IXYS 10Q 2008 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007


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		(I.R.S. 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.

Yesþ Noo

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 filero Accelerated filerþ Non-accelerated filero

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

Yeso Noþ

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of July 27, 2007 was 32,403,699.

IXYS CORPORATION

FORM 10-Q
June 30, 2007

INDEX


		Page
PART I — FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS		3
	UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS		3
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS		4
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME		5
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS		6
	NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		15
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		24
ITEM 4.	CONTROLS AND PROCEDURES		24
PART II — OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		25
ITEM 1A	RISK FACTORS		25
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		37
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		37
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		37
ITEM 5.	OTHER INFORMATION		37
ITEM 6.	EXHIBITS		37
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	June 30,			March 31,
	2007			2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	55,540		$	54,027
Restricted cash		137			169
Accounts receivable, net of allowances of $2,030 at June 30, 2007 and $2,847 at March 31, 2007		46,130			42,519
Inventories		85,304			85,965
Prepaid expenses and other current assets		3,585			3,268
Deferred income taxes, net		12,366			14,345

Total current assets		203,062			200,293
Property, plant and equipment, net		48,203			48,741
Other assets		8,018			5,319
Deferred income taxes, net		12,750			12,827
Goodwill		6,461			6,461

Total assets	$	278,494		$	273,641

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capitalized lease obligations	$	3,772		$	3,686
Current portion of loans payable		1,023			1,012
Accounts payable		20,508			19,926
Accrued expenses and other current liabilities		20,332			19,081
Litigation reserve		9,396			14,180

Total current liabilities		55,031			57,885
Long term income tax payable		4,050			—
Capitalized lease obligations, net of current portion		6,208			6,660
Long term loans payable, net of current portion		10,977			11,112
Pension liabilities		16,713			16,875

Total liabilities		92,979			92,532

Commitments and contingencies (Note 13)
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; 35,141,607 issued and 32,382,499 outstanding at June 30, 2007 and 35,031,947 issued and 32,512,039 outstanding at March 31, 2007		351			350
Additional paid-in capital		166,945			165,889
Less cost of treasury stock: 2,759,108 shares at June 30, 2007 and 2,519,908 shares at March 31, 2007		(25,131	)		(22,851	)
Retained earnings		34,209			29,605
Accumulated other comprehensive income		9,141			8,116

Total stockholders’ equity		185,515			181,109

Total liabilities and stockholders’ equity	$	278,494		$	273,641

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 per share data)


	Three Months Ended
	June 30,
	2007			2006
	(unaudited)
Net revenues	$	75,901		$	67,741
Cost of goods sold		53,513			45,857

Gross profit		22,388			21,884

Operating expenses:
Research, development and engineering		5,073			5,108
Selling, general and administrative		10,840			12,056
Release of litigation provision		(4,784	)		(36,827	)

Total operating expenses		11,129			(19,663	)

Operating income		11,259			41,547
Other income (expense):
Interest income		579			774
Interest expense		(308	)		(125	)
Other income (expense), net		342			(1,493	)

Income before income tax		11,872			40,703
Provision for income tax		(4,868	)		(16,407	)

Net income	$	7,004		$	24,296


Net income per share—basic	$	0.22		$	0.71

Weighted average shares used in per share calculation — basic		32,490			34,172

Net income per share—diluted	$	0.21		$	0.68

Weighted average shares used in per share calculation — diluted		33,790			35,575

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

IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)


	Three Months Ended
	June 30,
	2007		2006
	(unaudited)
Net income	$	7,004	$	24,296
Other comprehensive income:
Unrealized gain on available for sale investment securities, net of taxes of $173 and $192 for the three months ended June 30, 2007 and 2006		287		30
Foreign currency translation adjustments		738		1,900

Comprehensive income	$	8,029	$	26,226

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

IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Three Months Ended
	June 30,
	2007			2006
	(unaudited)
Cash flows from operating activities:
Net income	$	7,004		$	24,296
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		2,952			2,285
Provision for receivables allowances		277			2,640
Net change in inventory reserves		1,311			2,157
Change in litigation reserve		(4,784	)		(36,827	)
Foreign currency adjustments on intercompany amounts		(8	)		151
Deferred income taxes		1,979			15,673
Stock based compensation		434			537
Gain on investments		(129	)		—
Loss on disposal of plant and equipment		—			1
Changes in operating assets and liabilities:
Accounts receivable		(3,601	)		(5,509	)
Inventories		(117	)		(9,223	)
Prepaid expenses and other current assets		(289	)		(1,229	)
Other assets		(171	)		(109	)
Accounts payable		396			2,531
Accrued expenses and other liabilities		2,786			(1,608	)
Pension liabilities		(403	)		(98	)

Net cash provided by (used in) operating activities		7,637			(4,332	)


Cash flows from investing activities:
Change in restricted cash		32			77
Purchase of investments		(2,045	)		(100	)
Purchase of plant and equipment		(1,514	)		(3,032	)

Net cash used in investing activities		(3,527	)		(3,055	)


Cash flows from financing activities:
Principal payments on capital lease obligations		(953	)		(165	)
Repayments of loans payable		(254	)		(215	)
Purchases of treasury stock		(2,280	)		—
Proceeds from employee equity plans		623			370
Proceeds from collection of notes from stockholders		—			1

Net cash used in financing activities		(2,864	)		(9	)

Effect of exchange rate fluctuations on cash and cash equivalents		267			1,273

Net increase (decrease) in cash and cash equivalents		1,513			(6,123	)
Cash and cash equivalents at beginning of period		54,027			78,192

Cash and cash equivalents at end of period	$	55,540		$	72,069

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 defined benefit plans. All significant intercompany transactions have been eliminated in consolidation. All adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been made. The condensed balance sheet as of March 31, 2007 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, 2007 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. Recent Accounting Pronouncements

In September 2006, Financial Accounting Standards Board (“FASB”), issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 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 FASB 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. SFAS 157 is effective for the Company beginning in the first quarter of fiscal 2009. The Company is currently evaluating the impact of SFAS 157 to the Company’s financial position and results of operations.

