**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

| **ý**                                       |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|--------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                             |   |                                                                                          |
| **For  the fiscal year ended December 31, 2003** |
|                                             |
| **OR**                                           |
|                                             |   |                                                                                          |
| **o**                                            |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number 001-16047**

 

**ADVANCED POWER TECHNOLOGY, INC.**

(Exact name ofregistrant as specified in its charter)

* *

| **Delaware**                                                          |   | **93-0875072**                           |
|-----------------------------------------------------------------------|--------|------------------------------------------|
|  (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |

 

**405SW Columbia Street, Bend, Oregon 97702**

(Address ofprincipal executive offices and zip code)

 

**(541)382-8028**

(Registrant’stelephone number)

 

Securitiesregistered pursuant to Section 12(b) of the Act:

**None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**CommonStock, par value $.01 per share**

 

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Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to the filing requirements for the past90 days. Yes ý  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not becontained to the best of the registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor in any amendment to this Form 10-K. o

 

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

 

The aggregate market value of the voting stock held by non-affiliatesof the Registrant as of June 30, 2003, the last trade date for the end of ourmost recent fiscal second quarter, was $47 million based upon thecomposite closing price of the Registrant’s Common Stock on the Nasdaq NationalMarket System on that date.

 

The number of shares of the Registrant’s Common Stock outstanding as ofMarch 1, 2004 was 10,509,632 shares.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the registrant’s proxy statement in connection with its2004 Annual Meeting of Shareholders are incorporated by reference intoPart III.

 

 

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**ADVANCEDPOWER TECHNOLOGY, INC.**

**FORM10-K**

**TABLEOF CONTENTS**

 

 
| **Part I**   |                                                                                        |   |
|--------------|---------------------------------------------------------------------------------------------|--------|
| Item 1.      | Business                                                                                    |   |
| Item 2.      | Properties                                                                                  |   |
| Item 3.      | Legal Proceedings                                                                           |   |
| Item  4.     | Submission  of Matters to a Vote of Security Holders                                        |   |
| **Part II**  |                                                                                        |   |
| Item  5.     | Market  for Registrant’s Common Equity and Related Stockholder Matters                 |   |
| Item 6.      | Selected Financial  Data                                                                    |   |
| Item  7.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item  7A.    | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |
| Item  8.     | Financial  Statements and Supplementary Data                                                |   |
| Item  9.     | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure       |   |
| Item 9a.     | Controls and  Procedures                                                                    |   |
| **Part III** |                                                                                        |   |
| Item  10.    | Directors  and Executive Officers of the Registrant                                         |   |
| Item 11.     | Executive Compensation                                                                      |   |
| Item  12.    | Security  Ownership of Certain Beneficial Owners and Management                             |   |
| Item  13.    | Certain  Relationships and Related Transactions                                             |   |
| Item  14.    | Principal  Accountant Fees and Services                                                     |   |
| **Part IV**  |                                                                                        |   |
| Item 15.     | Exhibits, Financial  Statement Schedules, and Reports on Form 8-K                           |   |
|         | Signatures                                                                                  |   |
|         | Exhibits                                                                                    |   |

 

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**PART I**

 

**ITEM 1.BUSINESS.**

 

*Exceptas expressly indicated or unless the context otherwise requires, the “Company”,“APT”, “we”, “our” or “us” means Advanced Power Technology, Inc., a Delawarecorporation, and its subsidiaries. Additional information about our Company, including access to periodicand current reports are available free of charge on our website as soon asreasonably practicable after such material is electronically filed with, or furnishedto, the SEC.  Our website address iswww.advancedpower.com*

 

Advanced Power Technology Inc. is a leading designer, manufacturer andmarketer of high-performance power semiconductors and modules for RadioFrequency (RF), Linear, and Switchmode applications. Power semiconductorsmanage and regulate electrical power by converting electricity into a formrequired by electrical and electronic products. Our power semiconductorsincrease system efficiency, permit the design of more compact end products andimprove features and functionality. We are primarily focused on the high power,high frequency segment of the power semiconductor market. High power refers tothe ability to dissipate above one kilowatt, and high frequency refers to theability to switch on and off at rates above 100 kilohertz. In addition wecontinue to strengthen our portfolio of RF products that operate at frequenciesranging from 1 megahertz to 100 megahertz. RF generally refers to the abilityto operate at frequencies above 1 megahertz. We sell our products primarily inNorth America, Europe, and Asia, through a network of independent salesrepresentatives and distributors.

 

The acquisition of GHz Technology, Inc. and the business ofMicrosemi RF Products, Inc. in 2002 helped us to further penetrate RFmarkets.  We believe that theseacquisitions serve to position APT as an emerging, dominant supplier in bipolarRF power transistors for avionics, radar and non-cellular communicationsapplications operating at frequency ranges from 1 megahertz to multiplegigahertz and add valuable RF technology and substantial RF engineering,manufacturing and marketing capability to the Company. These acquisitions arepart of the Company’s ongoing strategy to expand its product and technologyportfolio in the RF power arena through both internal development andacquisitions.

 

**Industryand Market Overview**

 

We believe there are two significant factors driving the general demandfor high performance power semiconductors:

 

•                  Rapidproliferation of sophisticated electronics; and

 

•                  Increasingneed for higher power and more precisely regulated power quality in electronicequipment.

 

The use of power semiconductors is becoming more pervasive inelectronic devices to convert and control electricity that powers thesedevices. As a result, the power semiconductor market is a large and growingsegment of the semiconductor industry. The proliferation of consumer electronicdevices, wireless communication, and mobile computing is driving demand for newgenerations of power semiconductors that are smaller, lighter and moreefficient. At the same time, we believe applications in the areas of medicaland industrial products will create additional demand for more powerful andreliable power semiconductors. These applications include defibrillators,medical imaging, arc welding, and projection systems.

 

Power semiconductors address the growing demand for energy efficiencyand are used to provide the precisely regulated power required by sophisticatedelectronic products and equipment. The more sophisticated the end product, thegreater its need for specially formatted, finely regulated power. Powersemiconductors are typically used to:

 

•                  convertor “rectify” alternating current, or AC, power delivered by electricalutilities to direct current, or DC, power which is required by most electronicequipment;

 

•                  convertDC power at a certain voltage level to DC power at a different voltage level tomeet the specific voltage requirement of an application

 

•                  invertDC power to high frequency AC power to permit the processing of power usingsubstantially smaller electronic components; or

 

•                  rectifyhigh frequency AC power from switch-mode power supplies to meet the specific DCvoltage required by an application.

 

The demand for power semiconductors is also expanding as a result ofthe proliferation of new technologies that require electricity and theincreasing use of electrical processes and automation in industry to increaseproductivity. Sophisticated electronics are

 

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increasing theirshare of total electrical consumption. The increasing complexity and powerrequirements of electronic products, and the continued increase in electronicfeatures in communications equipment, consumer electronics and industrialprocesses all require more efficient power management.

 

RF and microwave semiconductors are typically used as electronicswitches or to amplify electrical signals. The Company’s RF technology allowsit to serve a wide range of RF applications, such as radar, avionics, medicalimaging, semiconductor capital equipment, and non-cellular communicationssystems.

 

**MarketSize and Trends**

 

The principal end-user markets for our products are communications anddata processing, semiconductor capital equipment, industrial/medical, andmilitary/aerospace. The following data has been gathered from published sourcesthat were not specifically prepared or approved for use in this report.Statistics published by the Semiconductor Industry Association (SIA) report inNovember of 2003 forecasted that the worldwide market for all powersemiconductors was projected to increase by 8% in 2003 to $9.0 billionfrom $8.3 billion in 2002.  Theprojected market is $11.6 billion in 2006, representing a compound annualgrowth rate of 9% from 2003. Based on data from the SIA, the worldwide marketsin which we participate (radio frequency, or RF transistors, Power MOSFETs,Insulated Gate Bipolar Transistors, or IGBTs and high power rectifiers),increased by approximately 11% in 2003 to $6.4 billion compared to $5.8 billionin 2002.  The SIA forecast projects thatthe worldwide markets in which we participate will be $8.4 billion in 2006,representing a compound growth rate of 9% from 2003.  APT’s product lines serve a collection of niche markets whichmake up a subset of the overall power semiconductor markets listed above,focusing on high power and high frequency applications.  Industry statistics related to APT’sspecific markets are not generally available and cannot be reasonablyestimated.

 

The primary markets we serve are characterized by rapid technologicaldevelopment and increasing complexity. In addition to more overall power, webelieve these markets will require more reliable and precisely regulated formsof power. The following key trends are significant factors driving the demandfor high power, high frequency semiconductors in our primary markets:

 

•                  Convergenceof Voice, Video and Data Transmission and Proliferation of Wireless Systems. Asvoice, video and data converge into one digital stream, the power demands oftraditional and emerging transmission systems are changing. Service providersand equipment manufacturers are looking to modify and supplement existinginfrastructures to address these new demands for data transmission, datastorage, and high power servers. Power semiconductors with higher power levelsand faster switching speeds give providers and manufacturers much moreflexibility in addressing these demands, in particular in building base stationsfor wireless applications and servers.

 

•                  Demandfor Semiconductor Capital Equipment. According to the SIA, the worldwidesemiconductor market, which grew by 16% in 2003, is forecasted to grow from$163 billion in 2003 to $220 billion in 2006, representing a compoundannual growth rate of 10%. According to Dataquest research, sales ofsemiconductor capital equipment to produce these semiconductor devices areexpected to grow by 88% from 2003 to 2005, followed by a 14% decline in 2006.  This represents an average growth rate of17% from 2003 through 2006. As semiconductor capital equipment becomes moresophisticated in areas such as thin film deposition and plasma etching, thereis an increasing need for high power, high frequency semiconductors. However,the semiconductor industry has from time to time experienced depressed businessconditions and has rapidly changed from periods of strong demand to periods ofweak demand.

 

•                  Emergenceof New Applications for High Power, High Frequency Semiconductors. Continuingdemands for higher power, higher voltages and higher frequencies are expandingthe range of applications for which sophisticated power semiconductor productsare suitable. For example, the use of RF power semiconductors presentsopportunities to enter new markets. The same power delivery systems used forplasma generation in semiconductor processing equipment are now finding newapplications in the industrial market (such as flat panel displays, optical andglass coatings and tool-hard coatings) and the data storage market (such asdata recording heads as well as hard and compact disc technologies). Inaddition, RF MOSFETs are being used in magnetic resonance imaging equipment inplace of vacuum tubes, enhancing the performance and reducing the size of thosesystems.  In addition, the acquisitionswe made in 2002 provide us with the products and technology to sell intoadditional applications such as radar, avionics and non-cellularcommunications.

 

# **Products**

 

Our semiconductor products combine innovative proprietary and patentedsemiconductor technology, designs, processes and packaging solutions that areoptimized for our customers’ applications. They can be broadly categorized intotwo categories: Switching Power Semiconductors and RF and MicrowaveSemiconductors.

 

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Switching PowerSemiconductors are typically used as electronic switches in power supplies forhighly efficient and precise control of electrical power. These power suppliesare often referred to as “switching” or “switch-mode” power supplies and arethe dominant type of power supply used for high power applications. Theswitches in most of these power supplies turn “on” and “off” from 20,000 to1,000,000 times per second or operate in the 20 kHz to 1 MHz frequency range.

 

RF and MicrowaveSemiconductors are typically used as electronic switches or to amplifyelectrical signals. These semiconductor devices are generally used in RFamplifiers that operate at frequencies ranging from 1 million to severalbillion cycles per second (1 MHz to several GHz). These devices range from lowto very high power over this frequency range.

 

Switching Power Semiconductors are used in virtuallyall of our end markets and are composed of the following product types:

 

•                  DiscretePower Semiconductors - power transistors (MOSFETs, IGBTs) and diodes (FastRecovery Epitaxial Diodes or FREDs and Schottky Barrier Diodes).  These transistors are most often used as the“switches” in “switching” power supplies. Based on our original coreproprietary and patented technology, our MOSFET products include Power MOS IV®introduced in 1989, Power MOS V® introduced in 1999, Power MOS VI® introducedin 1999 and Power MOS 7® introduced in 2000. Each succeeding generation offersperformance improvements over the preceding generation allowing us to continueto provide leading edge products to our customers. Many of our IGBTs are basedon our core MOSFET technologies and are used as lower cost alternatives toMOSFETs in many applications. The diodes are a complimentary product line tothe transistors since most applications require both transistors and diodes inthe design. The diodes control current flow in circuits by allowing current topass in one direction but not in the other. The transistor performance is oftenaffected by the performance of the diode in the power circuit and our diodesare optimized to take maximum advantage of our advanced transistortechnologies. Our discrete power semiconductors are optimized for high voltageapplications between 100 and 1400 volts. Our discrete power semiconductors arepackaged either in plastic molded packages or hermetically sealed metal cans.Our plastic packaged products represent the majority of our unit volumes. Ourhermetic products are typically used in high reliability applications, servingthe military and aerospace markets, although there is a trend in these marketstoward using plastic products that are more cost effective. As a result, someof our plastic products have been successfully used in aerospace applicationsincluding the International Space Station.

 

•                  PowerModules provide integrated solutions that combine many single componentstogether to provide a power function or power supply sub-system. These cover awide range of integration and complexity, from relatively simple functionsintegrating less than ten components to fully integrated functions integratingmore than 500 components in a single power module. These can be the preferredchoice over discrete power semiconductors because of one or all of thefollowing reasons: improved performance, reduced size, reduced overall cost,limited engineering resources available to our customers, reduced time tomarket, or as barriers to competition. The Company offers modules that arecustomer dedicated custom designs for a specific application. They are oftenreferred to as Application Specific Power Modules or ASPM®. In addition werecently introduced a line of standard modules that offer industry standardpackage outlines and footprints, and incorporate common circuit configuration.We believe the line of standard modules will allow us to expand our overallmarket penetration. We produce most of the power semiconductors used in ourpower modules. However, we do purchase specific components from other partieswhich complement our overall designs or which provide capabilities outside oursemiconductor product range. Many of our module customers also buy our discretepower semiconductors.

 

RF and Microwave Semiconductors are used in virtually all of our endmarkets and share some of the same customer base as our Switching PowerSemiconductors. In 1996 we introduced our first RF MOSFETs for applicationswith frequencies up to 100 megahertz. These were derived from our proprietaryMOSFET technology used for switching power applications. The technology isreferred to as VDMOS which stands for vertically diffused MOSFET. Verticalrefers to current flowing vertically through the chip. These RF transistorsprovided higher operating voltages (up to 250 volts) than any RF transistorsavailable in the market. This higher voltage offered many advantages for highpower applications such as plasma generation for semiconductor capitalequipment and medical imaging equipment. In 2002 Advanced Power Technologyacquired two leading suppliers of silicon based radio frequency (RF) powertransistors - GHz Technology, Inc. and the business of Microsemi RF Products,Inc. a wholly owned subsidiary of Microsemi Corporation. APT is now asignificant provider of RF and microwave silicon based transistors withapproximately half of Company revenues provided by these products. We offer RFproducts which serve our customer requirements for both previous generationdesign production as well as new designs. Our technology base to includes LDMOS(lateral diffused MOSFET where current flows laterally along the surface of thechip) and BJT (Bipolar Junction Transistors). All RF and microwave products arebased on silicon and span the frequency range from 1MHz to several GHz withoperating voltages from as low as a few volts to as high as 250V.  With these acquisitions we are positioned toserve applications which include communication radios, non-cellular basestations, broadcast, radar, avionics, and military communications.

 

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**Researchand Development**

 

Our research and development efforts focus on improving and developingnew core technologies and the products derived from them. For both SwitchingPower Semiconductors and RF and Microwave Semiconductors our existing andplanned future technologies are designed to allow our customers to mix andmatch technologies to provide the optimum product solutions for theirapplications. For switching applications this is the choice between MOSFET andIGBT transistors, while for RF applications this is the choice between BJT andnewer MOSFET technologies.

 

Our research and development engineers work closely with our productand manufacturing engineers to continually improve our products and our coretechnology. We focus on internal improvements in our technology (such asreducing feature size) to improve the efficiency and speed of our products, andon incorporating outside technological advances, for example in packagingprocesses and materials, to ensure that our products meet our high performancestandards. We also spend significant engineering time modifying our coreproducts in order to address specific customers or market needs. Our discretesemiconductor research and development activities take place at our Bend,Oregon facility. Power Module research and development activity takes place atour Bordeaux, France facility. Our RF research and development activity takesplace at our Bend, Oregon, Santa Clara, California, and Montgomeryville,Pennsylvania facilities.

 

**Customers**

 

In 2003, we sold our products to over 2,000 customers worldwide througha network of independent sales representatives and distributors, managed by oursales staff. We sell our products primarily in North America, Europe, and Asia.In 2003, approximately 65% of our revenues were from customers in the UnitedStates, 19% from customers in Europe, and 16% from customers in Asia and therest of the world.

 

We sell our products both to original equipment manufacturers, or OEMs,and through distributors. Revenues to our five largest customers accounted for38%, 37%, and 38%, of our total revenues in 2003, 2002, and 2001, respectively.Advanced Energy Industries, Inc. accounted for approximately 9.3% of ourrevenues in 2003,  9.5% of our revenuesin 2002, and 10.8% of our revenues in 2001. Richardson Electronics Ltd.accounted for 15.8% of our revenues in 2003, 12.0% of our revenues in 2002 andaccounted for less than 10% of our revenues in 2001.  No other customer exceeded 10% of our revenues during theseperiods. We provide our customers a 12-month repair or replacement warranty.

 

**Sales,Marketing and Distribution**

 

The principal end-user markets for our products are communications anddata processing, semiconductor capital equipment, industrial/medical, andmilitary/aerospace. Our largest volume OEM customers include Advanced EnergyIndustries, Inc., MKS Instruments, Inc., Raytheon Systems, RockwellCollins and Fronius International GmBH. Power semiconductors are typicallycritical to the performance of our customers’ end products, and we thereforework closely with a number of our large OEM customers in the design phase oftheir products to ensure that we can meet their performance requirements. Onceour products have been designed into end products, they tend to be used throughthe lifecycle of these end products.

