required for a normal production cycle, we have increased our inventory produced in expectation of future orders. If anticipated demand fails to materialize, we may have to write down excess inventory, which would hurt our financial results.

We have a material weakness 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 a material weakness existed as of March 31, 2006 as a result of the absence of a financial accounting professional with sufficient skills and experience to make estimates and judgments about non-routine transactions consistent with accounting principles generally accepted in the United States of America during the closing process.

that aspects of the settlement should be recorded in a future period, as opposed to being accounted for as a subsequent event that should be reflected in the current period financial statements. As a result of the errant judgment, we understated our accounts payable at March 31, 2006 by $560,000 and overstated our income before income taxes for the quarter ended March 31, 2006 by $560,000.

We have not concluded that this material weakness was remediated at September 30, 2006. Existence of this material weakness 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 further determined that our disclosure controls and procedures were not effective as of September 30, 2006. See Item 4 of Part I, “Controls and Procedures,” 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 2007 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 of other companies and technologies. 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 or integrating disparate 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’s products or personnel;

	•		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.

As a result of an acquisition, 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 for fiscal 2006, 39% came from wafers manufactured for us by external foundries. 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’ 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.

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, if 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 that 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 Fairchild Semiconductor, Fuji, Hitachi, Infineon, International Rectifier, Microsemi, Mitsubishi, 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.

Fluctuations in the mix of products sold may adversely affect our financial results.

Because of the wide price differences among our products, geographies and markets, the mix and types of products sold may have a substantial impact on our revenues and gross profit margins. In addition, more recently introduced products tend to have higher associated costs because of initial overall development costs and higher start-up costs. Fluctuations in the mix and types of our products may also affect the extent to which we are able to recover our fixed costs and investments that are associated with a particular product, and as a result can negatively impact our financial results.

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. 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 and other personnel and our failure to attract retain and motivate personnel could have an adverse effect on our results of operations.

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. Manual steps also increase the probability of control deficiencies and material weaknesses.

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 those adopted under the 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 could require, 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.

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 assurance 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 currently 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.

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 15% of our net revenues in fiscal 2006 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.

As of November 1, 2006, Nathan Zommer, Ph.D., our President and Chief Executive Officer, owned, directly or indirectly, approximately 21% 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, any change 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 15% of our revenues in fiscal 2006 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.

Changes in, or interpretations of, accounting principles could result in unfavorable accounting charges.

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Our accounting principles that recently have been or may be affected by changes in the accounting principles are as follows:

	§		accounting for stock-based compensation

	§		accounting for income taxes

	§		accounting for business combinations and related goodwill

	§		accounting for defined benefit plans

In particular, the FASB recently issued SFAS 123(R) which requires the measurement of all stock based compensation to employees, including grants of employee stock options, using a fair value based method and the recording of such expense in our consolidated statements of income. We were required to adopt SFAS 123(R) in the first quarter of fiscal year 2007. The adoption of SFAS 123(R) had an adverse effect on our reported financial results. In the future it may significantly adversely affect our reported financial results and may impact the way in which we conduct our business. It could result in increased employee turnover if we are unable to provide competitive compensation to our employees. Please refer to Note 2 of our Notes to Unaudited Condensed Consolidated Financial Statements for further information regarding the adoption of SFAS 123(R).

If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.

Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined resulting in an impact on our results of operations.

Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.

Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities.

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.

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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES


						(c) Total Number of
						Shares (or Units)
	(a) Total Number of		(b) Average			Purchased as Part of		(d) Maximum Number (or Approximate Dollar
	shares (or Units)		Price Paid per			Publicly Announced		Value) of Shares (or Units) that May Yet Be
Period	Purchased		Share (or Unit)			Plans or Programs		Purchased Under the Plans or Programs
July 1, 2006 – July 31, 2006		—		(1	)		—		2,000,000	(2)
August 1, 2006 – August 31, 2006		535,700		8.78			535,700		1,464,300
September 1, 2006 – September 30, 2006		109,000		8.92			109,000		1,355,300
Total		644,700		8.80			644,700


(1)		Not applicable

(2)		The current stock purchase program was approved on May 12, 2006 and will expire on June 15, 2007. The purchase of up to 2,000,000 shares of common stock was approved.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.


Director	Votes For		Votes Withheld
Donald Feucht		31,896,928		931,905
Samuel Kory		31,968,883		859,950
S. Joon Lee		31,672,150		1,156,683
David L. Millstein		31,970,923		857,910
Kenneth D. Wong		31,671,850		1,156,983
Nathan Zommer		31,943,734		885,099


	IXYS CORPORATION
	By:	/s/ Uzi Sasson
	Uzi Sasson, Vice President of Finance and
	Chief Financial Officer (Principal Financial Officer)


Exhibit
No.		Description
	10.1	Form of Restricted Stock Unit Award Agreement with Change of Control Vesting (filed on August 30, 2006 as Exhibit 10.1 to the Current Report on Form 8-K (No. 000-26124) and incorporated herein by reference).

	10.2	Indemnity Agreement dated August 25, 2006 by and between IXYS Corporation and David L. Millstein (filed on August 30, 2006 as Exhibit 10.2 to the Current Report on Form 8-K (No. 000-26124) and incorporated herein by reference).

	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)


		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	16
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26
ITEM 4.	CONTROLS AND PROCEDURES	26
PART II – OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	27
ITEM 1A	RISK FACTORS	27
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	39
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	39
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	40
ITEM 5.	OTHER INFORMATION	40
ITEM 6.	EXHIBITS	40
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1


(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.