In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for the Company beginning in the first quarter of fiscal 2009, although earlier adoption is permitted. The Company is currently evaluating the impact of SFAS 159 to its financial position and results of operations.

The Company adopted FIN 48 as of April 1, 2007 as required. See Note 12 for further discussion.

3. Employee Equity Incentive Plans

Stock Option, Restricted Stock Units and Stock Bonuses:

IXYS has the 1999 Equity Incentive Plan and the 1999 Non-Employee Directors’ Equity Incentive Plan (the “Plans”) under which stock options, restricted stock units (“RSUs”) or stock bonuses may be granted. Stock options are granted for not less than 85% of fair market value at the time of grant. The options granted to employees typically vest over four years and expire ten years from the date of grant. 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. Under the Plans, IXYS may also award shares of common stock as stock bonuses. The Company did not award any stock bonuses during the quarter ended June 30, 2007.

RSUs may be granted under the Company’s 1999 Equity Incentive Plan. 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 granted to employees 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 did not award any RSUs during the quarter ended June 30, 2007.

Since inception, the cumulative amount authorized for the 1999 Equity Incentive Plan was approximately 11.6 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% 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% of an employee’s eligible compensation. During the quarter ended June 30, 2007, there were approximately 44,000 shares purchased under the Purchase Plan, leaving about 28,000 shares available for purchase under the plan in the future.

On July 31, 2007, the Board of Directors of the Company amended the Purchase Plan and reserved an additional 350,000 shares of common stock for issuance under the Purchase Plan. The total shares reserved under the plan after the amendment is 850,000. The amendment is subject to approval by the stockholders of the Company at its annual stockholders meeting.

Stock-Based Compensation:

The following table summarizes the effects of share-based compensation charges (in thousands):

Income Statement Classifications


	Three Months Ended June 30,
	2007		2006
	(unaudited)
Selling, general and administrative expenses	$	434	$	537

Share-based compensation effect on income before tax		434		537
Provision for income tax¹		169		209

Net share-based compensation effects in net income	$	265	$	328


¹		Estimated at a statutory income tax rate of 39%

For the first quarter of fiscal 2008, the unaudited condensed consolidated statements of operations and cash flows do not reflect any tax benefit for the tax deduction from option exercises and other awards. As of June 30, 2007, there were $4.1 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 1.9 years.

The Black-Scholes option pricing model is used to estimate the fair value of options granted under the Company’s equity incentive plans and rights to acquire stock granted under the Company’s stock purchase plan. The weighted average estimated values of employee stock option grants and rights granted under the stock purchase plan, as well as the weighted average assumptions used in calculating these values during the first quarter ended June 30, 2007 and 2006, were based on estimates at the grant date as follows:


	Stock Options						Purchase Plan
	Three Months Ended June 30,						Three Months Ended June 30,
	2007			2006			2007			2006
Weighted average estimated fair value of grant per share	$	4.25		$	4.50		$	2.65		$	2.40
Risk-free interest rate		5.0	%		5.1	%		4.9	%		4.2	%
Expected term (in years)		4.3			3.7			0.5			0.5
Volatility		49	%		55	%		44	%		56	%
Dividend yield		0	%		0	%		0	%		0	%

Information with respect to outstanding stock options as of June 30, 2007 was as follows:


	Number of			Weighted Average		Intrinsic
	Shares			Exercise Price Per Share		Value¹
						(000)
Balances, March 31, 2007		4,456,025		$	8.27
Options granted		620,200		$	9.37
Options exercised		(34,600	)	$	7.82	$	75
Options cancelled and expired		(11,250	)	$	10.94

Balance, June 30, 2007		5,030,375		$	8.40

Exercisable, June 30, 2007		4,081,550		$	8.19
Exercisable, March 31, 2007		4,071,650		$	8.20


^1.		Represents the difference between the exercise price and the value of IXYS stock at the time of exercise.

RSUs award activity under the Company’s equity incentive plans for the quarter ended June 30, 2007 is summarized below:


	Number of			Weighted Average		Intrinsic
	Shares			Grant-Date Fair Value		Value¹
						(000)
Balances, March 31, 2007		139,352		$	9.54
RSUs granted		—			—
RSUs vested		(30,742	)	$	9.60	$	305
RSUs forfeited		—

Balance, June 30, 2007		108,610


^1.		Represents the value of IXYS stock on the vesting date.

4. Computation of Net Income per Share

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


	Three Months Ended June 30,
	2007		2006
	(unaudited)
Basic:
Weighted-average shares outstanding for the period		32,490		34,172

Net income available for common stockholders	$	7,004	$	24,296

Net income available for common stockholders per share	$	0.22	$	0.71

Diluted:
Weighted-average shares outstanding for the period		32,490		34,172
Net effective dilutive stock options based on treasury method using average market price		1,300		1,403

Shares used in computing per share amounts		33,790		35,575

Net income per share available for common stockholders	$	7,004	$	24,296

Net income per share	$	0.21	$	0.68

Total common stock equivalents excluded for the computation of earnings per share as their effect was anti-dilutive		1,999		1,443

Basic income available per common share is computed using net income and the weighted average number of common shares outstanding during the period. Diluted income 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.