 

Our internal sales organization consists of two worldwide salesdirectors, one each for Power Products and RF products and four regional salesmanagers, who all work under the supervision of the vice president of sales.There is one sales manager for each of Europe and Asia and two for NorthAmerica. Each regional sales manager directs the sales efforts of theindependent manufacturers’ representatives and independent distributors in hisor her region. We currently have 37 independent manufacturers’ representatives,whose primary focus is developing and servicing major OEM accounts. In additionwe have a vice president in charge of worldwide distribution sales.

 

We use independent distributors to develop and service our smallervolume accounts worldwide. We have six national distributors in North America,and 18 single country distributors who cover Western Europe and Asia. In 1998,we entered into a strategic agreement with Richardson Electronics Ltd., aworldwide distributor, under which they stock a broad selection of our productson a worldwide basis. Currently, Richardson is our leading distributor based onrevenues. In 2003, we entered into a similar strategic agreement with FutureElectronics as a worldwide distributor. These arrangements have enhanced ourability to meet the needs of our smaller volume customers and permittedincreased revenues to large manufacturing customers by freeing up sales andsupport resources. Distributors can return up to 5% of the dollar value ofproducts purchased during the prior six months upon 30 days notice. Weclosely monitor inventory levels at our key distributors on a monthly basis.

 

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Our application engineering, product engineering and product marketingorganizations provide technical support for the sales force. We employ 29engineers in these organizations, as well as support staff. Customer servicefor all of our accounts is handled by our customer service organizations inBend, Oregon, Santa Clara, California, Montgomeryville, Pennsylvania andBordeaux, France. Our website gives our customers access to information aboutus and our products, enables them to request quotations or technical assistanceand provides links to our local sales channels worldwide.

 

**Manufacturingand Facilities**

 

**RF and Microwave Semiconductors:**

 

Wafer fabrication for our RF and Microwave semiconductor products isperformed in our internal wafer fabrication sites located in Bend, Oregon,Santa Clara, California and Montgomeryville, Pennsylvania. Package assembly andtest of these products is performed in our own domestic facilities located inSanta Clara, California and Montgomeryville, Pennsylvania, in addition tosubcontractors in Mexico and Malaysia. Over time, we plan to move more assemblyand test of commercial communication products to our subcontractor in Malaysia,which we expect will reduce our manufacturing costs. Manufacturing of our militaryand aerospace products for avionics and radar applications, where state of theart RF performance and repeatability are critical, will continue in SantaClara, California at our automated assembly and test line. During 2003 we beganthe process to consolidate the silicon manufacturing currently performed inMontgomeryville, Pennsylvania to our Bend Oregon facility in order to reduceour overall wafer fabrication production costs. We expect to complete thetransfer in 2004.

 

**Switching Power Semiconductors:**

 

The wafer fabrication for our switching power semiconductor products isperformed in our internal wafer fabrication site located in Bend, Oregonfacility and by our manufacturing partners, Infineon Technologies in Austriaand Episil Technologies in Taiwan under wafer foundry agreements. We use twosubcontractors in the Philippines, Team Pacific and PSI Technologies to packageand test our plastic discrete products under subcontract agreements. Wemanufacture and assemble all of our discrete Hermetic packages in our facilitylocated in Bend. Our Power Modules are manufactured at our own facilities inBordeaux, France and Bend, Oregon as well as on a captive manufacturing linelocated at one of our subcontractor’s facilities in the Philippines. The decisionof where to manufacture our Power Modules is based on the complexity ofthe product, the geographic location of the customer, and other factors. During2004 we will transfer more assembly and test manufacturing of our Power Modulescurrently manufactured in both our Bend and Bordeaux facilities to our captiveline in the Philippines, which we expect to result in lower production costs.

 

Our current manufacturing strategy is to expand our use of externalsubcontractors to provide for the manufacturing needs to support our growth. Weselected Infineon Technologies as our foundry partner for its ability toprocess more cost effective large diameter wafers in its state-of-the-artmanufacturing facility and for their familiarity with power semiconductors in general.Our agreement with Infineon extends indefinitely and requires a two year noticeof termination. In addition, in 2001, in order to provide for additionalcapacity and capability for wafer fabrication we entered into a foundryagreement with a foundry located in Taiwan, Episil Technologies. Episil, a“pure-play” foundry service provider, offers cost effective state-of-the-artmanufacturing services as well as silicon starting material for our products,while being located in close proximity to our subcontract assembly and testpartners and our expanding customer base in Asia. This close proximity providesfor reduced cycle times and improved customer service.

 

During 2003, equipment utilization at our internal wafer fabricationfacility in Bend was approximately one third. The Company implemented twopermanent reductions in force during 2001 and 2002. As a result of thisdownsizing the Company’s internal wafer fabrication facility has been staffedto support technologies not conducive to outside foundries, custom proprietaryproducts, quick turns, and research and development efforts. The Company plansto predominantly rely on cost-effective wafer processing subcontractors, knownas foundries, to support future growth.

 

We have agreements with Team Pacific and PSI Technologies,subcontractors in the Philippines for assembly and testing of most of ourplastic encapsulated discrete products. Our agreements extend through January26, 2006 and December 31, 2004 with Team Pacific and PSI Technologies, respectively.Our subcontractors currently electrically test the majority of the productsthat they manufacture for us. During 2003 we set up a permanent finished goodswarehouse in Manila where the product from our subcontractors is collected andshipped directly to our customers. This substantially reduced the amount ofproduct having to be returned to our Bend facility prior to shipment tocustomers resulting in lower costs and faster cycle times.

 

Our manufacturing processes emphasize quality and reliability, andinvolve testing at various stages of the manufacturing process. We test 100% ofour products. Our Bend and Santa Clara facilities are certified toIS0-9001-2000 standards and to U.S. military specifications.

 

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**Competition**

 

We encounter varying degrees of competition for our products, dependingon the nature of the product and the particular market served. Generally, thepower semiconductor industry is highly competitive and subject to priceerosion.  Many of our competitors arelarger companies with greater financial resources. There are a number ofcompanies that manufacture products that compete directly with our products.Our principal competitors include Fairchild Semiconductor, InternationalRectifier, IXYS, MA/Com, Motorola, Philips and ST Microelectronics.

 

We believe that the primary elements of competition in our markets areproduct features and performance, quality, reliability, technical support,breadth of product line, competitive pricing and customer service and support.We believe that our proprietary design makes our products more efficient andallows them to operate at higher powers and frequencies than those of ourcompetitors, allowing us to compete effectively in our markets.

 

**IntellectualProperty Matters**

 

We have received 18 U.S. patents and 25 foreign patents and haveapplications pending for 14 additional U.S. and foreign patents on differentaspects of our core technology. We rely on these patents, trade secret andother intellectual property laws, as well as confidentiality and intellectualproperty assignment agreements with our employees to protect our proprietaryrights. We regard certain of our processes, information and knowledge that wehave developed and use to design and manufacture our products as proprietary.We have also registered trademarks for Power MOS IV®, Power MOS V®, Power MOSVI®, Power MOS 7®, and ASPM®.

 

We have licensed portions of our intellectual property forcommercialization in certain foreign markets. In 1990, we entered into twonon-exclusive, non-transferable licenses and technology transfer agreements forthe manufacture of our products in Japan. In 1991, we entered into a similararrangement with a manufacturer in the United Kingdom for sales in Europe only.Each of these agreements resulted in one-time payments to us and entitles us tocertain royalties over the life of the licenses. To date, on-going royaltiesfrom these licensing arrangements have not been material.

 

**Employees**

 

At December 31, 2003, we had 276 employees. Of these, 146 were atour facilities in Bend, Oregon, 35 were at our facility in Bordeaux, France, 59at our facility in Santa Clara, California, 36 at our facility inMontgomeryville, Pennsylvania and one was located in Boston, Massachusetts. Our continued success depends heavily onour ability to attract and retain qualified personnel. We consider ourrelations with our employees to be good. None of our employees are representedby a union.

 

**EnvironmentalRegulation**

 

While we believe we have the environmental permits necessary to conductour business and that our operations conform to present environmentalregulations, increased public attention has been focused on the environmentalimpact of semiconductor operations. In the conduct of our manufacturingoperations, we have handled and do handle materials that are consideredhazardous, toxic or volatile under federal, state and local laws; therefore, weare subject to regulations related to the use, storage, discharge and disposalof materials. The risk of accidental release of such materials cannot becompletely eliminated, and if such a release occurs, we could be heldfinancially responsible for the clean up or other consequences of the release.Along with the rest of the semiconductor industry, we are subject to variableinterpretations and governmental priorities concerning environmental laws andregulations. Environmental statutes have been interpreted to provide for jointand several liability and strict liability regardless of actual fault. We maybe required to incur costs to comply with current or future environmental lawsor regulations, and our operations, business or financial condition could beadversely affected by such requirements.

 

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**ITEM 2.PROPERTIES.**

 

We lease a 41,000 square foot building in Bend, Oregonwhere our internal wafer fab is located, as well as our engineering andresearch and development organization. We manufacture four-inch wafers in thisfacility. We lease an 18,000 square foot building in Bend, Oregon that housessome of our administrative functions, as well as some assembly, testing andshipping, and 4,125 square feet in an additional building in Bend, which housesadditional administrative functions. We lease a 10,250 square foot facility inBordeaux, France that houses our ASPM® manufacturing, shipping and warehousingfunctions, as well as the administrative and product development staff for ourEuropean operation. During 2003, APT renewed leases for the 18,000 square footand 4,125 square foot facilities in Bend, Oregon for a total commitment of $1.4million over the five year renewal periods.

 

In connection with our acquisition of GHzTechnology, Inc. in January 2002, we assumed leases for a 9,850square foot building for semiconductor manufacturing, shipping and warehousing,and research and development, and a 5,000 square foot building foradministrative functions. Both buildings are located in Santa Clara,California. In November of 2003, APT purchased the 5,000 square foot buildingfor approximately $1.3 million out of current available cash andavailable-for-sale securities.  Asannounced on November 6, 2003, the building purchase was a restructuring actionwe undertook for the purpose of reducing rent expense through the purchase andsubsequent resale of the building. The buyout reduced our operating leasecommitments by approximately $530,000 over 2004 and 2005. The building isreported as an asset held for sale and is actively marketed for sale as APT nolonger requires the space. In accordance with SFAS 144, an asset held for saleis carried at estimated fair value. As such, APT recorded a write down from thepurchase price paid for the building in the fourth quarter of 2003 ofapproximately $350,000.

 

In connection with ouracquisition in May 2002 of the product lines and certain assets of Microsemi RFProducts, Inc, a wholly owned subsidiary of Microsemi Corporation, we purchaseda 20,600 square foot building in Montgomeryville, Pennsylvania.  The facility houses semiconductormanufacturing, shipping, warehousing, research and development, andadministrative functions for the operation.

 

**ITEM3. LEGAL PROCEEDINGS.**

 

From time to time the Company is involved in various legal matters thatarise out of the ordinary conduct of our business, including those related tolitigation over intellectual property rights, commercial transactions,contracts, product liability, environmental, safety and health, and employmentmatters.  The Company is currentlyinvolved in various legal proceedings. The Company does not believe that the ultimate resolution of suchlitigation will have a material adverse effect on the Company’s financialposition, results of operations or cash flows. The Company accrues loss contingencies in connection with its litigationwhen it is probable that a loss has occurred and the amount of the loss can bereasonably estimated.

 

On August 15, 2002, IXYS Corporation filed a patentinfringement lawsuit against APT with the United States District Court,Northern District of California.  Theclaim filed by IXYS alleges that APT infringes on their United States PatentNo. 5,486,715 and 5,801,419.  The IXYSclaim also requested that damages be determined at trial and that such damagesbe trebled. On October 1, 2002, APT filed its answer to the IXYS complaint,denying the allegations of patent infringement.  In addition, APT filed a patent infringement counterclaim againstIXYS, alleging that IXYS infringes on APT United States Patent No. 5,283,202,entitled “IGBT Device With Platinum Lifetime Control Having Gradient Or ProfileTailored Platinum Diffusion Regions.” APT has filed with the court several affirmative defenses related to thevalidity of the IXYS patents.  Trial isscheduled to commence in July of 2004. As stated above, APT does not believethat it infringes upon the IXYS patents cited in the claim and intends tovigorously defend itself in this lawsuit. The length of time and legal fees associated with the patentinfringement litigation with IXYS may be significant.

 

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

No matters were submitted to security holders for a vote during thefourth quarter ended December 31, 2003.

 

8

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**PART II**

 

**ITEM 5. MARKET FOR THE REGISTRANT’SCOMMON STOCK AND RELATED STOCKHOLDER MATTERS.**

 

Our common stock is traded on the Nasdaq National Market under thesymbol “APTI.” Our common stock began trading on August 8, 2000. The highand low sales prices as reported on the Nasdaq National Market for the two mostrecent fiscal years ended December 31, 2002 and December 31, 2003 were asfollows:

 
|                  |   | **High** |   | **Low** |   |
|-----------------------|--------|----------|--------|---------|--------|
|                  |   |     |   |    |   |
| **Fiscal  year 2003** |   |     |   |    |   |
| Quarter 4             |   | $        | 9.04   |    | $      | 6.78 |   |
| Quarter 3             |   | 9.70     |   | 6.80    |   |
| Quarter 2             |   | 8.28     |   | 3.00    |   |
| Quarter 1             |   | 4.99     |   | 3.01    |   |
| **Fiscal  year 2002** |   |     |   |    |   |
| Quarter 4             |   | $        | 4.92   |    | $      | 2.30 |   |
| Quarter 3             |   | 15.15    |   | 3.65    |   |
| Quarter 2             |   | 15.13    |   | 11.60   |   |
| Quarter 1             |   | 12.60    |   | 10.40   |   |

 

As of March 1, 2004, the last reported sale price of our commonstock on the Nasdaq National Market was $10.36 per share, there wereapproximately 92 stockholders of record and we estimate approximately 2,000beneficial stockholders of our common stock.

 

We have not declared or paid any cash dividends on our capital stock,and we do not anticipate doing so in the foreseeable future. We currentlyintend to retain future earnings, if any, to operate and expand our business.

 

9

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**ITEM6. SELECTED FINANCIAL DATA.**

 
|                                            |   | **Years  Ended December 31,**              |       |
|-------------------------------------------------|--------|--------------------------------------------|------------|
|                                            |   | **2003 (2)**                               |       | **2002 (1)** |   | **2001** |   | **2000** |   | **1999** |   |
|                                            |   | **(In  thousands, except per share data)** |       |
|                                            |   |                                       |       |   |   |   |   |   |   |   |   |
| **Consolidated  Statement of Operations Data:** |   |                                       | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Revenues, net                                   |   | $                                          | 48,892     |   | $ | 43,425 |   | $ | 36,855 |   | $ | 44,168 |   | $ | 27,461 |   |
| Gross profit                                    |   | 15,512                                     |       | 12,237 |   | 11,832 |   | 17,455 |   | 9,461 |   |
| Net income  (loss)                              |   | (3,330                                     | )          | (3,687 | ) | 1,796 |   | 3,759 |   | (175 | ) |
| Basic net income  (loss) per share              |   | (0.32                                      | )          | (0.36 | ) | 0.21 |   | 0.59 |   | (0.04 | ) |
| Diluted net  income (loss) per share            |   | (0.32                                      | )          | (0.36 | ) | 0.19 |   | 0.50 |   | (0.04 | ) |
| **Consolidated  Statement of Cash Flows Data:** |   |                                       | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Cash flow from  operations                      |   | 2,261                                      |       | 5,074 |   | 1,067 |   | 4,986 |   | 1,654 |   |
| Capital  expenditures (3)                       |   | 4,828                                      |       | 2,649 |   | 2,335 |   | 2,957 |   | 599 |   |
| **Consolidated  Balance Sheet Data:**           |   |                                       | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Working capital  (deficit)                      |   | $                                          | 31,780     |   | $ | 33,181 |   | $ | 45,508 |   | $ | 42,945 |   | $ | (1,803 | ) |
| Total assets                                    |   | 74,503                                     |       | 76,948 |   | 58,075 |   | 57,313 |   | 14,184 |   |
| Long-term  obligations, less current portion    |   | —                                     |       | — |   | — |   | 130 |   | 3,525 |   |
| Stockholders’  equity (deficit)            |   | 68,210                                     |       | 71,172 |   | 53,948 |   | 51,118 |   | (2,475 | ) |

 

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(1) In 2002, we acquired GHz Technology, Inc.(effective January 25) and the product lines and certain assets of Microsemi RFProducts, Inc. (effective May 24).  As aresult of these transactions, during fiscal 2002 we recorded acquisitionrelated charges for purchased in-process research and development (IPR&D),amortization of intangible assets, inventory fair value adjustments anddeferred compensation amortization of $4,330, of which $1,974 was included incosts of goods sold and $2,356 in operating expenses.  The total amount of these items net of taxes was $3,544.

 

(2) As a result of the acquisitions made in 2002,during the year ended 2003 we recorded acquisition related charges foramortization of intangible assets and deferred compensation amortization of$1,168, of which $1,118 was included in costs of goods sold and $50 inoperating expenses.  Also recorded in2003 was $645 of restructuring related charges included in operating expenses.During 2003 we acquired the administrative building we leased in Santa Clara,California in order to avoid future lease payments which were substantiallyabove market rate. The building is reported as assets held for sale, andaccordingly we took a $350 impairment charge to adjust the carrying value tofair market value.  Also included inrestructuring charges is severance related to downsizing and organizationalchanges. During 2003 we recorded a tax expense for a valuation allowanceagainst our net deferred tax assets for $846. The total amount for these itemsnet of taxes was $2,659.

 

(3) Capital expendituresin 2003 included the purchase of the building in Santa Clara for $1,332.Capital expenditures other than the building purchase were $3,496.

 

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**ITEM7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

 

***Business Overview***

 

Advanced Power Technology, Inc.is a leading designer, manufacturer and marketer of high-performance powersemiconductors and modules for Radio Frequency (RF), Linear, and Switchmodeapplications. Power semiconductors manage and regulate electrical power byconverting electricity into a form required by electrical and electronicproducts. Our power semiconductors increase system efficiency, permit thedesign of more compact end products and improve features and functionality. Weare primarily focused on the high power, high frequency segment of the powersemiconductor market. High power refers to the ability to dissipate above onekilowatt, and high frequency refers to the ability to switch on and off atrates above 100 kilohertz. In addition, we continue to strengthen our portfolioof RF products that operate at frequencies ranging from 1 megahertz to 100megahertz. RF generally refers to the ability to operate at frequencies above 1megahertz. We sell our products primarily in North America, Europe, and Asia,through a network of independent sales representatives and distributors.

 

The acquisition of GHz Technology, Inc. and the business of MicrosemiRF Products, Inc. in 2002 helped us to further penetrate RF markets.  We believe that these acquisitions serve toposition APT as an emerging, dominant supplier in bipolar RF power transistorsfor avionics, radar and non-cellular communications applications operating atfrequency ranges from 1 megahertz to multiple gigahertz and add valuable RFtechnology and substantial RF engineering, manufacturing and marketingcapability to the Company. These acquisitions are part of the Company’s ongoingstrategy to expand its product and technology portfolio in the RF power arenathrough both internal development and acquisitions.

 

APT has operations in Bend,Oregon, Santa Clara, California, Montgomeryville, Pennsylvania, and Bordeaux,France.  Each site has production,research and development and administrative activities. We also make use ofsubcontract manufacturers for the fabrication of our wafers and for assemblyand test operations.  Our operationlocations are more fully described in Item 1 of this report.

 

***BusinessEnvironment***

 

APT operates on a worldwide basis. As such, our operationsare affected by global, regional, and industry economic and political factors.However, the Company’s geographic and market segment diversity serves to limitthe impact of any one industry or the economy of any single country on theconsolidated operating results.

 

In 2003, approximately 65% of our revenues were from customers in theUnited States, 19% from customers in Europe, and 16% from customers in Asia andthe rest of the world. The principal end-user markets for our products arecommunications and data processing, semiconductor capital equipment,industrial/medical, and military/aerospace. Our revenues are impacted by theoverall semiconductor market and the resulting demand for semiconductor capitalequipment, capital spending in the communications industry, government andcorporate spending on military and aerospace programs, and the overall generaleconomic and political conditions.

 

We believe there are two significant factors driving the general demandfor high performance power semiconductors: rapid proliferation of sophisticatedelectronics; and the increasing need for higher power and more preciselyregulated power quality in electronic equipment. We plan to utilize and furtherdevelop our technology in order to supply high performance power semiconductorsdesigned to meet these demands.

 

The use of power semiconductors is becoming more pervasive inelectronic devices to convert and control electricity that powers thesedevices. As a result, the power semiconductor market is a large and growingsegment of the semiconductor industry. The proliferation of consumer electronicdevices, wireless communication, and mobile computing is driving demand for newgenerations of power semiconductors that are smaller, lighter and moreefficient. At the same time, we believe applications in the areas of medicaland industrial products will create additional demand for more powerful andreliable power semiconductors. These applications include military andaerospace systems, defibrillators, medical imaging, arc welding, and projectionsystems.

 

***BusinessStrategies***

 

We believe that the key success factors for APT over thenear term horizon are: to increase the RF power products share of our totalrevenues; to improve the balance between our diversified markets; focus on newproduct opportunities for our power products; to further reduce productioncosts and operating expenses through the consolidation of our manufacturingoperations and administrative functions; and continue to further leverage ourlower cost subcontract manufacturers. On average, RF power products provide higher gross margins thanswitching products, but also require a higher level of engineeringsupport.  APT plans to continue itsstrategy to increase RF power revenues through internal development oracquisition.  The implosion of theInternet bubble in 2001 

 

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demonstratedclearly that over reliance on specific markets can lead to rapid growthfollowed by rapid decline.  Achievingsatisfactory financial performance in the face of significant cyclical swingsis extremely difficult. Our product and market strategies are aimed atachieving a relatively equal balance between the markets we serve.  Our power products business has beenhistorically weighted towards semiconductor capital equipment andcommunications markets.  Our strategy isto find new opportunities in the power products business in industrial andmedical applications.  We plan tocontinue to rationalize and consolidate our internal manufacturing operations,in light of past acquisitions and possibly for any future acquisitions we mightmake, and to continue increased utilization of lower cost offshore subcontractorsin order to lower our overall manufacturing costs.

 

APT’s financialperformance and ability to successfully execute these plans are subject to anumber of risks, and actual results may differ materially.  Factors that could affect the Company’sactual results include the ability of subcontractors to meet their deliverycommitments; unfavorable changes in industry and competitive conditions; theCompany’s mix of product shipments; the accuracy of customers forecasts; theeffectiveness of the Company’s efforts to control and reduce costs; the costand liability associated with patent infringement litigation; and otheruncertainties more further disclosed later in this section of this report.

 

**Critical Accounting Policies and Estimates**

 

Advanced Power Technology’sdiscussion and analysis of its financial condition and results of operationsare based upon consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires APT to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosures of contingent assets and liabilities. Onan on-going basis, APT evaluates its estimates, including those related toproduct returns and warranty obligations, allowance for doubtful accounts,excess and obsolete inventories, income taxes, valuation of intangible assetsincluding goodwill, valuation of long-lived assets, contingencies andlitigation, and excess component order cancellation costs. APT bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

 

APT believes the followingcritical accounting policies affect its more significant judgments andestimates used in the preparation of its consolidated financial statements.

 

***Product Returns and Warranty Obligations***

 

Product revenue is recognizedupon shipment of product. In general, APT provides for a one-year repair orreplacement warranty on its products. Upon shipment, APT provides for theestimated cost that may be incurred for product warranty and sales returnsbased on historical experience. APT uses independent distributors to sell someof its products. Distributors can return a contractually agreed upon percentageof the dollar value of products purchased during the prior six months andreceive certain price protections on purchased products. Sales to distributorsare recognized upon shipment, less an allowance for estimated returns based onhistorical experience.

 

While the Company engages inextensive product quality programs and processes, including actively monitoringand evaluating the quality of its component suppliers, APT’s warranty obligationis affected by product non-conformance rates, material usage and servicedelivery costs incurred in correcting a product non-conformance. Should actualproduct non-conformance rates, material usage, service delivery costs, ordistributor returns differ from APT’s estimates, revisions to the estimatedwarranty liability would be required.

 

***Allowance for Doubtful Accounts***

 

APT maintains an allowance fordoubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments. Management regularly reviews the adequacyof the allowance after considering the size of the accounts receivable balance,historical bad debts, the customer’s expected ability to pay and our collectionhistory with each customer. Management reviews significant individual accountsthat are past due to determine whether an allowance should be made based onthese factors.  If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required.

 

***Excess and Obsolete Inventories***

 

*** ***Inventories are stated at the lower of standard cost(approximates actual cost on a first-in, first-out basis) or market (netrealizable value).  APT establishesreserves for estimated unmarketable (excess) or obsolete inventory equal to thedifference between the cost of inventory and the estimated net realizable valuebased upon assumptions about future demand and market conditions. APTestablishes reserves for excess component order cancellation costs based onestimated net realizable value of the components purchased and any

 

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additional cancellation charges. APT evaluates historicalusage of the product, current customer demand, purchase commitments andforecasted usage of the product.  Ifactual market conditions are less favorable than those projected by management,additional reserves may be required.

 

***Income Taxes***

 

APT records a valuationallowance to reduce its deferred tax assets to the amount that is more likelythan not to be realized. APT considers future taxable income and ongoingprudent and feasible tax planning strategies in assessing the need for thevaluation allowance. In the event APT were to determine that it would be ableto realize its deferred tax assets in the future in excess of its net recordedamount, an adjustment to decrease the valuation allowance would increase incomein the period such determination was made. Should APT determine that it wouldnot be able to realize all or part of its net deferred tax asset in the future,an adjustment to increase the valuation allowance would be charged to income inthe period such determination was made. During 2003, the Company determined that a full valuation allowanceshould be recorded against its net deferred tax assets.

 

***Valuation of Goodwill and Intangible Assets withIndefinite Lives***

 

APT values goodwill andintangible assets with indefinite lives in accordance with Statement ofFinancial Accounting Standards No. (SFAS) 142 “Goodwill and Other IntangibleAssets.”  Currently APT carries agoodwill balance in connection with previous acquisitions, but has no otherintangible assets with indefinite lives. We annually review goodwill for impairment and when events orcircumstances indicate the carrying value of the asset might exceed its currentfair value. We determine fair value using discounted cash flow analysis andother acceptable valuation methodologies such as market multiples andcomparable transactions. This requires us to make certain assumptions andestimates regarding industry economic factors and future profitability.  It is our policy to conduct impairmenttesting based on our most current business plans, which reflect changes weanticipate in the economy and industry. If actual results are not consistent with our assumptions and judgments,we could be exposed to a material impairment charge as a result of writing downthe carrying value of goodwill.

 

***Valuation of Long-Lived Assets***

 

APT values long-lived assets,including intangible assets with finite lives, in accordance with SFAS 144“Accounting for the Impairment or Disposal of Long-Lived Assets.” We evaluateour long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable.  We determine the potential impairment usingundiscounted cash flow analysis, which requires us to make certain assumptionsand estimates regarding industry economic factors and futureprofitability.  It is our policy toconduct impairment testing based on our most current business plans, whichreflect changes we anticipate in the economy and industry.  If actual results are not consistent withour assumptions and judgments, we could be exposed to a material impairmentcharge as a result of writing down the carrying value of long-lived assets. Ifthe operation is determined to be unable to recover the carrying amount of itsassets, then intangible assets are written down first, followed by the otherlong-lived assets of the operation, to fair value. Fair value is determinedbased on discounted cash flows or appraised values, depending on the nature ofthe assets. Long-lived assets considered held for sale are valued at the lowerof historical cost or fair value less costs to sell. Such assets are notdepreciated while so classified.

 

***Contingencies and Litigation***

 

APT is subject to thepossibility of various loss contingencies arising in the ordinary course ofbusiness.  We consider the likelihood ofloss or impairment of an asset or the incurrence of a liability, as well as ourability to reasonably estimate the amount of loss in determining losscontingencies.  An estimated losscontingency is accrued when it is probable that an asset has been impaired or aliability has been incurred and the amount of loss can be reasonablyestimated.  We regularly evaluatecurrent information available to us to determine whether such accruals shouldbe adjusted. (Refer to Part I, Item III “Legal Proceedings” of this filing).

 

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**Resultsof Operations**

 

The following table presents our consolidated statement of operationsdata for the periods indicated as a percentage of net revenue:

 
|                                                 |   | **Years  Ended December 31,** |   |
|------------------------------------------------------|--------|-------------------------------|--------|
|                                                 |   | **2003**                      |   | **2002** |   | **2001** |   |
|                                                 |   |                          |   |   |   |   |   |
| Revenues, net                                        |   | 100.0                         | %      | 100.0 | % | 100.0 | % |
| Cost of goods  sold                                  |   | 66.0                          |   | 67.3 |   | 67.9 |   |
| Amortization of  technology rights and other charges |   | 2.3                           |   | 4.5 |   | — |   |
| Total cost of  goods sold                            |   | 68.3                          |   | 71.8 |   | 67.9 |   |
|                                                 |   |                          |   |   |   |   |   |
| Gross profit                                         |   | 31.7                          |   | 28.2 |   | 32.1 |   |
| Operating  expenses:                                 |   |                          |   |   |   |   |   |
| Research and  development                            |   | 6.1                           |   | 8.9 |   | 4.9 |   |
| Selling, general  and administrative                 |   | 30.2                          |   | 28.4 |   | 25.1 |   |
| Restructuring  charges                               |   | 1.3                           |   | — |   | — |   |
| In-process  research & development               |   | —                        |   | 4.9 |   | — |   |
|                                                 |   |                          |   |   |   |   |   |
| Total operating  expenses                            |   | 37.6                          |   | 42.2 |   | 30.0 |   |
|                                                 |   |                          |   |   |   |   |   |
| Income from  operations                              |   | (5.9                          | )      | (14.0 | ) | 2.1 |   |
| Other income  (expense):                             |   |                          |   |   |   |   |   |
| Interest income,  net                                |   | 0.4                           |   | 1.4 |   | 4.3 |   |
| Other, net                                           |   | —                        |   | — |   | — |   |
|                                                 |   |                          |   |   |   |   |   |
| Income (loss)  before income taxes                   |   | (5.5                          | )      | (12.6 | ) | 6.4 |   |
| Income tax  (benefit) expense                        |   | 1.3                           |   | (4.1 | ) | 1.5 |   |
|                                                 |   |                          |   |   |   |   |   |
| Net income  (loss)                                   |   | (6.8                          | )%     | (8.5 | )% | 4.9 | % |

 

**YearsEnded December 31, 2003 and 2002**

 

*Revenues.*  Our revenues for 2003 were $48.9 million,compared to $43.4 million in 2002, or a 12.6% increase. Approximately 7.1% ofthe increase reflects the additional months of revenue contributed by theacquisitions we made during 2002, while 5.5% of the increase represents organicgrowth on higher unit volumes. Overall we experienced year over year strengthin each of the markets we serve. Communications and data processing revenue increased by 16.4%,semiconductor capital equipment increased by 19.6%, military and aerospaceincreased by 10.7% and industrial/medical increased by 7.8%.  As a result of incremental capital spendingby companies that produce semiconductors, we experienced significantstrengthening in the semiconductor capital equipment market which grew by 36.7%in the second half of 2003 compared to the first half.

 

Although we sawstrengthening in the communications and data processing market, there had notyet been a substantial and sustained increase in infrastructure spending whichis necessary for APT to significantly expand revenues within this market. Basedon the strength in the semiconductor capital equipment market we saw in 2003over 2002, it now appears that we have firmly entered a period of sustainedgrowth for this segment. However, this does not preclude quarterly variability.APT’s customers in the semiconductor capital equipment market have designed ourproducts into a broad array of both their current and emerging technologieswhich positions us well for future growth. In the industrial/medical market ourdesigns into medical imaging and defibrillator applications continue to drivethe growth in this segment.  Asexpected, revenues in the fourth quarter of 2003 in the military and aerospacemarket decreased sequentially from the third quarter of 2003, tempering theoverall year over year gain. Order activity was strong in the fourth quarter of2003. We expect to benefit from increased spending on military programs as wellas from designs we have won in aviation and radar systems in foreign marketplaces.

 

Overall, ourrevenues by geographic area for 2003 was 65% in North America, 19% in Europe,and 16% in Asia and the rest of the world. This compares to 64% in North America, 24% in Europe and 12% in Asia andthe rest of the world in 2002. We expect to see Asia contribute more to revenuegrowth in 2004.

 

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*Gross Profit.*  Our gross profit margin was 31.7% in 2003compared to 28.2% in 2002. Excluding the non-cash purchase accounting chargesfor the fair value of inventory acquired and the amortization of the technologyrights assets, gross profit margin was 34.0% in 2003 compared to 32.7% in 2002,or an increase of 1.3%.  Lower salesreturns and lower provisions for excess and obsolescent inventory contributedapproximately 1.7% to the improved gross margin. Increased production volumesand the resulting increased factory utilization at our facility in Santa Clara,California resulted in improved factory overhead absorption in 2003 compared to2002. The improved utilization added approximately 2.2% to our overall grossprofit in 2003. We expect to see production volume for the products from bothour Bend, Oregon facility and our Santa Clara facility to increase resulting infurther margin enhancement during 2004. The margin improvement due to increasedutilization was partially offset by lower factory production volumes at ourfacility in Bordeaux, France which caused a drop of approximately 2.3% in ourgross margin. The Company has taken actions to reduce production personnel by23% at the Bordeaux facility and shift production to our lower cost offshoresubcontractors. We expect this process to be completed in the second half of2004. During 2003 we began the process to consolidate the silicon manufacturingcurrently performed in Montgomeryville, Pennsylvania to our Bend Oregon facilityin order to reduce our overall wafer fabrication production costs. We expect tocomplete the transfer in 2004.

 

*Research and Development Expense.*  Our research and development expenses were$3.0 million in 2003 compared to $3.9 millionin 2002, or approximately 6.1% and 8.9% of revenues, respectively. During 2002,higher expenses were incurred for pre-production and prototype lots, especiallyfor our Power MOS7® technology, as the company prepared to introduce a largevolume of new products in this technology. During 2003, fewer resources were used for pre-production and prototypelots as the new parts moved into full production. This resulted in anapproximately $650,000 decline in spending on supplies, materials andprototypes over the prior year. During 2003 we also had lower payroll by$150,000 due to the transfer of engineers to product application functions. Thedecrease in the research and development expense as a percentage of revenue isalso due to our higher revenue levels in 2003. The Company plans to continue its research and development programsleading to the introduction of new products for use in both switching and RFapplications. Therefore, we expect the level of research and developmentexpenses to be approximately 7% over sustained periods of time.

 

*Selling, General and Administrative Expense.*  Our selling, general and administrativeexpenses totaled $14.8 million in 2003 comparedto $12.3 million in 2002, or approximately 30.2% and 28.4% of revenues in 2003and 2002, respectively. The increase in expenses over the prior year level isattributable to higher payroll costs of $1.1 million as a result of thediscontinuance of the graduated pay reductions we implemented in 2001 and thefirst half of 2002, as well as additional personnel in selling, general andadministrative functions due to new hires, the additional companies weacquired, and to the transferring of job functions from other operating areasof the Company.  In addition we incurredincreased legal expenses of $900,000 in connection with ongoing patentlitigation, as more fully explained in Part I, Item 3 to this report. We havedenied infringement of the IXYS patents and have asserted affirmative defensesand counterclaims.  However, the lengthof time and legal fees associated with patent litigation with IXYS may besignificant.