5. Inventories

Inventories consist of the following (in thousands):


	June 30,		March 31,
	2007		2007
	(unaudited)
Raw materials	$	22,841	$	23,144
Work in process		42,037		43,477
Finished goods		20,426		19,344

Total	$	85,304	$	85,965

6. Other Assets

At June 30, 2007, other long term assets include equity securities held as available for sale of $3.4 million, long term equity investments of $3.8 million and intangible assets of $266,000. Investments available for sale have been stated at their fair value as at June 30, 2007. Long term equity investments are accounted for under the equity method of accounting. Long term equity investments include a strategic investment of $2.0 million made during the quarter ended June 30, 2007. At March 31, 2007, other assets included $2.9 million of investments available for sale, $1.7 million of long term equity investments and intangible assets of $390,000.

7. Borrowing Arrangements

On June 10, 2005, 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 and a margin. The margin can range from 70 basis points to 125 basis points, depending on the calculation of a ratio of indebtedness to cash flow for the German subsidiary. During the first five years of the loan, if the Euribor rate exceeds 3.75%, then the Euribor rate for the purposes of the loan shall be 4.1%, and, if the Euribor rate falls below 2%, then the Euribor rate for the purposes of the loan shall be 3%. Thereafter, the interest rate is recomputed annually. The interest rate at June 30, 2007 was 4.8%.

Each fiscal quarter beginning September 2005, during the first five years of the loan, a principal payment of €167,000, or about $225,000, 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 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 June 30, 2007, 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.

8. Accrued Expenses and Other Current Liabilities

At June 30, 2007, accrued expenses and other current liabilities include uninvoiced goods and services of $7.1 million, income taxes payable of $4.3 million and other liabilities of $8.9 million. At March 31, 2007, accrued expenses and other current liabilities include uninvoiced goods and services of $7.0 million, income taxes payable of $3.9 million and other liabilities of $8.2 million.

9. 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. These plans have been curtailed.

The net periodic pension expense includes the following components (in thousands):


	Three Months Ended June 30,
	2007		2006
	(unaudited)
Service cost	$	2	$	199
Interest cost on projected benefit obligation		171		458
Expected return on plan assets		7		(388	)
Recognized actuarial loss		11		12

Net periodic pension expense	$	191	$	281

IXYS expects to make contributions to the plans of approximately $801,000 in the fiscal year ending March 31, 2008. This contribution is primarily contractual.

10. Accumulated Other Comprehensive Income:

The components of accumulated other comprehensive income, net of tax (in thousands):


	June 30,			March 31,
	2007			2007
	(Unaudited)
Accumulated net unrealized gain on available-for-sale investments securities, net of taxes $620 in quarter ended June 30, 2007 and $447 in quarter ended March 31, 2007	$	930		$	644
Accumulated minimum pension liability, net of taxes of $1,521		(2,747	)		(2,747	)
Accumulated foreign currency translation adjustments		10,958			10,219

Total accumulated other comprehensive income	$	9,141		$	8,116

11. Segment Information

IXYS has a single operating segment. This operating segment is comprised of semiconductor products used primarily in power-related applications. While the Company has separate businesses with discrete financial information, the Company has one chief operating decision maker and 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 June 30,
	2007		2006
	(unaudited)
United States	$	19,308	$	21,418
Europe and the Middle East
Germany		10,904		8,612
Italy		1,841		1,716
United Kingdom		6,991		4,897
Other		11,821		8,331
Asia Pacific
Korea		3,580		4,349
China		10,049		8,550
Japan		2,221		2,051
Other		4,242		4,803
Rest of the world		4,944		3,014

Total	$	75,901	$	67,741

The following table sets forth net revenues for each of IXYS’s product groups for the three months ended June 30, 2007 and 2006 (in thousands):


	Three Months Ended June 30,
	2007		2006
	(unaudited)
Power Semiconductors	$	57,194	$	50,142
Integrated Circuits		12,325		13,079
Systems and RF Power Semiconductors		6,382		4,520


Total	$	75,901	$	67,741

12. Taxes

Effective at the beginning of the first quarter of fiscal 2008, the Company adopted the provision of FIN 48, “Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109.” FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

As a result of the implementation of FIN 48, the Company increased the liability for net unrecognized tax benefits by $2.4 million, and accounted for the reduction as a cumulative effect of a change in accounting principle that resulted in a decrease to retained earnings of $2.4 million. The total amount of gross unrecognized tax benefits as of the date of adoption was $6.2 million. These gross unrecognized tax benefits would affect the effective tax rate if realized. The Company historically classified unrecognized tax benefits in current taxes payable. As a result of adoption of FIN 48, $4.1 million unrecognized tax benefits were reclassified to long term income taxes payable.

During the quarter, the Company initiated a transfer of certain intellectual properties which triggered a taxable event in the United States. The gain allows the Company to utilize certain net operating loss carry-forwards, which triggered the realization of unrecognized tax benefits of approximately $1.5 million.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the consolidated condensed statements of income. As of the date of adoption of FIN 48, the Company had accrued $19,000 for the payment of interest and penalties relating to unrecognized tax benefits.

The Company files U.S. federal, U.S. state, and foreign tax returns. The Company is generally no longer subject to tax examinations for years prior to fiscal 2004 for federal and state tax returns, except in certain limited circumstances. The Company has one non-U.S. income tax audit pending. While the final resolution of the audit is uncertain, in management’s opinion, the ultimate disposition of the audit will not have a material adverse impact on the Company’s consolidated financial position, liquidity or results of operations.

13. Commitments and Contingencies

Legal Proceedings:

IXYS is 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 IXYS believes 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 ineBay, 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 is appealing 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 January 2007, the Federal Circuit Court declined to issue a stay of the judgment and injunction. The judgment therefore became payable and the injunction enforceable. In September 2007, the 699 patent expires and the practical effect of the injunction ends. At June 30, 2007, IXYS’s reserve for this matter was $6.9 million. There is no assurance that this amount is sufficient for any actual losses that may be incurred as a result of this litigation.

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.

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 Superior Court ruled against LoJack’s motion. LoJack and IXYS each appealed the judgment of the Superior Court. On April 13, 2007, the parties’ appeals were argued before the Appeals Court of Massachusetts.

On July 23, 2007, the Appeals Court ruled that IXYS owed LoJack $805,000 plus simple interest at the rate of 12% per annum from April 10, 2003, which aggregates to $1.2 million at June 30, 2007. LoJack has announced that it will file to appeal the ruling of the Appeals Court to the Supreme Judicial Court, the highest court in the Commonwealth of Massachusetts. The Supreme Judicial Court may, but is not obligated to, permit the appeal. The enforcement of the judgment will be stayed pending appeal without the necessity of filing any bond. Payment of an award is not required prior to the conclusion of this process. IXYS released $4.9 million from litigation reserves previously accrued. The total reserves as of June 30, 2007 are $2.5 million including attorney’s fees that may be payable. There is 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 June 30, 2007 and 2006.

IXYS Corporation guarantees, for certain events of default, a $5.0 million line of credit issued by a German bank to IXYS Semiconductor GmbH to support a letter of credit facility. At June 30, 2007, there were approximately $1.6 million of open letters of credit to support inventory purchases. Westcode Semiconductor Limited, a subsidiary, had a Letter of Credit facility from a British bank for £383,000, or approximately $770,000, as of June 30, 2007. The bank also issued a guarantee on behalf of the subsidiary for £248,000, or approximately $497,000, in connection with a product supply contract.

14. Subsequent Event

On July 31, 2007, the Board of Directors of the Company amended the 1999 Employee Stock Purchase Plan to add 350,000 shares on common stock to the plan. See Note 3 for further details.

In January 2007, IXYS entered into an agreement to purchase a building in Milpitas, California, to be used as its corporate offices and facility for operations, for $7.5 million. The transaction closed on August 2, 2007. In connection with the purchase, the Company assumed a loan of $7.5 million with interest at the rate of 7.455% per annum, due and payable in February 2011. Monthly payments of principal and interest in the amounts of $56,000 are due under the loan. In addition, monthly impound payments aggregating $18,000 are to be made for items such as real property taxes, insurance and capital expenditures. At maturity, the remaining balance on the loan will be $7.1 million.

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

This discussion contains forward-looking statements, which are subject to certain risks and uncertainties, including, without limitation, those described elsewhere in Item 1A of Part II of thisForm 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 thisForm 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 power semiconductors and systems and RF power semiconductors have increased while our revenues from the sale of integrated circuits have decreased slightly. The growth in power semiconductor revenues reflects increasing sales to the industrial and commercial market, the telecom market and the medical market. Sales to industrial and commercial customers have driven the growth in systems and RF power semiconductor revenues. Integrated circuit revenues decreased in light of a decline in the sale of ASICs for the consumer products market. Distribution revenues, compared to total net revenues, remained largely constant, despite the All American Semiconductor bankruptcy. Amounts spent for research and development expenses continued to be relatively flat and are expected to remain this range over the next few quarters. Selling, general and administrative expenses, exclusive of the bad debt expense for the All American Semiconductor bankruptcy, have declined, in large part due to a reduction in professional and consulting expenses.

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 49% of our revenues in the first three months of fiscal 2008 and 48% of our revenues in the first three months of fiscal 2007 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 $99,000 in the first three months of fiscal 2008 and $65,000 in the first three months of fiscal 2007.

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. Shipping and handling costs are included in cost of sales.

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 of revenues in 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 exchange for orders of an equal or greater amount. In the first three months of fiscal 2008 and 2007 approximately $217,000 and $324,000, 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 of revenues in the statement of operations. We establish the allowance based upon the historical experience and management’s estimation of future returns.

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. We receive periodic statements regarding our products held by our distributors. Our distributors had approximately $3.6 million in inventory of our products on hand at June 30, 2007. 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 believe that the analysis of these inputs enable us to make reliable estimates of future credits under the ship and debit program. This analysis requires the exercise of significant judgments. 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 of revenues in the statement of operations. If competitive pricing were to decrease sharply and unexpectedly, our estimates might 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 three months ended June 30, 2007 (in thousands):


Balance at March 31, 2007	$	237
Additions		621
Deductions		(554	)

Balance at June 30, 2007	$	304

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.

Inventories.Inventories are recorded at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market value. 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. 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. Under standard costing, abnormal expenditures are recognized as expenses in the current period versus being capitalized in inventory. The fixed production overhead is allocated to inventory based on the normal capacity of the production facilities. We review our standard costs on an as-needed basis but in any event at least once a year, and update them as appropriate to approximate actual costs.

We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. The value of our inventories is dependent on our estimate of future demand as it relates to historical sales. If our projected demand is over-estimated, we may be required to reduce the valuation of our inventories below cost. We regularly review inventory quantities on hand and record an estimated provision for excess inventory based primarily on our historical sales and expectations for future use. For example, 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. We also recognize a reserve based on known technological obsolescence, when appropriate. 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, 2007	$	18,829
Sale of excess inventory		(167	)
Scrap of excess inventory		(383	)
Additional accrual of excess inventory		1,190

Balance at June 30, 2007	$	19,469

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, 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 June 30, 2007, our lower of cost or market reserve was $723,000.

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.

Valuation of Goodwill and Intangible Assets.We value goodwill and intangible assets in accordance with Statement of Financial Accounting Standards No. (“SFAS”) 142, “Goodwill and Other Intangible Assets.”