 

*Stock Compensation Expense.*  Stock compensation expense includes costsrelating to stock-based employee compensation arrangements, and is based on thedifference between the fair market value of our common stock on the date ofgrant of options and the exercise price of options to purchase that stock.Stock compensation expense is recognized over the vesting periods of therelated options, typically five years. Stock compensation expense of $150,000was recorded in 2003 versus $498,000 in 2002. Of this amount, $41,000 wasrecorded in cost of goods sold, $109,000 was recorded in selling, general andadministrative expense. We expect to record stock compensation expense ofapproximately $21,000 in 2004.

 

*Interest Income (Expense).* Interestincome in 2003 was $246,000 compared to $630,000 in 2002.  The decline in interest income was due tolower invested cash balances as a result of cash used to acquire GHz and MSC RF in 2002 and also due to lowerinterest rates available in the current market environment.  Interest expense was $29,000 in 2003compared to $60,000 in 2002.

 

*Restructuring Charges.* As part of management’sstrategic plans, the Company announced in November of 2003 restructuringactions intended to improve manufacturing efficiencies and lower administrativecosts. The actions include consolidation of certain administrative functions,rationalization of internal and external assembly and test manufacturing, andthe reduction of rent expense through the purchase and resale of one of the twobuildings currently occupied by the Company’s Santa Clara, Californiasubsidiary. These announced actions were in addition to previously dislosedplans to consolidate our wafer fabrication plant in Montgomeryville, Pennsylvaniato Bend, Oregon. Total restructuring related charges recognized in 2003 were$645,000.  Not all restructuringactivities were completed as of December 31, 2003.  As such, management expects that additional restructuring chargesof approximately $120,000 will be incurred in 2004.

 

The total severance related charges recognized in 2003 was $295,000.The severance charges relate to already separated personnel and personnel thatare eligible for benefits upon completion of certain transfer activities. Thebuilding buyout reducedour operating lease commitments by approximately $530,000 over 2004 and 2005.The building purchase is reported as an asset held for sale and is beingmarketed for sale as APT no longer requires the space. In accordance with SFAS144, an asset held for sale is carried 

 

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at estimated fair value. As such, APT recorded an impairmentcharge for the building in the fourth quarter of 2003 of approximately$350,000. The net carrying value of the building as of December 31, 2003 wasapproximately $1 million and is included as a component of other currentassets.

 

*Income Taxes.*  We recorded a tax expense of approximately23% on our net loss of $2.7 million in 2003, compared to a tax benefit of 32.4%in 2002. Our effective tax rate in 2003 differs from the federal statutory rateprimarily due to the recording of a non-cash charge of $846,000 to establish afull valuation reserve against our net deferred tax assets, offset by areduction in our taxes payable by $225,000. In assessing the valuation ofdeferred tax assets, SFAS No. 109 “Accounting for Income Taxes,” requires amore likely than not standard. The ultimate realization of deferred tax assetsis dependent on the generation of future domestic taxable income during theperiods in which the associated temporary differences become deductible.Management considers the scheduled reversals of deferred tax liabilities,projected future taxable income, and tax planning strategies in making thisassessment. Although the Company anticipates future long term profitability,SFAS No. 109 requires that recent historical operating performance weigh moreheavily in assessing the valuation of deferred tax assets. The more likely thannot assessment was principally based upon the losses generated during 2002 and2003 and the cyclical nature of the industry which make projections of industrytrends difficult. As of December 31, 2003, APT has federal and state netoperating loss carry forwards of $5.4 million and $5.6 million, respectively,which expire beginning in years 2020 through 2023.

 

**YearsEnded December 31, 2002 and 2001**

 

*Revenues.*  Our revenues for 2002 were $43.4 million,including $15.1 million from GHz Technology, Inc. (GHz) and the business ofMicrosemi RF Products, Inc (MSC RF), a wholly owned subsidiary of MicrosemiCorporation, which APT acquired effective January 25, 2002 and May 24, 2002,respectively. This represents an increase of 17.8% compared to the revenues of$36.9 million in 2001.  Without theadditional revenues from our acquisitions, revenues were $28.3 million in 2002,representing a decline of 23.0% over the prior year.

 

The semiconductormarket experienced record growth up to October 2000, followed by recorddeclines in 2001.  As APT typically lagsthe overall semiconductor industry, our revenues peaked in the first quarter of2001 and then we experienced sequentially declining revenues through the fourthquarter of 2001.  Our 2002 revenues hadquarterly increases from the low levels of the second half of 2001, but stillremain below the levels achieved in 2001 on a year to date basis excluding theimpact of acquisitions. We experienced sequential revenue growth of 16% in eachof the first and second quarters of 2002, 6% in the third quarter of 2002,followed by a 15% decline in the fourth quarter of 2002, when excludingrevenues from both of our acquisitions. The year over year decline is mainly due to continued weakness of ourrevenues into the communications and data processing market, which remains wellbelow 2001 levels.

 

Including theimpact of the companies acquired, the 17.8% increase in revenues is largelyattributable to increased revenues in the military and aerospace market.  The additional revenues contributed by ouracquisitions are heavily weighted towards the military and aerospace market andthe communications and data processing market, and therefore serve to moreevenly diversify our overall revenues from the various markets that weparticipate in.  In addition, therevenues from the acquired companies significantly increase our position in theRF power market, consistent with our long established strategy.

 

During 2000, we entered into a joint venture agreement in China, whichincluded a license and technology transfer agreement for certain of ourtechnologies, in exchange for cash payments totaling $1.5 million over twoto three years. There were no revenues recognized from the agreement during2002 and 2001. APT terminated this agreement in February of 2003 in accordancewith the terms of the agreement.  As aresult, APT will not receive any future payments relative to this agreement.

 

*Gross Profit.*  Our gross profit margin was 28.2% in 2002compared to 32.1% in 2001. Excluding the non-cash purchase accounting chargesfor the fair value of inventory acquired and the amortization of the technologyrights assets, gross profit margin was 32.7% compared to 32.1% in 2002, whichhad no purchase accounting charges.  Asdescribed above, our revenues peaked in the first quarter of 2001 and thensubsequently declined through the fourth quarter of 2001.  Accordingly, our gross profit margin in thefirst half of 2001 was 38.3% followed by 19.4% in the second half of 2001 dueto the much lower levels of production and under utilization of our internalmanufacturing facilities.  During 2002,we experienced quarterly increases in revenues and production volumes, leadingto improved utilization of our internal manufacturing facilities.  We also began to benefit from the cost reductionactions taken in the second half of 2001, as more fully described in the 2001versus 2000 gross profit section below, such as reducing our overall productionpersonnel levels by approximately 35% or about 35 employees.  Also contributing to our improved grossmargins in 2002 is the higher content of our RF power business due to theacquisitions made during the year, which carry a higher overall gross profitrate.  Our RF revenues wereapproximately 46.3% of total revenue in 2002 compared to 14.5% in 2001.

 

*Research and Development Expense.*  Our research and development expenses were$3.9 million in 2002 compared to $1.8 million in 2001, or approximately 8.9%and 4.9% of revenues in 2002 and 2001, respectively.  The increased spending over the prior year

 

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is primarily dueto the additions of GHz and MSC RF, which contributed $2.0 million in 2002,consisting mainly of payroll, supplies, facilities and depreciation charges.Excluding the impact of GHz and MSC RF, research and development chargesremained flat over the prior year.

 

*Selling, General and Administrative Expense.*  Our selling, general and administrativeexpenses totaled $12.3 million in 2002 compared to $9.3 million in 2001, orapproximately 28.4% and 25.1% of revenues in 2002 and 2001, respectively.  The increased spending over the prior yearis primarily due to the additions of GHz and MSC RF, which contributed $3.0million in 2002, consisting mainly of payroll, commissions, facilities, and depreciationcharges. Excluding the impact of GHz and MSC RF, selling, general andadministrative expenses remained flat over the prior year.  The graduated pay reductions implemented in2001 were discontinued in the third quarter of 2002. We did experience increasedlegal expenses over 2001 in connection with ongoing patent litigation, as morefully explained in Part I, Item 3 of this report.

 

*Stock Compensation Expense.*  Stock compensation expense includes costsrelating to stock-based employee compensation arrangements, and is based on thedifference between the fair market value of our common stock on the date ofgrant of options and the exercise price of options to purchase that stock.Stock compensation expense is recognized over the vesting periods of therelated options, typically five years. Stock compensation expense of $498,000was recorded in 2002 versus $203,000 in 2001. Of this amount, $187,000 wasrecorded in cost of goods sold, $73,000 was recorded in research anddevelopment expense and $238,000 was recorded in selling, general andadministrative expense.

 

*Interest Income (Expense).*  Interest income in 2002 was $630,000compared to $1.7 million in 2001.  Thedecline in interest income was due to the use of cash and investments toacquire GHz and MSC RF and also due to lower interest rates available in thecurrent market environment.  Interestexpense was $60,000 in 2002 compared to $55,000 in 2001.

 

*Income Taxes.*  We recorded a tax benefit for 2002 at aneffective tax rate of approximately 32.4% compared to a tax expense of 24.0% in2001. The effective tax rate benefit in 2002 was lower than the federalstatutory rate primarily due to the in process research and development chargesrecorded for financial statement purposes in the GHz acquisition under GAAPwhich are not deductible for tax purposes. This was partially offset by the benefit of a reduction in the valuationallowance due to the realization of foreign net operating loss carry forwardsand non taxable municipal interest income. The effective tax rate expense in 2001 was lower than the federalstatutory rate primarily due to a reduction in the valuation allowance due tothe realization of foreign net operating loss carry forwards and non taxablemunicipal interest income.

 

*Net Loss.*Although our revenues increased in 2002 over 2001, we experienced a netloss of $3,687 versus net income of $1,796 in 2001. As a result of ouracquisitions during fiscal 2002, we recorded acquisition related charges forpurchased in-process research and development (IPR&D), amortization ofintangible assets, inventory fair value adjustments and deferred compensationamortization of $4,330, of which $1,974 was included in costs of good sold and$2,356 in operating expenses. The total amount net of taxes was $3,544. Withoutthese purchase related charges our net loss in 2002 would have been $143. Thisdecline in profit is primarily due to a 23% decline in revenues on our existingbusiness before acquisitions, resulting in lower gross profit while ouroperating expenses remained relatively flat on a before acquisition basis. Thisresulted in an operating loss on our existing business, which was partiallyoffset by an operating profit on our acquired business.

 

**Liquidityand Capital Resources**

 

Management assesses the Company’s liquidityin terms of its ability to generate cash to fund its operating, investing, andfinancing activities. Significant factors affecting the management of liquidityare: cash flows from operating activities, capital expenditures, investments inbusinesses, and access to bank credit when required and at reasonable rates.The Company’s key cash flow metrics for the last five years are presented inPart I, Item 6, “Selected Financial Data” of this report.

 

*Operating Cash Flows:* In 2003, we generated approximately $2.3million from operating activities. This resulted from our net loss of $3.3million offset by non-cash charges for depreciation, amortization, assetimpairment of $4.5 million, deferred tax valuation allowance of $846,000,inventory provisions of $454,000, and deferred compensation amortization of$150,000. Our collections from customers were approximately $48.2 million in2003 compared to $40.0 million in 2002. The net change in working capitalaccounts resulted in a use of cash of $366,000.  As revenues increased over the prior year, we increasedinvestment in inventory and accounts receivable offset by larger accountspayable balances.

 

*InvestingCash Flows:* In 2003, we generated approximately $2.6 millionin investing activities, which consisted mainly of purchases of plant andequipment for $4.8 million, including $1.3 million to purchase anadministrative building and buyout an above market lease (see RestructuringCharges above), offset by the net proceeds from the sale of available-for-salesecurities of $7.4 million.

 

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*Financing Cash Flows:* In 2003, we generatedapproximately $12,000 from financing activities, which consisted of netproceeds of $75,000 from the exercise of stock options offset by payments onlease obligations.

 

As of December 31, 2003, APT had $31.8 million in working capital.  Our trade accounts receivable balance was$7.6 million reflecting a days sales outstanding ratio of 52 days, compared totrade accounts receivable of $6.9 million at December 31, 2002, reflecting adays sales outstanding ratio of 54 days. Based on the geographic mix of ourcustomers and the credit terms we extend, management expects our days salesoutstanding ratio to range from 50 to 60 days. Our inventory balance was $12.4million reflecting inventory turns of 2.7 times per year, compared to aninventory balance of $11.9 million at December 31, 2002, reflecting inventoryturns of 2.2 times per year. The Company continues to pursue actions to monitorinventory levels and improve inventory turns. The calculations above are basedon yearly average balances of trade accounts receivable and inventory, adjustedto include the related opening balances from our acquisitions.

 

APT currently expects to fund expenditures for capital requirements aswell as liquidity needs from a combination of available cash balances,internally generated funds and financing arrangements if needed. As of December31, 2003, APT had $16.6 million in cash and cash equivalents andavailable-for-sale securities. APT’s investment policy is to invest in shortterm, high-grade liquid investments with the goal of capital preservation.APT’s ability to generate positive cash flow from operations may be affected bymarket conditions as well as other risk factors as described below. We expectfrom time to time to evaluate potential acquisitions and equity investmentscomplementary to our market strategy. To the extent we pursue suchtransactions, we could require additional equity or debt financing to fund suchactivities or to fund our working capital requirements in the event of anindustry downturn or an unexpected adverse change in our business operations.To the extent we require additional capital we cannot assure you that we willbe able to obtain such financing on terms favorable to us, or at all.

 

**OffBalance Sheet Arrangements & Commitments**

 

As of December 31, 2003 and 2002 the Company did not have anyunconsolidated entities or off balance sheet financial arrangements, guaranteesor similar commitments with such entities. A summary of the Company’scontractual obligations and commitments as of December 31, 2003 is presented inthe table below.  Purchase obligationsinclude amounts committed under legally enforceable contracts or purchaseorders.

 
|                          |   | **Payments  due by period** |   |
|-------------------------------|--------|-----------------------------|--------|
|                          |   | **Total**                   |   | **Less than  one year** |   | **1-3 Years** |   | **3-5 years** |   | **More than 5  years** |   |
|                          |   |                        |   |   |   |   |   |   |   |   |   |
| Long term debt                |   | $                           | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Operating leases              |   | 7,751                       |   | 1,151 |   | 2,366 |   | 2,326 |   | 1,908 |   |
| Capital leases                |   | —                      |   | — |   | — |   | — |   | — |   |
| Purchase obligations          |   | $                           | 5,170  |   | $ | 5,170 |   | — |   | — |   | — |   |
| Other long term liabilities   |   | —                      |   | — |   | — |   | — |   | — |   |
| Total contractual obligations |   | $                           | 12,921 |   | $ | 6,321 |   | $ | 2,366 |   | $ | 2,326 |   | $ | 1,908 |   |

 

**RecentAccounting Pronouncements**

 

In December 2003, FASB Interpretation No. 46R (FIN No. 46R) was issued,which replaces FIN No. 46 , “Consolidation of Variable Interest Entities.” Theinterpretation requires variable interest entities to be consolidated if theequity investment at risk is not sufficient to permit an entity to finance itsactivities without support from other parties or the equity investors lackcertain specified characteristics of a controlling financial interest. Theguidelines of the interpretation will become applicable for the Company in itsfirst quarter 2004 financial statements. The Company currently has no equityinvestments that fall within the scope of FIN No. 46R, and therefore does notcurrently anticipate any material accounting or disclosure requirement underthe provisions of the interpretation.

 

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**RiskFactors Affecting Business and Results of Operations**

 

This report contains statements which, to the extent that they do notrecite historical fact, constitute “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. The words “believe,” “expect,”“estimate,” “may,” “will,” “could,” “plan” or “continue” and similar expressionsare intended to identify forward-looking statements. Such forward-lookinginformation involves important risks and uncertainties that could materiallyalter results in the future from those expressed in any forward-lookingstatements made by, or on behalf of, us. These risks and uncertainties include,but are not limited to those listed in this report.

 

We caution you that such forward-looking statements are onlypredictions and actual events or results may differ materially. In evaluatingsuch statements, you should specifically consider the various factors whichcould cause actual events or results to differ materially from those indicatedby such forward-looking statements, including the factors that we discussbelow. We are under no duty to update any of the forward-looking statementsafter the date of this report, to conform them to actual results or to changesin our expectations.

 

**Thesemiconductor industry is very cyclical, and an industry downturn would reduceour revenues.**

 

The semiconductor industry is characterized by:

 

•                                          rapidtechnological change;

•                                          cyclicalmarket patterns;

•                                          significantprice erosion;

•                                          periods ofover-capacity and production shortages;

•                                          variations inmanufacturing costs and yields; and

•                                          significantexpenditures for capital equipment and product development.

 

The semiconductor industry has from time to time experienced depressedbusiness conditions. In the past, business conditions in this industry haverapidly changed from periods of strong demand to periods of weak demand. Anyfuture downturn in the industry could harm our business and cause our operatingresults to suffer. We cannot assure you that we will not experience substantialperiod-to-period fluctuations in operating results due to general semiconductorindustry conditions or other factors.

 

**We havehistorically experienced fluctuations in our operating results and expect thesefluctuations to continue, which may cause our common stock price to decline.**

 

Our quarterly and annual operating results are affected by a widevariety of factors that could materially and adversely affect our revenues,gross margins and operating results. These factors include:

 

•                                          the volumeand timing of orders received;

•                                          marketacceptance of our products and the products of our customers;

•                                          competitivepricing pressures;

•                                          our abilityto expand manufacturing output to meet increasing demand;

•                                          the timingand extent of our research and development expenses; and

•                                          fluctuationsin manufacturing yields.