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 one reporting unit 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 the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, we report the excess as an impairment loss. We believe the methodology we use in testing impairment of goodwill provides us with a reasonable basis in determining whether an impairment charge should be taken. To date, our goodwill has not been considered to be impaired based on the results of our analysis.

Valuation of property, plant and equipment.We regularly evaluate the recoverability of our property, plant, equipment and intangible assets in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Actual useful lives and cash flows could be different from those estimated by our management. This could have a material effect on our operating results and financial position. Reviews are regularly performed to determine whether facts and circumstances exist indicating that the carrying amount of assets may not be recoverable or that the useful life is shorter than originally estimated. We assess the recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. If assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the net book value of the assets is depreciated over the newly determined remaining useful lives.

Legal contingencies.We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. SFAS 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 June 30, 2007 of approximately $9.4 million, comprised of reserves for our litigation against International Rectifier Corporation of $6.9 million and against LoJack Corporation of $2.5 million.

Income tax.We adopted FIN 48 in the quarter ended June 30, 2007. See Note 12 in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. A valuation allowance reduces our deferred tax assets to the amount that is more likely than not to be realized. In determining the amount of the valuation allowance, we consider estimated future taxable income as well as feasible tax planning strategies in each taxing jurisdiction in which we operate. If we determine that we will not realize all or a portion of our remaining deferred tax assets, we will increase our valuation allowance with a charge to income tax expense. Conversely, if we determine that we will ultimately be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will 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.

Furthermore, computation of our tax liabilities involves examining uncertainties in the application of complex tax regulations. As a result of the implementation of FIN 48, we recognize liabilities for uncertain tax positions based on the two-step process as prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if there is sufficient available evidence to indicate if it is more likely than not that the position will be sustained on an audit, including resolution of any related appeals or litigation processes. The second step requires us to measure and determine the approximate amount of the tax benefit at the largest amount that is more than 50% likely of being realized upon ultimate settlement with the tax authorities. It is inherently difficult and requires significant judgment to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We re-examine these uncertain tax positions on a quarterly basis. This reassessment is based on various factors during the period including but not limited to, changes in worldwide tax laws and treaties, changes in facts or circumstances, effectively settled issues under audit and any new audit activity. A change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Defined benefit plans.We maintain pension plans covering certain of our employees in foreign locations. For financial reporting purposes we recognize the funded status of our defined benefit pension and post-retirement benefit plans with a corresponding adjustment to accumulated other comprehensive income, net of tax. Funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation for pension plans. These amounts are adjusted to recognize the amortized gain or losses as a part of net periodic pension cost. Net periodic pension costs are calculated based upon a number of actuarial assumptions, including a discount rate for plan obligations, assumed rate of return on pension plan assets and assumed rate of compensation increase for plan employees. Our assumptions are derived from actuarial projections and actual market data. These assumptions are based upon management’s judgment, considering known trends and uncertainties. Actual results that differ from these assumptions would impact the future expense recognition and cash funding requirements of our pension plans.

Share-based compensation.Total share-based compensation during the first quarter of fiscal 2008 was $434,000.Determining the appropriate fair value model and calculating the fair value of employee stock options and rights to purchase shares under stock purchase plans at the date of grant requires judgment. We use the Black-Scholes option pricing model to estimate the fair value of these share-based awards consistent with the provisions of SFAS 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. The assumptions for expected volatility and expected life are the two assumptions that significantly affect the grant date fair value.

We use historical volatility based on our stock price. We use the simplified calculation of expected life described in the Staff Accounting Bulletin 107 of the SEC, due to changes in the vesting terms and contractual life of current option grants compared to our historical grants. If we determined that another method used 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 longer expected lives result in an increase to share-based compensation determined at the date of grant.

In addition, SFAS 123(R) requires us to develop an estimate of the number of share-based awards that will be forfeited due to employee turnover. Quarterly changes in the estimated forfeiture rate can have a significant effect on reported share-based compensation, as the cumulative effect of adjusting the rate for expense amortization after April 1, 2006 is recognized in the period the forfeiture estimate is changed. We estimate and adjust forfeiture rates based on a quarterly review of recent forfeiture activity and expected future employee turnover. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the expense recognized in the financial statements. These adjustments affect our selling, general and administrative expenses. The effect of forfeiture adjustments in the first quarter of fiscal 2008 was insignificant. Cumulative adjustments are recorded to the extent that the related expense is recognized in the financial statements, beginning with implementation in the first quarter of fiscal 2007. Therefore, we expect the potential impact from cumulative forfeiture adjustments to increase in future periods. The expense that 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 September 2006, Financial Accounting Standards Board, of FASB, issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, or GAAP, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, FASB 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. SFAS 157 is effective for our company beginning in the first quarter of fiscal 2009. We are currently evaluating the impact of SFAS 157 to our financial position and results of operations.

SFAS 159 is effective for our company beginning in the first quarter of fiscal 2009, although earlier adoption is permitted. We are currently evaluating the impact of SFAS 159 to our financial position and results of operations.

We adopted FIN 48 as of April 1, 2007 as required. See Note 12 of Notes to Unaudited Condensed Consolidation Financial Statements for further discussion.

Results of Operations — Three Months Ended June 30, 2007 and 2006

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


	Three Months Ended June 30,
				% increase from
	2007			2006 to 2007			2006
Net revenues	$	75,901			12.0	%	$	67,741
Cost of goods sold		53,513			16.7	%		45,857

Gross profit	$	22,388			2.3	%	$	21,884


Operating expenses:
Research, development and engineering	$	5,073			-0.7	%	$	5,108
Selling, general and administrative		10,840			-10.1	%		12,056
Release of litigation provision		(4,784	)		-87.0	%		(36,827	)

Total operating expenses	$	11,129			-156.6	%	$	(19,663	)

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


	Three Months Ended June 30,
	2007			2006
	% of Net			% of Net
	Revenues			Revenues
Net revenues		100.0	%		100.0	%
Cost of goods sold		70.5	%		67.7	%

Gross profit		29.5	%		32.3	%


Operating expenses:
Research, development and engineering		6.7	%		7.5	%
Selling, general and administrative		14.3	%		17.8	%
Release of litigation provision		-6.3	%		-54.4	%

Total operating expenses		14.7	%		-29.1	%

Operating income		14.8	%		61.4	%

Other income (expense), net		0.8	%		-1.2	%

Income before income tax		15.6	%		60.2	%
Provision for income tax		6.4	%		24.2	%

Net income		9.2	%		36.0	%

Net Revenues

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

Revenues


	Three Months Ended June 30,
			% change in
			Revenues from
	2007		2006 to 2007			2006
	(000)					(000)
Power Semiconductors	$	57,194		14.1	%	$	50,142
Integrated Circuits		12,325		-5.8	%		13,079
Systems and RF Power Semiconductors		6,382		41.2	%		4,520


Total Revenues	$	75,901				$	67,741


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 June 30,
			% change in
			ASP from 2006
	2007		to 2007			2006
Power Semiconductors	$	2.14		-2.3	%	$	2.19
Integrated Circuits	$	0.69		38.0	%	$	0.50
Systems and RF Power Semiconductors	$	18.08		67.3	%	$	10.81

Units

	Three Months Ended June 30,
			% change in
			units from 2006
	2007		to 2007			2006
	(000)					(000)
Power Semiconductors		26,733		16.7	%		22,917
Integrated Circuits		17,985		-31.4	%		26,232
Systems and RF Power Semiconductors		353		-15.6	%		418

Total Units		45,071					49,567

The 12.0% increase in net revenues in the three months ended June 30, 2007 as compared to the three months ended June 30, 2006 reflects an increase in the sales of power semiconductors and systems and RF power semiconductors. The increase in the power semiconductor group included an increase of $3.5 million in the revenues from sales of rectifiers and thyristors and a $3.3 million increase in the revenues from sales of MOS products. The increase in systems and RF power semiconductors was principally due to an increase in revenues from sales of subassemblies. The decrease in revenues of integrated circuits was due to a decrease of $2.1 million in the sales of ASICs to consumer products market.

The increase in the ASP of ICs was principally due to the reduction of sales of ASICs to the consumer products market. The increase in ASPs of systems and RF power semiconductors was due to an increase in the sale of subassemblies. The decrease in the ASP of power semiconductors primarily occurred as a result of changes in the mix of products sold and the erosion of prices that is common in the semiconductor industry. Comparing the quarter ended June 30, 2006 to the quarter ended June 30, 2007, units decreased due to a decrease in the shipments of ASICs to consumer products market, partially offset by an increase in units of power semiconductors.

For the quarter ended June 30, 2007, sales to customers in the United States represented approximately 25.4% and sales to international customers represented approximately 74.6% of our net revenues. Of our international sales, approximately 55.8% were derived from sales in Europe and the Middle East, approximately 35.5% were derived from sales in the Asia Pacific region and approximately 8.7% were derived from sales in the rest of the world. By comparison, for the quarter ended June 30, 2006, sales to customers in the United States represented approximately 31.6% and sales to international customers represented approximately

68.4% of our net revenues. Of our international sales, approximately 50.9% were derived from sales in Europe and the Middle East, approximately 42.7% were derived from sales in the Asia Pacific region and approximately 6.4% were derived from sales in the rest of the world. The decrease in United States revenues as a percent of total revenues was caused by a shift by our customers to contract manufacturers in the Asia Pacific region and the overall strength in Europe and the Asia Pacific region.

In the first quarter of fiscal 2008, our revenues were reduced by allowances for sales returns, stock rotations and ship and debit. See “Critical Accounting Policies and Significant Management Estimates” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Gross Profit.

Gross profit margin decreased to 29.5% in the three months ended June 30, 2007 from 32.3% in the three months ended June 30, 2006, because of under-utilization, resulting in under-absorption of manufacturing costs, and inefficiencies in production. The increase in gross profit expressed in dollars in the three months ended June 30, 2007 as compared to the three months ended June 30, 2006 is primarily the result of the increase of revenues by 12.0%.

In the first quarter of fiscal 2008, our gross profit and gross profit margin were increased by the sale of excess inventory, which had previously been written down. See “Critical Accounting Policies and Significant Management Estimates — Inventories” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Research, Development and Engineering.

Research, development and engineering, or R&D, expenses typically consist of internal engineering efforts for product design and development. For the three months ended June 30, 2007 as compared to the three months ended June 30, 2006, R&D expenses were largely unchanged. Expressed as a percentage of revenues, our R&D expenses were 6.7% and 7.5% for the three months ended June 30, 2007 and 2006, respectively, and declined as a result of the revenue increase. Although R&D expenses may increase as we fund more development projects, we do not expect a material increase in such expenses when expressed as a percentage of revenues.

Selling, General and Administrative.

In the three months ended June 30, 2007 as compared to the three months ended June 30, 2006, selling, general and administrative expenses decreased by $1.2 million and from 17.8% to 14.3% of net revenues. The decrease in selling, general and administrative expenses resulted primarily from a reduction of $1.1 million in professional and consulting fees related to regulatory compliance.

Release of Litigation Provision.