 

Historically in the semiconductor industry, average selling prices ofproducts have decreased over time. If we are unable to introduce newproprietary products with higher margins or reduce manufacturing costs tooffset anticipated decreases in the prices of our existing products, then ouroperating results will be harmed. Our business is characterized by short-termorders and shipment schedules, and customer orders typically can be canceled orrescheduled without penalty to the customer. Because most of our backlog iscancelable without penalty, we typically plan our production and inventorylevels based on internal forecasts of customer demand, which is highlyunpredictable and can fluctuate substantially. In addition, because of fixedcosts in the semiconductor industry, we are limited in our ability to reducecosts quickly in response to any revenue shortfalls. As a result of theforegoing factors, we may experience material adverse fluctuations in ourfuture operating results on a quarterly or annual basis. We cannot assure youthat we will be profitable on a quarterly or annual basis in future periods.

 

**Ifwe cannot introduce new products on a timely basis, our financial results maysuffer.**

 

The markets for our products are characterized by rapid technologicalchange and frequent new product introductions. Our success depends upon ourability to develop improved power semiconductors for new and existing markets,to introduce these products in a

 

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timely manner, andto have these products gain market acceptance. The development of new powersemiconductors is highly complex and from time to time we have experienceddelays in developing and introducing new products. Successful productdevelopment and introduction depends on a number of factors, including:

 

•                                          proper newproduct definition;

•                                          timelycompletion of design and testing of new products;

•                                          achievementof acceptable manufacturing yields; and

•                                          marketacceptance of our products and the products of our customers.

 

We cannot assure you we will be able to meet these challenges or adjustto changing market conditions as quickly and cost-effectively as necessary tocompete successfully. Due to the complexity and variety of powersemiconductors, the limited number of qualified development engineers and thelimited effectiveness of computer-aided design systems in the design of suchcircuits, we cannot assure you that we will be able to successfully develop andintroduce new products on a timely basis. We cannot assure you that anyproducts introduced by us will be adopted by existing or potential customers,or that any products initially accepted by our customers will become industrystandard products. Our failure to develop and introduce new productssuccessfully could significantly harm our business and cause our operatingresults to suffer.

 

Our results of operations are also dependent on our ability to optimizethe mix between sales of relatively higher margin but lower volume products andrelatively higher volume but lower margin products. In order to improve ourmargins, sales of higher margin products must in the future represent a greaterpercentage of our revenues, requiring us to develop, introduce and market newproprietary products. We cannot assure you that we will be successful indeveloping new proprietary products with the features and functionality thatcustomers in our key markets will demand.

 

**Disruption,termination or reduction in the functions performed by our key subcontractorscould reduce our revenues.**

 

We are increasingly more reliant on third partysubcontractors in Europe and Asia for manufacturing, assembly and packaging ofmost of our products. We have entered into a wafer foundry agreement withInfineon Technologies, an outside foundry located in Europe, which currentlyprovides a significant percentage of our wafers. In addition, during 2001 wesigned a wafer foundry agreement with Episil Technologies, located in Taiwan.Our agreement with Infineon extends indefinitely and requires a two-year noticeof termination. Our agreement with Episil Technologies extends indefinitely andrequires a one-year notice of termination. We also rely on agreements with Team Pacific and PSI Technologies,subcontractors in the Philippines, for assembly and packaging of most of ourswitching power semiconductor products. Our agreement with Team Pacific extendsthrough January 26, 2006 and requires Team Pacific to assemble all products wesend them, based on rolling periodic forecasts. Our agreement with PSITechnologies extends through December 31, 2004. In addition, we rely onsubcontractor services from VERTEK International, Inc. in Mexico andSemiconductor Assembler & Manufacturer, Sdn. Bhd. (SAM) in Malaysia forassembly and packaging of our RF and microwave products.  The agreements with VERTEK and SAM aregoverned by purchase orders which are periodically renewed.

 

Disruption or termination of these arrangements couldharm our business and operating results. Political instability, labor disputesor natural disasters could disrupt the operations of our subcontractors. If anyof our subcontractors experience financial, operational, production or qualityassurance difficulties resulting in a reduction or interruption in supply tous, our operating results would suffer until alternate subcontractors, if any,become available. Our subcontractors may not be able to maintain thetechnological capability to meet our future needs. In addition, oursubcontractors also manufacture and package products for our competitors, andthere is a risk that our subcontractors could allocate less of their productioncapacity and resources to our needs.

 

**Ifour manufacturing processes become obsolete, our margins and profitability willbe harmed.**

 

Semiconductor design and process methodologies aresubject to rapid technological change, requiring large expenditures forresearch and development in order to improve product performance and increasemanufacturing yields. We cannot assure you that our current process technologywill not become obsolete. If we are unable to develop or obtain access toadvanced silicon wafer processing technologies as they become needed, ourfuture operating results will suffer.

 

**Ifwe cannot adequately protect our intellectual property rights, our financialresults may suffer.**

 

Our success depends on our ability to obtain ormaintain protection of certain proprietary technologies used in our principalproducts. We rely on a combination of patents, trademarks, trade secret lawsand contractual provisions to protect our proprietary rights. Our competitorsmay, however, misappropriate our technology or independently developtechnologies that are as good as or better than ours. We cannot assure you thatany patent owned by us will not be invalidated, circumvented or challenged.Moreover, the process of seeking patent protection can be long and expensive,and we cannot assure you that our current patents are or any new patents thatmay be

 

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issued will be ofsufficient scope or strength to provide any meaningful protection or anycompetitive advantage to us. We may also become subject to or initiateinterference proceedings in the U.S. Patent and Trademark office, which candemand significant financial and management resources and could harm our financialresults.

 

In addition, we have licensed a portion of our intellectual propertyrights to European and Japanese entities and entered into a joint venture andlicensing and technology transfer agreement in China. The China agreement wassubsequently terminated effective in February of 2003.  Intellectual property law and practicediffers in foreign jurisdictions, and it may prove difficult for us to protectour rights in certain foreign countries. We cannot assure you that ourlicensing and other arrangements with foreign entities will not result ininfringements on our proprietary rights. If we are unable to protect ourintellectual property rights, either in the U.S. or abroad, we could faceincreased competition in the market for our products and technologies, whichcould negatively affect our revenues and ability to expand our business.

 

**We maybecome involved in costly and lengthy patent infringement or intellectualproperty litigation, which could harm our business.**

 

The semiconductor industry in general is characterizedby frequent litigation regarding patent and other intellectual property rights.Protecting our proprietary rights may require us to defend claims ofintellectual property infringement by our competitors. If any suchinfringements arise or are claimed in the future, we may be exposed tosubstantial liability for damages and may need to obtain licenses from thepatent owners, discontinue or change our processes or products or expendsignificant resources to develop or acquire non-infringing technologies. Wecannot be certain that licenses would be available under reasonable terms orthat we could successfully develop or acquire non-infringing technologies.Moreover, such efforts would likely be time-consuming and divert managementattention and resources. Our future involvement in patent infringement orintellectual property litigation could harm our operating results and financialcondition.

 

Although none of our patents or intellectual propertyrights has been successfully challenged to date, we have been sued by IXYSCorporation for purportedly infringing two of its patents covering powerMOSFETs.  We have denied infringement ofthe IXYS patents and have asserted affirmative defenses to our claims.  Trial is tentatively scheduled to commencein July of 2004.  We intend to contestIXYS’s claims vigorously but the outcome of this litigation remainsuncertain.  No assurance can be providedthat a court ruling unfavorable to APT would not materially harm ourbusiness.  In addition, the length oftime and legal fees associated with the patent litigation with IXYS may besignificant.

 

Additionally, in the future we could be accused ofinfringing the intellectual property rights of other third parties.  We also have certain indemnificationobligations to customers with respect to the infringement of third partyintellectual rights by our products.  Noassurance can be provided that any future infringement claims by third partiesor claims for indemnification by customers or end users of our products resultingfrom infringement claims will not be asserted or that assertions ofinfringement if proven to be true will not harm our business.

 

**Strongcompetition in the power semiconductor market may reduce the demand for ourproducts or the prices of our products, which could reduce our revenues andharm our business.**

 

The power semiconductor industry is highly competitiveand subject to rapid technological change. Significant competitive factors inthe power semiconductor market include:

 

•                                          productfeatures and performance;

•                                          productquality;

•                                          productreliability;

•                                          technicalknowledge;

•                                          breadth ofproduct line;

•                                          competitivepricing; and

•                                          customerservice and support.

 

Because the market for power semiconductors is diverse and highlyfragmented, we encounter different competitors in our various product markets.Our principal competitors in one or more of our product areas include FairchildSemiconductor, International Rectifier, IXYS, MA/Com, Motorola, Philips and STMicroelectronics.  Many of our competitorshave substantially greater technical, financial and marketing resources andgreater name recognition than we do. We expect intensified competition fromexisting power semiconductor suppliers and the possible entry of newcompetitors. Increased competition could harm our business. We cannot assureyou that we will be able to compete successfully in the future or thatcompetitive pressures will not harm our financial condition or our operatingresults.

 

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Competitivepressures could reduce market acceptance of our products and result in pricereductions and increases in expenses that could harm our business and ourfinancial condition.

 

**Ourfinancial results would be harmed if we were to lose one of our major customersor key distributors.**

 

Several of our major customers account for asignificant portion of our revenues each year. During 2003, our top fivecustomers accounted for approximately 38.0% of our revenues, and onedistributor, Richardson Electronics Ltd, accounted for 15.8% of our revenues.Revenues from Advanced Energy Industries, Inc represented 9.3% of revenues in2003. If we lost Richardson Electronics Ltd or one of our other majorcustomers, or if one of them reduced or canceled significant orders, our netincome and operating results could be harmed. Richardson Electronics Ltd servesas a significant distributor of our products. If this relationship werediscontinued, or if Richardson Electronics Ltd should fail to provide adequateservice to our customers, we could lose revenues and our operating resultswould suffer.

 

**Ifwe fail to manage our growth effectively, we may lose business and experiencereduced profitability.**

 

We have at times experienced periods of rapid revenuegrowth, and we anticipate future growth if demand increases in the markets forour products. To manage this growth successfully, we will need to manageincreased production requirements, attract, retain and train new employees andmanagement, improve our operational and administrative systems, and managemultiple relationships with customers and suppliers. We may be unable toaccomplish any of these requirements, and our failure to do so would harm ouroperating results.

 

**Wemay not be able to consummate future acquisitions or integrate acquisitionssuccessfully into our business.**

 

We have made two acquisitions since we became a publiccompany in August of 2000, and we plan to pursue additional acquisitions ofrelated businesses.  The expenseincurred in consummating the future acquisition of related businesses, or ourfailure to integrate such businesses successfully into our existing businesses,could result in our company incurring unanticipated expenses and losses.  In addition, we may not be able to identifyor finance additional acquisitions or realize any anticipated benefits fromacquisitions we do complete.  In theevent of future acquisitions, we could:

 

•                                          use asignificant portion of our available cash;

•                                          issue equitysecurities that would dilute current stockholders’ percentage ownership;

•                                          incursubstantial debt; or

•                                          assumecontingent liabilities.

 

Should we successfully acquire another business, the process ofintegrating acquired operations into our existing operations may result inunforeseen operating difficulties and may require significant financialresources that would otherwise be available for the ongoing development orexpansion of existing operations.  Someof the risks associated with acquisitions include:

 

•                                          difficultiesin the assimilation of acquired operations, technologies or products;

•                                          unanticipatedcosts associated with the acquisition or joint venture;

•                                          adverseeffects on existing business relationships with customers; and

•                                          potentialloss of key employees of acquired organizations.

 

Our ability to successfully manage these risks would be limited by thesmall size of our management team.

 

**Ourbusiness is subject to risks associated with operations in foreign countries.**

 

In 2003, approximately 35% of our revenues were tocustomers located outside of the U.S. We are vulnerable to risks associatedwith doing business in foreign countries, including tariffs, quotas, taxes andother market barriers, political and economic instability, currencyfluctuations, credit risk and difficulties in staffing and management ofoverseas operations. In addition, we have supply agreements, assemblyagreements, and other relationships with foreign companies that are subject tosimilar risks.

 

**Failureto attract and retain key technical and management personnel could harm ouroperating results.**

 

Our success depends upon the continued service of ourexecutive officers and other key management and technical personnel,particularly our development engineers, and on our ability to continue toattract, retain and motivate qualified personnel, particularly experienceddevelopment engineers, systems applications engineers and sales managers. Thereis intense competition for the services of

 

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developmentengineers in our industry. The loss of the services of one or more of ourdevelopment engineers, executive officers or other key personnel or ourinability to recruit replacements for such personnel or to otherwise attract,retain and motivate qualified personnel could harm our business. We do notcurrently carry life insurance payable to APT with respect to any of ouremployees.

 

**Our products are complex and couldcontain defects, which could reduce sales of those products or result in claimsagainst us.**

 

We develop complex and evolving products. Despitetesting by us and our customers, defects or other performance problems may befound in existing or new products. This could result in delay in recognition orloss of revenues, loss of market share or failure to achieve market acceptance.These defects may also cause us to incur significant warranty, support andrepair costs, divert the attention of our engineering personnel from ourproduct development efforts and harm our relationships with our customers. Anydefects or other problems with our products could result in financial or otherdamages to our customers who could seek damages from us for their losses. Evenan unsuccessful product liability claim would likely be time-consuming andcostly to defend.

 

**Interruptionsin wafer production may harm our operating results.**

 

Any prolonged inability to utilize our Bend, Oregon foundry or thirdparty foundries as a result of fire, natural disaster or otherwise would harmour financial condition and cause our operating results to suffer. If we arenot able to obtain additional foundry capacity as required, our relationshipswith our customers would be harmed and our revenues would likely be reduced. Wemay not be able to make arrangements for additional foundry capacity in atimely fashion or at all, and such arrangements, if any, may not be on termsfavorable to us. Moreover, if we are able to secure additional foundrycapacity, we may be obligated to utilize all of that capacity or incurpenalties. These penalties may be expensive and could harm our operatingresults.

 

**Wedepend on the availability of raw materials to manufacture our products, and adisruption in supply could harm our operating results.**

 

We rely on raw materials to manufacture our products,including silicon, various chemicals, gases and compounds. In particular, weobtain silicon wafers and some packages through limited sources of supply, andin the event of a shortage, we may be forced to locate alternative sources andbe forced to pay higher prices. A severe shortage or an increase in the priceof silicon wafers or some packages may harm our gross margins and our abilityto deliver our products on a timely basis, if at all.

 

**Ourbusiness may be adversely effected by acts of terrorism.**

 

Acts of terrorism couldinterrupt or restrict our business in several ways.  We rely extensively on the use of air transportation to move ourinventory to and from our vendors and to ship finished products to ourcustomers.  If terrorist acts cause airtransportation to be grounded or interrupted, our business would be adverselyeffected.

 

In addition, acts ofterrorism could cause existing export regulations to be changed, which couldlimit the extent to which we are allowed to export our products.  To the extent that acts of terrorism alsoreduce customer confidence and create general economic weakness, our businesswould also be adversely effected.

 

**Ourmanufacturing operations involve hazardous substances, and the costs ofcomplying with applicable environmental laws could harm our financial results.**

 

Our manufacturing operations are subject to variousfederal, state, local and foreign environmental laws and regulations relatingto the management, disposal and remediation of hazardous substances and theemission and discharge of pollutants into the air, water and soil. In theconduct of our manufacturing operations, we have handled and do handlematerials that are considered hazardous, toxic or volatile under federal, stateand local laws. The risk of accidental release of such materials cannot becompletely eliminated, and if such an accidental release occurs, we could beheld financially responsible for clean-up costs and other consequences of therelease. In addition, if environmental laws become more stringent over time, orexisting laws are more stringently enforced, we could incur greater compliancecosts and be subject to increased risks and penalties for violations. We couldbe held liable for significant damages for violating environmental laws andcould lose certain licenses or permits, which could harm our financial results.

 

**Anaccident at our manufacturing facility could cause serious damage for which wecould be responsible.**

 

Our manufacturing operations involve high voltageequipment, explosive gases and hazardous chemicals. An accident at ourmanufacturing facility could result in serious personal injury or propertydamage for which we could be held financially responsible. Any financialobligation in excess of available insurance could harm our financial results.

 

23

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**Ourcharter contains provisions that may hinder or prevent a change in the controlof our company.**

 

The authorization of undesignated preferred stockmakes it possible for our board of directors to issue preferred stock withvoting or other rights or preferences that could impede the success of anyattempt to change control of APT. These and other provisions in our charter maydefer hostile takeovers or delay changes in control or management, which couldreduce our stock price. Also, there are provisions of Delaware law that mayhave similar effects.

 

**Sixmembers of management, as a group, own a significant interest in our commonstock.**

 

Six members of our senior management own approximately40% of our outstanding shares of common stock, after the issuance of1.5 million shares for the acquisition of GHz Technology Inc. As aresult, these members of management exercise significant control over allmatters requiring stockholder approval. The concentrated holdings of managementmay result in a delay of, or serve as a deterrent to, possible changes incontrol of APT, which may reduce the market price of our common stock.

 

24

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**ITEM 7A. QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK.**

 

We do not use derivative financial instruments in ourinvestment portfolio. Due to the short duration and conservative nature of ourcash equivalents, and the high quality and conservative nature of our long-terminvestments, we do not expect any material loss with respect to our investmentportfolio.

 

Currently less than 2% of our revenues are transacted in localcurrencies, primarily Euros. As a result, our international results ofoperations have limited exposure to foreign exchange rate fluctuations. We donot currently hedge against foreign currency rate fluctuations. Most of ourexport revenues and revenues by APT Europe are in U.S. dollars, and most of ourforeign currency revenues are from operations with significant expenses in thesame currency. As a result, gains and losses from such fluctuations have notbeen material to our consolidated results of operations.

 

**ITEM8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**

 

The information required by this item is included in Note 11 of Notesto Consolidated Financial Statements and as listed in Item 15 of Part IVof this Report.

 

**ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.**

 

None.