For the quarter ended June 30, 2007, we released $4.9 million on our ongoing litigation against LoJack Corporation and accrued $83,000 of interest on the International Rectifier matter. See Note 13 of the Notes to Unaudited Condensed Consolidated Financial Statements for a description of the current status of these litigation matters.

Other Income (Expense), Net.

In the quarter ended June 30, 2007, other income, net, including interest income, net, and changes in foreign currency transactions, was $613,000, as compared to other expense, net of $844,000 in the quarter ended June 30, 2006. The other income in the 2007 period was primarily due to the recognition of $1.1 million received on an insurance claim, foreign currency translation losses of $921,000, and interest income, net of $271,000; whereas, for the comparable period of the prior fiscal year, other expense, net consisted principally of losses associated with changes in foreign currency rates.

Interest income, net, was $271,000 in the three months ended June 30, 2007 as compared to $649,000 in the three months ended June 30, 2006. Interest income, net, declined because of an increase in interest expense on additional capital lease equipment and a decrease in interest income due to lower cash balances.

Provision for Income Tax.

In the quarter ended June 30, 2007, the provision for income tax reflected an effective tax rate of 41.0%, as compared to an effective tax rate of 40.3% in the quarter ended June 30, 2006. The effective tax rate increased marginally during the June 2007 quarter from that of the June 2006 due to a one-time impact from a tax planning strategy.

We are in the process of implementing tax planning strategies in the form of migrating intellectual property rights to lower tax jurisdictions. This may cause future effective tax rates to fluctuate from year to year.

Liquidity and Capital Resources

At June 30, 2007, cash and cash equivalents of $55.5 million were 2.8% more than the $54.0 million at March 31, 2007.

Net cash provided by operating activities in the three months ended June 30, 2007 was $7.6 million, as compared to net cash used in operating activities of $4.3 million in the three months ended June 30, 2006. Net accounts receivable increased by $3.6 million, or 8.5%, from March 31, 2007 to June 30, 2007, primarily due to the timing of revenues. Our net inventories at June 30, 2007 decreased $661,000, or 0.8%, from March 31, 2007 during the quarter. Our accounts payable at June 30, 2007 increased by $582,000, or 2.9%, from accounts payable at March 31, 2007, primarily because of the timing of purchases of inventories. Accrued expenses and other liabilities increased from March 31, 2007 to June 30, 2007 by $1.3 million, or 6.6%, principally because of uninvoiced purchases of raw materials.

We used $3.5 million in net cash for investing activities during the three months ended June 30, 2007, as compared to $3.1 million during the three months ended June 30, 2006. Our uses of cash for investing activities principally reflected an increase in strategic long term investment of $2.0 million and capital expenditure of $1.5 million. During the three months ended June 30, 2006, we spent $3.0 million on capital expenditures.

For the three months ended June 30, 2007, net cash used in financing activities was $2.9 million as compared to net cash used in financing activities of $9,000 in the three months ended June 30, 2006. During the three months ended June 30, 2007, the cash was used principally to purchase treasury stock. In the June 2006 period, the cash was used for repayment of lease and loan obligations, offset by proceeds from exercises of stock options.

Another potential source of liquidity is available borrowings under existing lines of credit. At June 30, 2007, we had available credit aggregating $3.4 million.

At June 30, 2007, our debt, consisting of capital lease obligations and loans payable, was $22.0 million, representing 39.6% of our cash and cash equivalents and 11.9% of our stockholders equity.

We are obligated on a €10.0 million, or a $12.0 million, loan. The loan has a term of 15 years and bears a variable interest rate, dependent upon the current Euribor rate and the calculation of a ratio of indebtedness to cash flow for the German subsidiary. Each fiscal quarter during the first five years of the loan, a principal payment of €167,000, or about $225,000, 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 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 June 30, 2007, 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.

On August 2, 2007, IXYS completed the purchase of a building in Milpitas, California, to be used as its corporate offices and facility for operations, for $7.5 million. In connection with the purchase, the Company assumed a loan, secured by the building, of $7.5 million. The loan bears interest at rate of 7.455% per annum and is due and payable in February 2011. Monthly payments of principal and interest of $56,000 are due under the loan. In addition, monthly impound payments aggregating $18,000 are to be made for items such as real property taxes, insurance and capital expenditures. At maturity, the remaining balance on the loan will be approximately $7.1 million.

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 a 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 damages of at least $6.9 million awarded to International Rectifier and the potential loss of $2.5 million 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, 2007.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act) as of June 30, 2007. This evaluation included various processes that were carried out in an effort to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified by the SEC. In this evaluation, the Chief Executive Officer and the Chief Financial Officer considered whether our disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. This evaluation also included consideration of certain aspects of our internal controls and procedures for the preparation of our financial statements. Our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2007, our disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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, errors 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 13 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 Annual Report on Form 10-K, 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 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, by implication, after September 30, 2005 and interest. 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 are appealing 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. In January 2007, the Federal Circuit Court declined to issue a stay of the damage award and injunction. The judgment therefore became payable and the injunction enforceable. 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 accrual of $6.9 million is sufficient for any actual losses that may be incurred as a result of this litigation.

Additionally, in the future, we could be accused of infringing the intellectual property rights of 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, 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 an 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 Superior Court ruled against LoJack’s motion. LoJack and we each appealed the judgment of the Superior Court. On April 13, 2007, the parties’ appeals were argued before the Appeals Court of Massachusetts.

On July 23, 2007, the Appeals Court ruled that we owed LoJack $805,000 plus simple interest at the rate of 12% per annum from April 10, 2003, which aggregates to $1.2 million at June 30, 2007. LoJack has announced that it will file to appeal the ruling of the Appeals Court to the Supreme Judicial Court, the highest court in the Commonwealth of Massachusetts. The Supreme Judicial Court may, but is not obligated to, take the appeal. The enforcement of the judgment will be stayed pending appeal without the necessity of filing any bond. Payment of an award, is not required prior to at the conclusion of this process. The total reserves as of June 30, 2007 are $2.5 million.

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 accrual of $2.5 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 2007, our product sales by region were approximately 27.5% in the United States, approximately 37.8% in Europe and the Middle East, approximately 30.0% in Asia Pacific and approximately 4.7% 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 Pacific. 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 primarily 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 adverse 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.

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 goals.

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

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

We 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 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 2007, 37.8% 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 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 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 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 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, 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. Many of our competitors have greater financial, technical, marketing and management resources than we have. Some of these competitors may be able to sell their products at prices below which it would be profitable for us to sell our products or benefit from established customer relationships that provide them with a competitive advantage. We cannot assure you that we will be able to compete successfully in the future against existing or new competitors or that our operating results will not be adversely affected by increased price competition.

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

A substantial majority of our products are sold to distributors or 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. For example, All American Semiconductor, Inc., one of our distributors, filed for bankruptcy in April 2007.

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.

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

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

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

Presently, because of past acquisitions, we are operating a number of different information systems that are not integrated. In part because of this, we use spreadsheets, which are prepared by individuals rather than automated systems, in our accounting. Consequently, in our accounting, we perform many manual reconciliations and other manual steps, which result in a high risk of errors. 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 dependence on subcontractors to assemble and test our products subjects us to a number of risks, including an inadequate supply of products and higher materials costs.

We depend on subcontractors for the assembly and testing of our products. The substantial majority of our products are assembled by 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 experience 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. Moreover, in engaging alternative subcontractors in exigent circumstances, our production costs could increase markedly.

We depend on a limited number of suppliers for our substrates, most of whom we do not have long-term agreements with.

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

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 12% of our net revenues in fiscal 2007 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.

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 12% of our revenues in fiscal 2007 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.

If our goodwill or long-lived assets become impaired, we may be required to record a significant charge to earnings.

Under generally accepted accounting principles, we review our long-lived 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 long-lived 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 long-lived assets is determined resulting in an impact on our results of operations.

We estimate tax liabilities, the final determination of which is subject to review by domestic and international taxation authorities.

We are subject to income taxes and other taxes in both the United States and the foreign jurisdictions in which we currently operate or have historically operated. We are also subject to review and audit by both domestic and foreign taxation authorities. The determination of our worldwide provision for income taxes and current and deferred tax assets and liabilities requires judgment and estimation. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the tax amounts recorded in our consolidated financial statements and may materially affect our income tax provision, net income or cash flows in the period or periods for which such determination is made.

We are exposed to various risks related to the regulatory environment.

We are subject to various risks related to: (1) new, different, inconsistent or even conflicting laws, rules and regulations that may be enacted by legislative bodies and/or regulatory agencies in the countries in which we operate; (2) disagreements or disputes between

national or regional regulatory agencies; and (3) the interpretation and application of laws, rules and regulations. If we are found by a court or regulatory agency not to be in compliance with applicable laws, rules or regulations, our business, financial condition and results of operations could be materially and adversely affected.

We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include in our Annual Report on Form 10-K a report of management on the effectiveness of our internal controls over financial reporting and an attestation by our independent registered public accounting firm to the adequacy of management’s assessment of our internal control. Ongoing compliance with these requirements is complex, costly and time-consuming. If (1) we fail to maintain effective internal control over financial reporting; (2) our management does not timely assess the adequacy of such internal control; or (3) our independent registered public accounting firm does not timely attest to the evaluation, we could be subject to regulatory sanctions and the public’s perception of our company may decline.

We invest in companies for strategic reasons and may not realize a return on our investments.

We make investments in companies to further our strategic objectives and support our key business initiatives. Such investments include investments in equity securities of public companies and investments in non-marketable equity securities of private companies, which range from early-stage companies that are often still defining their strategic direction to more mature companies whose products or technologies may directly support a product or initiative. The success of these companies is dependent on product development, market acceptance, operational efficiency, and other key business success factors. The private companies in which we invest may fail because they may not be able to secure additional funding, obtain favorable investment terms for future financings, or take advantage of liquidity events such as initial public offerings, mergers, and private sales. If any of these private companies fail, we could lose all or part of our investment in that company. If we determine that an other-than-temporary decline in the fair value exists for the equity securities of the public and private companies in which we invest, we write down the investment to its fair value and recognize the related write-down as an investment loss. Furthermore, when the strategic objectives of an investment have been achieved, or if the investment or business diverges from our strategic objectives, we may decide to dispose of the investment even at a loss. Our investments in non-marketable equity securities of private companies are not liquid, and we may not be able to dispose of these investments on favorable terms or at all. The occurrence of any of these events could negatively affect our results of operations.

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 occur, 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.

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

Nathan Zommer, Ph.D., our President and Chief Executive Officer, beneficially owned, as of July 27, 2007, 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.

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.

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
April 1, 2007 – April 30, 2007		—		(1	)		—		1,936,376	(2)
May 1, 2007 – May 31, 2007		59,200		9.31			59,200		1,877,176
June 1, 2007 – June 30, 2007		180,000		9.53			180,000		1,697,176
Total		239,200		9.48			239,200


(1)		Not applicable

(2)		The current stock purchase program was approved on February 27, 2007 and will expire on June 15, 2008. The purchase of up to 2,000,000 shares of common stock was approved.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

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

SIGNATURES

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


		IXYS CORPORATION

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

Date: August 7, 2007

EXHIBIT INDEX


Exhibit
No.		Description

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

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

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


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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Good

IXYS (IXYS) Inactive 10-Q2008 Q1 Quarterly report

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