 

**ITEM9A. CONTROLS AND PROCEDURES**

 

*(a) Evaluation of disclosure controls andprocedures.*

 

As required by new Rule 13a-15 under the Securities ExchangeAct of 1934, the Company carried out an evaluation under the supervision andwith the participation of the Company’s management, including the Company’sChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures,as of the end of the period covered by this report. Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures are effective to ensure thatinformation required to be disclosed by the Company in the reports it files orsubmits under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the Securities and Exchange Commission’srules and forms. In connection with the new rules, we currently are in theprocess of further reviewing and documenting our disclosure controls andprocedures, including our internal controls over financial reporting, and mayfrom time to time make changes aimed at enhancing their effectiveness and toensure that our systems evolve with our business.

 

Based on our most recent evaluation of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures,the Company did not discover:

 

(i) Any significant deficiencies or material weaknesses inthe design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record,process, summarize and report financial information;

(ii) Any instances of fraud, whether or not material, thatinvolved management or other employees who have a significant role in theregistrant’s internal control over financial reporting.

 

*(b)Changes in internal controls over financial reporting*

 

None.

 

25

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**PART III**

 

**ITEM10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.**

 

The information required by this item is included in our ProxyStatement for our 2004 annual meeting of shareholders.

 

**ITEM11. EXECUTIVE COMPENSATION**.

 

The information required by this item is included in our ProxyStatement for our 2004 annual meeting of shareholders.

 

**ITEM 12. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

 

The information required by this item is included in our ProxyStatement for our 2004 annual meeting of shareholders.

 

**ITEM13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

 

The information required by this item is included in our ProxyStatement for our 2004 annual meeting of shareholders.

 

**ITEM14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**

 

The information required by this item is included in our ProxyStatement for our 2004 annual meeting of shareholders.

 

26

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**PART IV**

 

**ITEM15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,AND REPORTS ON FORM 8-K**

 

(a)                                  1.  Index to Financial Statements

 
| Report of KPMG LLP                                                                                                                           |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets  as of December 31, 2003 and 2002                                                                                |   |
| Consolidated  Statements of Operations for the years ended December 31, 2003, 2002, and  2001                                                |   |
| Consolidated Statements of  Stockholders’ Equity and Comprehensive Income (Loss) for the years ended  December 31, 2003, 2002, and 2001 |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2003, 2002, and  2001                                                |   |
| Notes to Consolidated  Financial Statements                                                                                                  |   |

 

(a)                                  2.  Financial Statement Schedules

 

Schedules have been omitted because the information required to be setforth therein is not applicable or is included in the Consolidated FinancialStatements or notes thereto.

 

(a)                                  3.  Index to Exhibits

 

The following exhibits are filed with, or incorporated by referenceinto, this Annual Report on Form 10-K:

 
| **Exhibit Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 2.1                |   | Agreement and Plan of Merger dates as of December 6,  2001, among Advanced Power Technology, Inc., a Delaware corporation  (“Parent”), GHz Acquisition, Inc., a Delaware corporation and a wholly owned  subsidiary of Parent (“Merger Sub”), and GHz Technology, Inc. a California  corporation (the “Company”), incorporated by reference to Exhibits to the 8K  filed January 25, 2002.                                                                                        |
| 2.2                |   | Amendment to Agreement and Plan of Merger dated as  of January 10, 2002 among Advanced Power Technology, Inc. a Delaware  corporation, (“Parent”), GHz Acquisition, Inc., a Delaware corporation and a  wholly owned subsidiary of Parent (“Merger Sub”), and GHz Technology, Inc. a  California corporation (the “Company”), incorporated by reference to Exhibits  to the 8K filed January 25, 2002.                                                                            |
| 2.3                |   | Asset Purchase Agreement as of May 7, 2002 by and  between Microsemi RF Products, Inc., a Delaware corporation (the “Seller”, a  wholly owned subsidiary of Microsemi Corporation, a Delaware corporation  (“Microsemi”) and RF Acquisition Sub, Inc. (the “Purchaser”), a Delaware  corporation and a wholly owned subsidiary of Advanced Power Technology, Inc.  a Delaware corporation (“APT”), incorporated by reference to Exhibits to the  8K filed May 31, 2002. |
| 3.1                |   | Amended and Restated Certificate and Articles of  Incorporation, incorporated by reference to Exhibits to the Company’s  Registration Statement on Form S-1, as amended, effective August 8, 2000,  Registration No. 333-38418, (“the S-1”).                                                                                                                                                                                                                                                     |
| 3.2                |   | Amended and Restated Bylaws, incorporated by  reference to Exhibits to the S-1.                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1                |   | Form of Common Stock Certificate, incorporated by  reference to Exhibits to the S-1.                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.3                |   | Registration Rights Agreement by and among Advanced  Power Technology, Inc., a Delaware corporation, and the investors listed  on Exhibit A, thereto, incorporated by reference to Exhibits to the 8K filed  January 25, 2002.                                                                                                                                                                                                                                                                        |
| 4.4                |   | Escrow Agreement by and among Advanced Power  Technology, Inc., a Delaware corporation (“APT”), GHz Technology, Inc., a  Delaware corporation (“GHz”), Frank Schneider, solely in his capacity as  Shareholder Representative (“Shareholder Representative”), and Silicon Valley  Bank (the “Escrow Agent”), incorporated by reference to Exhibits to the 8K  filed January 25, 2002.                                                                              |
| 4.5                |   | Form of Common Stock Purchase Warrant between  Advanced Power Technology, Inc. and Mark Gates, incorporated by reference to  Exhibits to the 8K filed January 25, 2002.                                                                                                                                                                                                                                                                                                                                    |
| 10.1               | *      | Stock Option Plan dated December 31, 1995, as  amended, incorporated by reference to Exhibits to the S-1.                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2               | *      | Employment Agreement: Patrick P.H. Sireta,  incorporated by reference to Exhibits to the S-1.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.3               | *      | Employment Agreement: Russell J. Crecraft,  incorporated by reference to Exhibits to the S-1 .                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

27

----

 
| 10.4   | *      | Employment Agreement: Greg M. Haugen, incorporated  by reference to Exhibits to the S-1.                                                                                                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5   | *      | Employment Agreement: John I. Hess, incorporated by  reference to Exhibits to the S-1.                                                                                                                                                      |
| 10.6   | *      | Employment Agreement: Thomas A. Loder, incorporated  by reference to Exhibits to the S-1.                                                                                                                                                   |
| 10.7   | *      | Employment Agreement: Dah Wen Tsang, incorporated by  reference to Exhibits to the S-1.                                                                                                                                                     |
| 10.8   |   | Lease Agreement between Shevlin No. One and Advanced  Power Technology, Inc. dated as of March 6, 1996, as amended,  incorporated by reference to Exhibits to the S-1.                                                            |
| 10.9   |   | Commercial Lease between Glassow Ventures, L.L.C.  and Advanced Power Technology, Inc. dated March 6, 1996, incorporated by  reference to Exhibits to the S-1.                                                                              |
| 10.10  | † | North America Distributor Agreement between  Richardson Electronics, Ltd. and Advanced Power Technology, Inc. dated as of  April 1, 1997, incorporated by reference to Exhibits to the S-1.                                                 |
| 10.11  | † | Manufacturing Agreement by and between Siemens AG  and Advanced Power Technology, Inc. dated October 14, 1997, incorporated  by reference to Exhibits to the S-1.                                                                      |
| 10.12  | † | Agreement for Wafer Production and Testing by and  between Advanced Power Technology, Inc. and Siemens Aktiengesellschaft dated  February 11, 1998, as amended, incorporated by reference to Exhibits to the  S-1.                          |
| 10.13  | † | Document of Understanding between Advanced Energy  Industries, Inc. and Advanced Power Technology, Inc. dated August 14,  1998, as amended, incorporated by reference to Exhibits to the S-1.                                          |
| 10.14  | † | Supply Contract between Wacker Siltronic Corporation  and Advanced Power Technology, Inc. dated December 17, 1998,  incorporated by reference to Exhibits to the S-1.                                                                  |
| 10.15  | † | Master Agreement by and between Liaoning Heahai  Power Electronics Co. Ltd., Advanced Power Technology, Inc. and Advanced  Power Technology Europe SA dated as of October 15, 1999, incorporated by  reference to Exhibits to the S-1. |
| 10.16  | † | Subcontract Agreement between Team Pacific  Corporation and Advanced Power Technology, Inc. dated January 26, 2000,  incorporated by reference to Exhibits to the S-1.                                                                 |
| 10.17  |   | Leases: Bordeaux, France, incorporated by reference  to Exhibits to the S-1.                                                                                                                                                                |
| 10.19  |   | Agreement for Wafer Production and Testing between  APT and Episil Technologies, Inc., incorporated by reference to Exhibits to  the 10Q for the third quarter of 2001.                                                                     |
| 21.1** |   | Subsidiaries of Advanced Power Technology, Inc.                                                                                                                                                                                             |
| 23.1** |   | Consent of KPMG LLP.                                                                                                                                                                                                                        |
| 31**   |   | Rule13a-14(a)/15d-14(a)  Certifications, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                             |
| 32**   |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                   |

 

----

†                                          Confidentialtreatment has been requested with respect to certain portions of theseagreements. The omitted portions have been filed separately with the Securitiesand Exchange Commission.

 

*                                         ThisExhibit constitutes a management contract or compensatory plan or arrangement.

 

**                                  Submittedelectronically herewith

 

(b)                                 Reportson Form 8-K

 

Filed:

There were no reports filed on Form 8-K during the quarter.

 

Furnished:

 
| **Date of Report** |   | **Date  Furnished** |   | **Description**                                                                                 |
|--------------------|--------|---------------------|--------|-------------------------------------------------------------------------------------------------|
|               |   |                |   |                                                                                            |
| October 23,  2003  |   | October 24,  2003   |   | Earnings release  for third quarter 2003 financial results.                                     |
| November 6,  2003  |   | November 7,  2003   |   | Financial  release regarding restructuring actions and charges for the fourth quarter of  2003. |

 

Such pressreleases are not incorporated by reference herein or deemed “filed’ within themeaning of Section 18 of the Securities Act.

 

28

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**SIGNATURES**

 

Pursuant to the requirements of Sections 13 or 15(d) of the SecuritiesExchange Act of 1934, as amended, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized onMarch 10, 2004.

 
|   | ADVANCED POWER TECHNOLOGY, INC.                                               |
|--------|------------------------------------------------------------------------------------|
|   | By:                                                                                | /s/ GREG M. HAUGEN |
|   | Greg M. Haugen                                                                     |
|   | Vice President, Finance and Administration, Chief  Financial Officer and Secretary |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below on March 10, 2004 by the followingpersons on behalf of the Registrant and in the capacities indicated.

 
| **Signature** |                    | **Title** |
|---------------|-------------------------|-----------|
|          |                    |
|          | /s/ PATRICK P.H. SIRETA |      | Chairman, President and Chief Executive Officer  (Principal Executive Officer) |
|          | Patrick P.H. Sireta     |      |   |
|          |                    |      |   |
|          | /s/ GREG M. HAUGEN      |      | Vice President, Finance and Administration, Chief  Financial Officer and Secretary |
|          | Greg M. Haugen          |      | (Principal Financial and Accounting Officer) |
|          |                    |      |   |
|          | /s/ ROBERT C. PEARSON   |      | Director |
|          | Robert C. Pearson       |      |   |
|          |                    |      |   |
|          | /s/ JAMES E. PETERSEN   |      | Director |
|          | James E. Petersen       |      |   |
|          |                    |      |   |
|          | /s/ DOUGLAS S. SCHATZ   |      | Director |
|          | Douglas S. Schatz       |      |   |
|          |                    |      |   |
|          | /s/ ALFRED J. STEIN     |      | Director |
|          | Alfred J. Stein         |      |   |

 

29

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**INDEPENDENT AUDITORS’ REPORT**

 

 

TheBoard of Directors and Shareholders

AdvancedPower Technology, Inc.:

 

We have audited the accompanying consolidatedbalance sheets of Advanced Power Technology, Inc. and subsidiaries as ofDecember 31, 2003 and 2002, and the related consolidated statements ofoperations, stockholders’ equity and comprehensive income (loss), and cashflows for each of the years in the three-year period ended December 31,2003. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Advanced Power Technology, Inc. and subsidiaries asof December 31, 2003 and 2002 and the results of their operations andtheir cash flows for each of the years in the three-year period endedDecember 31, 2003 in conformity with accounting principles generallyaccepted in the United States of America.

 
|                   | **/s/ KPMG LLP** |   |
|------------------------|------------------|--------|
|                   |
| Portland,  Oregon      |
| January 30,  2004 |

 

F-1

----

 

**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands, except share amounts)**

 
|                                                                                                                                                                                   |   | **December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|
|                                                                                                                                                                                   |   | **2003**         |   | **2002** |   |
|                                                                                                                                                                                   |   |             |   |   |   |
| **Assets**                                                                                                                                                                             |   |             |   |   |   |
| Current assets:                                                                                                                                                                        |   |             |   |   |   |
| Cash and cash equivalents                                                                                                                                                              |   | $                | 11,564 |   | $ | 6,708 |   |
| Short-term investments in available-for-sale securities                                                                                                                                |   | 4,000            |   | 10,452 |   |
| Accounts receivable, net                                                                                                                                                               |   | 7,564            |   | 6,899 |   |
| Inventories, net                                                                                                                                                                       |   | 12,382           |   | 11,949 |   |
| Prepaid expenses and other current assets                                                                                                                                              |   | 2,436            |   | 2,521 |   |
| Total current assets                                                                                                                                                                   |   | 37,946           |   | 38,529 |   |
| Property and equipment, net                                                                                                                                                            |   | 11,002           |   | 10,617 |   |
| Long-term investments in available-for-sale securities                                                                                                                                 |   | 1,000            |   | 2,000 |   |
| Other assets                                                                                                                                                                           |   | 174              |   | 109 |   |
| Intangible assets, net                                                                                                                                                                 |   | 8,811            |   | 9,887 |   |
| Goodwill                                                                                                                                                                               |   | 15,570           |   | 15,806 |   |
| Total assets                                                                                                                                                                           |   | $                | 74,503 |   | $ | 76,948 |   |
|                                                                                                                                                                                   |   |             |   |   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                          |   |             |   |   |   |
| Current liabilities:                                                                                                                                                                   |   |             |   |   |   |
| Accounts payable                                                                                                                                                                       |   | $                | 3,471  |   | $ | 2,873 |   |
| Accrued expenses                                                                                                                                                                       |   | 2,695            |   | 2,475 |   |
| Total current liabilities                                                                                                                                                              |   | 6,166            |   | 5,348 |   |
| Other long term liabilities                                                                                                                                                            |   | 127              |   | 428 |   |
| Total liabilities                                                                                                                                                                      |   | 6,293            |   | 5,776 |   |
| Commitments and contingencies                                                                                                                                                          |   |             |   |   |   |
| Stockholders’ equity:                                                                                                                                                             |   |             |   |   |   |
| Preferred stock, par value $.001, 1,000,000 shares  authorized; no shares issued and outstanding                                                                                       |   | —           |   | — |   |
| Common stock, par value $.01, 19,000,000 shares  authorized; 10,579,930 shares issued and 10,463,080 outstanding in 2003,  10,503,219 shares issued and 10,394,362 outstanding in 2002 |   | 106              |   | 105 |   |
| Additional paid-in capital                                                                                                                                                             |   | 88,625           |   | 88,490 |   |
| Treasury stock, at cost, 116,850 and 108,857shares in  2003 and 2002, respectively                                                                                                     |   | (1,761           | )      | (1,700 | ) |
| Deferred stock compensation                                                                                                                                                            |   | (21              | )      | (171 | ) |
| Accumulated other comprehensive income                                                                                                                                                 |   | 309              |   | 166 |   |
| Accumulated deficit                                                                                                                                                                    |   | (19,048          | )      | (15,718 | ) |
| Total stockholders’ equity                                                                                                                                                        |   | 68,210           |   | 71,172 |   |
| Total liabilities and stockholders’ equity                                                                                                                                        |   | $                | 74,503 |   | $ | 76,948 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-2

----

 

**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, except per share amounts)**

 
|                                                                                       |   | **Years Ended December 31,** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                       |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                                                       |   |                         |   |   |   |   |   |
| Revenues, net                                                                              |   | $                            | 48,892 |   | $ | 43,425 |   | $ | 36,855 |   |
| Cost of goods sold                                                                         |   | 32,262                       |   | 29,214 |   | 25,023 |   |
| Amortization of technology rights and other charges                                        |   | 1,118                        |   | 1,974 |   | — |   |
| Total cost of goods sold                                                                   |   | 33,380                       |   | 31,188 |   | 25,023 |   |
| Gross profit                                                                               |   | 15,512                       |   | 12,237 |   | 11,832 |   |
| Operating expenses:                                                                        |   |                         |   |   |   |   |   |
| Research and development                                                                   |   | 3,001                        |   | 3,858 |   | 1,810 |   |
| Selling, general and administrative                                                        |   | 14,763                       |   | 12,313 |   | 9,268 |   |
| Restructuring charges                                                                      |   | 645                          |   | — |   | — |   |
| In-process research and development charges                                                |   | —                       |   | 2,108 |   | — |   |
| Total operating expenses                                                                   |   | 18,409                       |   | 18,279 |   | 11,078 |   |
| Income (loss) from operations                                                              |   | (2,897                       | )      | (6,042 | ) | 754 |   |
| Other income (expense), net:                                                               |   |                         |   |   |   |   |   |
| Interest income, net                                                                       |   | 217                          |   | 570 |   | 1,595 |   |
| Other, net                                                                                 |   | (29                          | )      | 14 |   | 14 |   |
| Total other income                                                                         |   | 188                          |   | 584 |   | 1,609 |   |
| Income (loss) before income taxes                                                          |   | (2,709                       | )      | (5,458 | ) | 2,363 |   |
| Income tax expense (benefit)                                                               |   | 621                          |   | (1,771 | ) | 567 |   |
| Net income (loss)                                                                          |   | $                            | (3,330 | ) | $ | (3,687 | ) | $ | 1,796 |   |
| Net income (loss) per share:                                                               |   |                         |   |   |   |   |   |
| Basic                                                                                      |   | $                            | (0.32  | ) | $ | (0.36 | ) | $ | 0.21 |   |
| Diluted                                                                                    |   | (0.32                        | )      | (0.36 | ) | 0.19 |   |
| Weighted average number of shares used in the  computation of net income (loss) per share: |   |                         |   |   |   |   |   |
| Basic                                                                                      |   | 10,410                       |   | 10,248 |   | 8,737 |   |
| Diluted                                                                                    |   | 10,410                       |   | 10,248 |   | 9,368 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-3

----

 

**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)**

**(In thousands, except share amounts)**

 
|                                           |   | **Common Stock** |   | **Treasury Stock** |   | **Additional  Paid-In** |     | **Deferred   Stock** |   | **Accumulated Other  Comprehensive** |   | **Comprehensive  Income** |    | **Accumulated** |   |       |    |
|------------------------------------------------|--------|------------------|--------|--------------------|--------|-------------------------|----------|----------------------|--------|--------------------------------------|--------|---------------------------|---------|-----------------|--------|------------|---------|
|                                           |   | **Shares**       |   | **Amount**         |   | **Shares**              |     | **Amount**           |   | **Capital**                          |   | **Compensation**          |    | **Income**      |   | **(Loss)** |    | **Deficit** |   | **Total** |   |
| Balance, December 31, 2000                     |   | 8,515,818        |   | $                  | 85     |                    | (108,857 | )                    | $      | (1,700                               | )      | $                         |    |            |   | $          | (13,827 | ) |   |   | $ | (13,827 | ) | $ | 51,118 |   |
| Exercise of stock options                      |   | 320,819          |   | 3                  |   | —                  |     | —               |   | 471                                  |   | —                    |    | —          |   |       |    | — |   | 474 |   |
| Tax benefit from exercise of options           |   | —           |   | —             |   | —                  |     | —               |   | 304                                  |   | —                    |    | —          |   |       |    | — |   | 304 |   |
| Stock compensation                             |   | —           |   | —             |   | —                  |     | —               |   | 39                                   |   | —                    |    | —          |   |       |    | — |   | 39 |   |
| Amortization of deferred stock compensation    |   | —           |   | —             |   | —                  |     | —               |   | —                               |   | 164                       |    | —          |   |       |    | — |   | 164 |   |
| Net income                                     |   | —           |   | —             |   | —                  |     | —               |   | —                               |   | —                    |    | —          |   | $          | 1,796   |   | 1,796 |   | 1,796 |   |
| Unrealized gain on investments                 |   | —           |   | —             |   | —                  |     | —               |   | —                               |   | —                    |    | 61              |   | 61         |    | — |   | 61 |   |
| Foreign currency translation                   |   | —           |   | —             |   | —                  |     | —               |   | —                               |   | —                    |    | (8              | )      | (8         | )       | — |   | (8 | ) |
| Comprehensive income                           |   |             |   |               |   |                    |     |                 |   |                                 |   |                      |    |            |   | $          | 1,849   |   |   |   |   |   |
| Balance, December 31, 2001                     |   | 8,836,637        |   | 88                 |   | (108,857                | )        | (1,700               | )      | 67,640                               |   | (166                      | )  | 117             |   |       |    | (12,031 | ) | 53,948 |   |
| Issuance of shares for acquisition             |   | 1,522,976        |   | 15                 |   | —                  |     | —               |   | 16,205                               |   | —                    |    | —          |   |       |    | — |   | 16,220 |   |
| Issuance of stock options for acquisition      |   | —           |   | —             |   | —                  |     | —               |   | 4,093                                |   | —                    |    | —          |   |       |    | — |   | 4,093 |   |
| Deferred stock compensation due to acquisition |   | —           |   | —             |   | —                  |     | —               |   | —                               |   | (497                      | )       | —          |   |       |    | — |   | (497 | ) |
| Exercise of stock options                      |   | 143,606          |   | 2                  |   | —                  |     | —               |   | 365                                  |   | —                    |    | —          |   |       |    | — |   | 367 |   |
| Tax benefit from exercise of options           |   | —           |   | —             |   | —                  |     | —               |   | 180                                  |   | —                    |    | —          |   |       |    | — |   | 180 |   |
| Amortization of deferred compensation          |   | —           |   | —             |   | —                  |     | —               |   | —                               |   | 485                       |    | —          |   |       |    | — |   | 485 |   |
| Stock compensation                             |   | —           |   | —             |   | —                  |     | —               |   | 14                                   |   | —                    |    | —          |   |       |    | — |   | 14 |   |
| Forfeiture of stock options                    |   | —           |   | —             |   | —                  |     | —               |   | (7                                   | )      | 7                         |    | —          |   |       |    | — |   | — |   |
| Net loss                                       |   | —           |   | —             |   | —                  |     | —               |   | —                               |   | —                    |    | —          |   | $          | (3,687  | ) | $ | (3,687 | ) | (3,687 | ) |
| Unrealized loss on investments                 |   | —           |   | —             |   | —                  |     | —               |   | —                               |   | —                    |    | (68             | )      | (68        | )       | — |   | (68 | ) |
| Foreign currency translation                   |   | —           |   | —             |   | —                  |     | —               |   | —                               |   | —                    |    | 117             |   | 117        |    | — |   | 117 |   |
| Comprehensive loss                             |   |             |   |               |   |                    |     |                 |   |                                 |   |                      |    |            |   | $          | (3,638  | ) |   |   |   |   |
| Balance, December 31, 2002                     |   | 10,503,219       |   | 105                |   | (108,857                | )        | (1,700               | )      | 88,490                               |   | (171                      | )  | 166             |   |       |    | (15,718 | ) | 71,172 |   |
| Exercise of stock options                      |   | 33,496           |   | —             |   | —                  |     | —               |   | 75                                   |   | —                    |    | —          |   |       |    | — |   | 75 |   |
| Exercise of stock warrants                     |   | 43,215           |   | 1                  |   | (7,993                  | )        | (61                  | )      | 60                                   |   | —                    |    | —          |   |       |    | — |   | — |   |
| Amortization of deferred stock compensation    |   | —           |   | —             |   | —                  |     | —               |   | —                               |   | 150                       |    | —          |   |       |    | — |   | 150 |   |
| Net loss                                       |   | —           |   | —             |   | —                  |     | —               |   | —                               |   | —                    |    | —          |   | $          | (3,330  | ) | $ | (3,330 | ) | (3,330 | ) |
| Unrealized loss on investments                 |   | —           |   | —             |   | —                  |     | —               |   | —                               |   | —                    |    | (3              | )      | (3         | )       | — |   | (3 | ) |
| Foreign currency translation                   |   | —           |   | —             |   | —                  |     | —               |   | —                               |   | —                    |    | 146             |   | 146        |    | — |   | 146 |   |
| Comprehensive loss                             |   |             |   |               |   |                    |     |                 |   |                                 |   |                      |    |            |   | (3,187     | )       |   |   |   |   |
| Balance, December 31, 2003                     |   | 10,579,930       |   | $                  | 106    |                    | (116,850 | )                    | $      | (1,761                               | )      | $                         | 88,025  |            | (21    | )          | 309     |   |   |   | $ | (19,048 | ) | $ | 68,210 |   |
|                                                |        |                  |        |                    |        |                         |          |                      |        |                                      |        |                           |         |                 |        |            |         |  |  |  |  |  |  |  |  |  |  |  |

** **

 

See accompanying notes toconsolidated financial statements.

 

F-4

----

 

**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

** **
|                                                                                      |   | **Years Ended December 31,** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                      |   | **2003**                     |   | **2002** |   | **2001** |   |
| Cash flows from operating activities:                                                     |   |                         |   |   |   |   |   |
| Net income (loss)                                                                         |   | $                            | (3,330 | ) | $ | (3,687 | ) | $ | 1,796 |   |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities: |   |                         |   |   |   |   |   |
| Depreciation and amortization                                                             |   | 4,156                        |   | 3,498 |   | 1,156 |   |
| Inventory provision                                                                       |   | 454                          |   | 893 |   | 582 |   |
| In-process research and development charges                                               |   | —                       |   | 2,108 |   | — |   |
| Net loss on disposal of property and equipment                                            |   | 4                            |   | — |   | — |   |
| Tax benefit from exercise of warrants and options                                         |   | —                       |   | 180 |   | 304 |   |
| Deferred taxes                                                                            |   | 846                          |   | (1,716 | ) | 298 |   |
| Deferred gain on sale-leaseback                                                           |   | (17                          | )      | (18 | ) | (17 | ) |
| Building impairment charge                                                                |   | 350                          |   | — |   | — |   |
| Amortization of deferred stock based compensation                                         |   | 150                          |   | 498 |   | 203 |   |
| Amortization of investment discount                                                       |   | 14                           |   | 154 |   | 62 |   |
| Changes in operating assets and liabilities, net of  effects of acquisitions:             |   |                         |   |   |   |   |   |
| Accounts receivable                                                                       |   | (526                         | )      | (835 | ) | 3,214 |   |
| Inventories                                                                               |   | (726                         | )      | 1,626 |   | (3,129 | ) |
| Prepaid expenses and other assets                                                         |   | 178                          |   | 2,718 |   | (1,660 | ) |
| Accounts payable and accrued expenses                                                     |   | 708                          |   | (345 | ) | (1,742 | ) |
| Net cash provided by operating activities                                                 |   | 2,261                        |   | 5,074 |   | 1,067 |   |
| Cash flows from investing activities:                                                     |   |                         |   |   |   |   |   |
| Purchases of available-for-sale securities                                                |   | (2,000                       | )      | (10,333 | ) | (21,918 | ) |
| Proceeds from available-for-sale securities                                               |   | 9,433                        |   | 24,838 |   | 13,529 |   |
| Acquisitions, net of cash acquired                                                        |   | —                       |   | (26,632 | ) | — |   |
| Purchase of property and equipment                                                        |   | (4,828                       | )      | (2,649 | ) | (2,335 | ) |
| Proceeds from sale of property and equipment                                              |   | —                       |   | 72 |   | — |   |
| Net cash provided by (used in) investing activities                                       |   | 2,605                        |   | (14,704 | ) | (10,724 | ) |
| Cash flows from financing activities:                                                     |   |                         |   |   |   |   |   |
| Payments on capital lease obligations                                                     |   | (63                          | )      | (78 | ) | (79 | ) |
| Proceeds from issuance of long-term debt                                                  |   | —                       |   | — |   | — |   |
| Principal payments on long-term debt                                                      |   | —                       |   | — |   | (20 | ) |
| Exercise of stock options                                                                 |   | 75                           |   | 367 |   | 474 |   |
| Net cash provided by financing activities                                                 |   | 12                           |   | 289 |   | 375 |   |
| Effects of exchange rate changes on cash                                                  |   | (22                          | )      | (53 | ) | 58 |   |
| Net change in cash and cash equivalents                                                   |   | 4,856                        |   | (9,394 | ) | (9,224 | ) |
| Cash and cash equivalents at beginning of year                                            |   | 6,708                        |   | 16,102 |   | 25,326 |   |
| Cash and cash equivalents at end of year                                                  |   | $                            | 11,564 |   | $ | 6,708 |   | $ | 16,102 |   |
|                                                                                      |   |                         |   |   |   |   |   |
| Supplemental disclosure of cash flow information:                                         |   |                         |   |   |   |   |   |
| Cash (paid) received during the year for: Interest                                        |   | $                            | (32    | ) | $ | (28 | ) | $ | (55 | ) |
| Income taxes                                                                              |   | 197                          |   | 2,098 |   | (1,223 | ) |
| Supplemental disclosure of non-cash activities:                                           |   |                         |   |   |   |   |   |
| Issuance of stock and options for acquisitions                                            |   | —                       |   | 20,313 |   | — |   |
| Unrealized gain (loss) on short-term and long-term  investments                           |   | (3                           | )      | (68 | ) | 61 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-5

----

 

**ADVANCED POWER TECHNOLOGY, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(In thousands, except share and per share amounts)**

 

**(1) Summary of Significant Accounting Policies**

 

***(a)Company Background***

 

Advanced Power Technology Inc. is a leadingdesigner, manufacturer and marketer of high-performance power semiconductorsand modules for Radio Frequency (RF), Linear, and Switchmode applications.Power semiconductors manage and regulate electrical power by converting electricityinto a form required by electrical and electronic products. Our powersemiconductors increase system efficiency, permit the design of more compactend products and improve features and functionality. We are primarily focusedon the high power, high frequency segment of the power semiconductor market.High power refers to the ability to dissipate above one kilowatt, and highfrequency refers to the ability to switch on and off at rates above 100kilohertz. In addition we continue to strengthen our portfolio of RF productsthat operate at frequencies ranging from 1 megahertz to 100 megahertz. RFgenerally refers to the ability to operate at frequencies above 1 megahertz. Wesell our products primarily in North America, Europe, and Asia, through a networkof independent sales representatives and distributors.

 

The acquisition of GHz Technology, Inc. andthe business of Microsemi RF Products, Inc. in 2002 helped us to furtherpenetrate RF markets.  We believe thatthese acquisitions serve to position APT as an emerging, dominant supplier inbipolar RF power transistors for avionics, radar and non-cellularcommunications applications operating at frequency ranges from 1 megahertz tomultiple gigahertz and add valuable RF technology and substantial RF engineering,manufacturing and marketing capability to the Company. These acquisitions arepart of the Company’s ongoing strategy to expand its product and technologyportfolio in the RF power arena through both internal development andacquisitions.

 

***(b)Principles of Consolidation***

 

The accompanying consolidated financial statementsinclude the accounts of APT and its wholly-owned subsidiaries, Advanced PowerTechnology Europe, SAS, Advanced Power Technology RF, Inc. and Advanced PowerTechnology RF Pennsylvania, Inc.  Allintercompany balances have been eliminated in the consolidated financialstatements.

 

***(c)Revenue Recognition, Sales Returns and Allowances***

 

APT complies with the revenue recognition guidancesummarized in Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition inFinancial Statements,” as updated by SAB No. 104 “Revenue Recognition,corrected copy.” The Company recognizes revenue when products are shipped andthe customer takes ownership and assumes risk of loss, collection of the relevantreceivable is probable, persuasive evidence of an arrangement exists, and thesales price is fixed or determinable. In general, APT provides for a one-yearrepair or replacement warranty on its products. Upon shipment, APT alsoprovides for the estimated cost that may be incurred for product warranty andsales returns based on historical experience. APT uses independent distributorsto sell its products. Distributors can return up to 5% of the dollar value ofproducts purchased during the prior six months upon a 30 days notice.Sales to distributors are recognized upon shipment, less an allowance forestimated returns based on historical experience. Revenue from certaincontractual product sales or license arrangements is deferred and recognizedwhen earned in accordance with the arrangement. The reserve for warranties andsales returns was $431, $351 and $365 as of December 31, 2003, 2002 and2001, respectively. The changes in the reserve for warranties and sales returnsfor the years ended December 31, 2003 and 2002 are as follows:

 

 

|                            |   | **December  31,** |   |
|---------------------------------|--------|-------------------|--------|
|                            |   | **2003**          |   | **2002** |   |
|                            |   |              |   |   |   |
| Balance—beginning  of year |   | $                 | 351    |   | $ | 365 |   |
| Acquisition  balance            |   | —            |   | 133 |   |
| Provision                       |   | 1,055             |   | 1,295 |   |
| Charge offs                     |   | (975              | )      | (1,442 | ) |
| Balance—end of  year       |   | $                 | 431    |   | $ | 351 |   |

 

F-6

----

 

***(d)Cash Equivalents and Investments***

 

APT classifies highly liquid investments purchasedwith an original maturity of three months or less as cash equivalents.Short-term investments consist of U.S. government debt securities and otherhighly liquid investments with original maturities in excess of three months,but less than one year. Long-term investments consist of highly liquid debtsecurities with maturities greater than one year. Investments are classified asavailable-for-sale in accordance with Statement of Financial AccountingStandards (SFAS) 115, “Accounting for Certain Investments in Debt and EquitySecurities.” Investments are carried at fair market value with unrealized gainsand losses reported in stockholders’ equity as a component of othercomprehensive income. The following is a summary of cash, cash equivalents andinvestments.

 
|                             |   | **December  31,** |   |
|----------------------------------|--------|-------------------|--------|
|                             |   | **2003**          |   | **2002** |   |
|                             |   |              |   |   |   |
| Cash and cash  equivalents:      |   |              |   |   |   |
| Municipal bonds  and notes       |   | $                 | 7,900  |   | $ | 1,950 |   |
| Money market  fund               |   | 839               |   | 1,653 |   |
| Total cash  equivalents          |   | 8,739             |   | 3,603 |   |
| Cash                             |   | 2,825             |   | 3,105 |   |
| Total cash and  cash equivalents |   | $                 | 11,564 |   | $ | 6,708 |   |
|                             |   |              |   |   |   |
| Short-term  investments:         |   |              |   |   |   |
| Municipal bonds  and notes       |   | $                 | 3,000  |   | $ | 9,952 |   |
| Commercial paper                 |   | 1,000             |   | — |   |
| Certificates of  deposit         |   | —            |   | 500 |   |
| Total short-term  investments    |   | $                 | 4,000  |   | $ | 10,452 |   |
|                             |   |              |   |   |   |
| Long-term  investments:          |   |              |   |   |   |
| Municipal bonds  and notes       |   | $                 | 1,000  |   | $ | 1,000 |   |
| Commercial paper                 |   | —            |   | 1,000 |   |
| U.S. government  debt securities |   | —            |   | — |   |
| Total long-term  investments     |   | $                 | 1,000  |   | $ | 2,000 |   |

 

 

***(e)Trade Accounts Receivable and Allowance for Doubtful Accounts***

 

Trade accounts receivable are recorded at theinvoiced amount and do not bear interest. The allowance for doubtful accountsis APT’s best estimate of the amount of probable credit losses in the existingaccounts receivable. APT determines the allowance based on historical write-offexperience, evaluation of the customer credit condition and general economicdata. The allowance for doubtful accounts is reviewed monthly. Past duebalances over 60 days and other specified accounts as necessary are reviewedindividually. Account balances are charged off against the allowance after allmeans of collection have been exhausted and the potential for recovery isconsidered remote.  APT does not haveany off-balance sheet credit exposure with its customers. The following tablepresents a roll forward of the allowance for doubtful accounts for theindicated periods:

 
|                            |   | **December  31,** |   |
|---------------------------------|--------|-------------------|--------|
|                            |   | **2003**          |   | **2002** |   | **2001** |   |
|                            |   |              |   |   |   |   |   |
| Balance—beginning  of year |   | $                 | 70     |   | $ | 59 |   | $ | 120 |   |
| Provision  (reduction)          |   | 243               |   | 14 |   | (34 | ) |
| Charge offs                     |   | (100              | )      | (3 | ) | (27 | ) |
| Balance—end of  year       |   | $                 | 213    |   | $ | 70 |   | $ | 59 |   |

 

F-7

----

 

***(f)Inventories***

 

Inventories are stated at the lower of standardcost (approximates actual cost on a first-in, first-out basis) or market (netrealizable value). The cost of certain inventories has been reduced by $2,036and $1,690, as of December 31, 2003 and 2002, respectively.

 

***(g)Property, Equipment, and Long-Lived Assets***

 

Property and equipment are recorded at cost.Machinery and equipment under capital lease are stated at the lower of thepresent value of the minimum lease payments at the beginning of the lease termor the fair value of the leased assets at the inception of the lease.

 

Depreciation is provided using the straight-linemethod over estimated useful lives, five to seven years for machinery,furniture and equipment. Leased assets and leasehold improvements are amortizedover the shorter of the estimated life of the asset or the term of the relatedlease, ranging from three to ten years. Depreciation begins on assets inprocess at the time the related assets are placed in service. Maintenance andrepairs are expensed as incurred.

 

As required by SFAS 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” management reviews long-livedassets and intangible assets for impairment whenever events or changes incircumstances indicate the carrying amount of the assets may not berecoverable. Recoverability of these assets is determined by comparing theforecasted undiscounted net cash flows of the operation to which the assetsrelate, to the carrying amount including associated intangible assets of theoperation. If the operation is determined to be unable to recover the carryingamount of its assets, then intangible assets are written down first, followedby the other long-lived assets of the operation, to fair value. Fair value isdetermined based on discounted cash flows or appraised values, depending on thenature of the assets. Long-lived assets considered held for sale are valued atthe lower of historical cost or fair value less costs to sell. Such assets arenot depreciated while so classified.

 

***(h)Goodwill and Intangible Assets***

 

APT values goodwill and intangible assets in accordance with SFAS 142,“Goodwill and Other Intangible Assets.” The costs of internally developedintangible assets are expensed as incurred. The costs of acquired intangible assets are recorded at fair value atacquisition. Intangible assets with finite lives are amortized using thestraight-line method over their estimated useful lives, estimated at ten years,and evaluated for impairment in accordance with SFAS 144. Amortization of technologyrights will be $1,076 for the years ending December 31, 2004, 2005, 2006, 2007and 2008.

 

Goodwill and intangible assets with indefinitelives are carried at fair value and reviewed at least annually for impairment,or more frequently if events and circumstances indicate that the asset might beimpaired, in accordance with SFAS 142. An impairment loss is recognized to theextent that the carrying amount exceeds the asset’s fair value. Thisdetermination is made at the report unit level and consists of two steps. APTis currently considered one reporting unit. First, the Company determines thefair value of the reporting unit and compares it to its carrying amount.Second, if the carrying amount of a reporting unit exceeds its fair value, animpairment loss is recognized for any excess of the carrying amount of thereporting unit’s goodwill over the implied fair value of that goodwill. Theimplied fair value of goodwill is determined by allocating the fair value ofthe reporting unit in a manner similar to a purchase price allocation, inaccordance with SFAS 141, “Business Combinations.” The residual fair valueafter this allocation is the implied fair value of the reporting unit goodwill.

 

***(i)Income Taxes***

 

Income taxes are accounted for under the asset andliability method. Under the asset and liability method, deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date. A valuation allowance is established when necessary to reducedeferred tax assets to the amount expected to be realized. During 2003, theCompany determined that a valuation allowance should be recorded against itsnet deferred tax assets.

 

***(j)Research and Product Development Expenses***

 

APT expenses the cost of research and developmentas incurred.  Research and developmentexpenses principally consist of payroll and related costs, facilities andequipment costs, and the costs of prototypes.

 

***(k)Stock-Based Compensation***

 

SFAS 123, “Accounting for Stock-BasedCompensation,” as amended by SFAS 148, “Accounting for Stock Based Compensation– Transition and Disclosure an amendment of FASB Statement No. 123,” defines afair value based method of accounting for employee stock options

 

F-8

----

 

or similar instruments. Under the fair value based method, compensationcost is measured at the grant date based on the value of the award and isrecognized over the service period, which is usually the vesting period.However, SFAS 123 also allows an entity to continue to measure compensationcost using the intrinsic value based method of accounting prescribed by APBOpinion No. 25 (“Opinion 25”), “Accounting for Stock Issued to Employees.”Under the intrinsic value based method, compensation cost is the excess, ifany, of the quoted market price of the stock at grant date or other measurementdate over the amount an employee must pay to acquire the stock. Entitieselecting to remain with the accounting in Opinion 25 must make pro formadisclosures of net income (loss) and, if presented, earnings per share, as ifthe fair value based method had been applied.

 

APT has elected to continue to apply theprescribed accounting in Opinion 25 and provide the required disclosures perSFAS 123 and SFAS 148. APT accounts for equity instruments issued tonon-employees in accordance with the provisions of SFAS 123 and EmergingIssues Task Force consensus on Issue No. 96-18, “Accounting for EquityInstruments that are Issued to Other than Employees, for Acquiring or inConjunction with Selling Goods or Services.”

 

APTapplies Opinion 25 in accounting for its Plan. Had APT determined compensationcost based on the fair value at the grant date for its stock options underSFAS 123, APT’s net income (loss) would have been the pro forma amountsindicated in the table below.

 
|                                                                                      |   | **Years  Ended December 31,** |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                      |   | **2003**                      |   | **2002** |   | **2001** |   |
|                                                                                      |   |                          |   |   |   |   |   |
| Net income  (loss):                                                                       |   |                          |   |   |   |   |   |
| As reported                                                                               |   | $                             | (3,330 | ) | $ | (3,687 | ) | $ | 1,796 |   |
| Add: Stock based  compensation included in reported net income (loss)                     |   | 150                           |   | 498 |   | 203 |   |
| Deduct: Stock  based compensation determined under fair value based method for all awards |   | (1,822                        | )      | (2,469 | ) | (1,639 | ) |
| Pro forma net  income (loss)                                                              |   | $                             | (5,002 | ) | $ | (5,658 | ) | $ | 360 |   |
|                                                                                      |   |                          |   |   |   |   |   |
| Earnings (loss)  per share:                                                               |   |                          |   |   |   |   |   |
| Basic – as  reported                                                                 |   | $                             | (0.32  | ) | $ | (0.36 | ) | $ | 0.21 |   |
| Basic – pro  forma                                                                   |   | $                             | (0.48  | ) | $ | (0.55 | ) | $ | 0.04 |   |
|                                                                                      |   |                          |   |   |   |   |   |
| Diluted – as  reported                                                               |   | $                             | (0.32  | ) | $ | (0.36 | ) | $ | 0.19 |   |
| Diluted – pro  forma                                                                 |   | $                             | (0.48  | ) | $ | (0.56 | ) | $ | 0.04 |   |

 

The effects of applying SFAS 123 in this pro forma disclosure arenot indicative of future amounts and additional awards anticipated in futureyears. The fair value of compensation costs reflected in the above pro formaamounts were determined using the Black-Scholes option pricing model and thefollowing weighted average assumptions:

 
|                     |   | **Years  Ended December 31,** |   |
|--------------------------|--------|-------------------------------|--------|
|                     |   | **2003**                      |   | **2002** |   | **2001** |   |
|                     |   |                          |   |   |   |   |   |
| Risk-free  interest rate |   | 2.6-3.2                       | %      | 3.8 | % | 4.6 | % |
| Expected  dividend yield |   | 0                             | %      | 0 | % | 0 | % |
| Expected life            |   | 5 years                       |   | 5 years |   | 5 years |   |
| Volatility               |   | 100                           | %      | 100 | % | 100 | % |

 

***(l)Foreign Currency***

 

The local currency of APT’s foreign subsidiary isthe functional currency. Assets and liabilities of APT’s foreign operation aretranslated into U.S. dollars using exchange rates in effect at the translationdate, and revenue and expenses are translated into U.S. dollars using averageexchange rates. The effects of foreign currency translation adjustments areincluded as a component of stockholders’ equity (deficit). Gains and lossesfrom foreign currency transactions are included in the consolidated statementsof operations in other income (expense).

 

***(m)Net Income (Loss) per Share***

 

Basic net income (loss) per shareis computed using the weighted average number of shares of common stockoutstanding for the period. Diluted net income per share is computed using theweighted average number of shares of common stock and dilutive potential commonshares related to stock options and warrants outstanding during theperiod.  Anti-dilutive potential commonshares are excluded from the diluted net income

 

F-9

----

 

share calculation.  Dilutive net loss per share excludes all potential common sharesfrom the calculation as the impact would be anti-dilutive.

 

Incremental dilutive sharesincluded in the calculation of diluted net income (loss) per share andincremental anti-dilutive shares that were excluded from the calculation ofdiluted net income (loss) per share for years ended December 31, 2003, 2002 and2001 are summarized below:

 

 
|                                                                                     |   | **Years  ended December 31,** |   |
|------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                     |   | **2003**                      |   | **2002** |   | **2001** |   |
|                                                                                     |   |                          |   |   |   |   |   |
| Incremental  dilutive shares included in diluted net income (loss) per share calculation |   | —                        |   | — |   | 631,000 |   |
|                                                                                     |   |                          |   |   |   |   |   |
| Anti-dilutive  shares excluded from diluted net income (loss) per share calculation      |   | 1,221,000                     |   | 1,105,000 |   | 241,000 |   |

 

 

***(n)Risk of Technological Change***

 

The markets in which APT competes or seeks tocompete are subject to rapid technological change, frequent new productintroductions, changing customer requirements for new products and features,and evolving industry standards. The introduction of new technologies and theemergence of new industry standards could render APT’s products less desirableor obsolete, which could harm its business.

 

***(o)Costs of Software Developed or Obtained for Internal Use***

 

Internal use software development costs areaccounted for in accordance with Statement of Position 98-1, “Accounting forthe Costs of Computer Software Developed or Obtained for Internal Use.” Costsincurred in the preliminary project stage are expensed as incurred and costsincurred in the application and development stage, which meet thecapitalization criteria, are capitalized and amortized on a straight-line basisover five years, the estimated useful life of the asset.

 

***(p)Management Estimates***

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates. Significant estimates and judgments made bymanagement include those related to product returns and warranty obligations,allowance for doubtful accounts, excess and obsolete inventories, income taxes,valuation of intangible assets including goodwill, valuation of long-livedassets, contingencies and litigation, and excess component order cancellationcosts.

 

***(q)Fair Value of Financial Instruments***

 

The carrying amount of cash and cash equivalents,short-term investments, accounts receivable and accounts payable approximatefair value due to the short-term nature of these instruments. The carryingamount of long-term investments approximates fair value based on quoted marketrates. The carrying amount of amounts due under long-term obligationsapproximate fair value since the interest rates approximate current rates availableto APT.

 

***(r)Concentration of Suppliers***

 

APT relies on external subcontractors for themanufacture of wafers and substantially all the assembly and packaging ofcertain products. The failure to perform by one of these suppliers could have amaterial impact on APT’s growth and results of operations.

 

F-10

----

 

**(2) Balance Sheet Components**

 

***(a)Inventories***

 

Inventories consist of the following:

 
|               |   | **December  31,** |   |
|--------------------|--------|-------------------|--------|
|               |   | **2003**          |   | **2002** |   |
|               |   |              |   |   |   |
| Raw materials      |   | $                 | 3,005  |   | $ | 2,806 |   |
| Work in process    |   | 6,796             |   | 6,705 |   |
| Finished goods     |   | 4,617             |   | 4,128 |   |
| Valuation  reserve |   | (2,036            | )      | (1,690 | ) |
| Inventories, net   |   | $                 | 12,382 |   | $ | 11,949 |   |

 

The following table presents a roll forward of theinventory valuation reserve:

 
|                            |   | **Years  ended December 31,** |   |
|---------------------------------|--------|-------------------------------|--------|
|                            |   | **2003**                      |   | **2002** |   | **2001** |   |
|                            |   |                          |   |   |   |   |   |
| Balance—beginning  of year |   | $                             | 1,690  |   | $ | 941 |   | $ | 675 |   |
| Provision                       |   | 454                           |   | 893 |   | 582 |   |
| Write offs                      |   | (108                          | )      | (144 | ) | (316 | ) |
| Balance—end of  year       |   | $                             | 2,036  |   | $ | 1,690 |   | $ | 941 |   |

 

***(b)Property and Equipment***

 

Property and equipment consist of the following:

 
|                                            |   | **December  31,** |   |
|-------------------------------------------------|--------|-------------------|--------|
|                                            |   | **2003**          |   | **2002** |   |
|                                            |   |              |   |   |   |
| Machinery,  furniture and equipment             |   | $                 | 21,498 |   | $ | 19,963 |   |
| Leasehold  improvements                         |   | 1,213             |   | 1,217 |   |
| Assets in  process                              |   | 2,708             |   | 847 |   |
|                                            |   | 25,419            |   | 22,027 |   |
| Less accumulated  depreciation and amortization |   | (14,417           | )      | (11,410 | ) |
|                                            |   | $                 | 11,002 |   | $ | 10,617 |   |

 

***(c)Accrued Expenses***

 

Accrued expenses consist of the following:

 
|                                          |   | **December  31,** |   |
|-----------------------------------------------|--------|-------------------|--------|
|                                          |   | **2003**          |   | **2002** |   |
|                                          |   |              |   |   |   |
| Payroll,  commissions and related liabilities |   | $                 | 653    |   | $ | 431 |   |
| Vacation accrual                              |   | 553               |   | 443 |   |
| Income and other  taxes payable               |   | 360               |   | 562 |   |
| Reserve for  warranty and sales return        |   | 431               |   | 351 |   |
| Other                                         |   | 698               |   | 688 |   |
|                                          |   | $                 | 2,695  |   | $ | 2,475 |   |

 

F-11

----

 

**(3)Restructuring Charges**

 

Restructuring costs are accounted for inaccordance with SFAS 146, “Accounting for Costs Associated with Exit orDisposal Activities.” A liability for a cost associated with an exit ordisposal activity is recognized and measured at fair value in the period theliability is incurred, except for liabilities related to ongoing servicerequirements which are recognized over the service period.

 

As part of management’s strategicplans, the Company announced in November of 2003 restructuring actions intendedto improve manufacturing efficiencies and lower administrative costs. Theactions include consolidation of certain administrative functions,rationalization of internal and external assembly and test manufacturing, andthe reduction of rent expense through the purchase and resale of one of the twobuildings currently occupied by the Company’s Santa Clara, Californiasubsidiary. These announced actions were in addition to previously disclosedplans to consolidate our wafer fabrication plant in Montgomeryville,Pennsylvania to Bend, Oregon. Total restructuring related charges recognized in2003 were $645.  Not all restructuringactivities were completed as of December 31, 2003.  As such, management expects that additional restructuring chargesof approximately $120 will be incurred in 2004.

 

The total severance related charges recognized in2003 was $295. The severance charges relate to already separated personnel andpersonnel costs associated with benefits expected to be paid upon completion ofcertain eligible transfer activities. The building purchase is reported as an asset held for saleand is being marketed for sale as APT no longer requires the space. Inaccordance with SFAS 144, an asset held for sale is carried at estimated fairvalue. As such, APT recorded an impairment charge for the building in thefourth quarter of 2003 of approximately $350. Fair value was estimated based oncomparable sales data of similar commercial space in the area. The net carryingvalue of the building as of December 31, 2003 was approximately $1 million andis included as a component of other current assets. The changes in the reserve for restructuringbalance for the year ended December 31, 2003 is shown in the table below.  There were no provisions or charges in 2002or 2001.

 
|                            |   | **December  31,  2003** |   |
|---------------------------------|--------|-------------------------|--------|
|                            |   |                    |   |
| Balance—beginning  of year |   | $                       | — |   |
| Provision                       |   | 295                     |   |
| Charge offs                     |   | (117                    | )      |
| Balance—end of  year       |   | $                       | 178    |   |

 

**(4) Acquisitions**

 

***(a) GHz Technology,Inc.***

 

On January 25, 2002, APTacquired all of the outstanding shares and stock options of GHz Technology,Inc. (GHz), in exchange for cash, APT common stock, and APT stock options.  The company was re-named to Advanced PowerTechnology RF, Inc. (APTRF).  The GHzassets acquired included approximately $205 in cash and $7,656 in marketablesecurities.  The transaction wasaccounted for by the purchase method of accounting, in accordance with SFAS141, “Business Combinations” and SFAS 142. APT obtained a third party valuation study to estimate the fair value ofthe acquired intangible assets.  APTbegan to consolidate the financial results of GHz on January 25, 2002 andforward.  The purchase price foraccounting purposes was derived as follows:

 
|                  |   | **Shares** |   | **Fair Value** |   |
|-----------------------|--------|------------|--------|----------------|--------|
| Cash                  |   |       |   | $              | 13,453 |   |
| Stock                 |   | 1,522,976  |   | 16,220         |   |
| Exchanged  options    |   | 425,823    |   | 4,093          |   |
| Direct costs          |   |       |   | 910            |   |
| Total purchase  price |   |       |   | $              | 34,676 |   |

 

APTcommon stock was valued at the average stock price at the time of thetransaction.  With respect to stockoptions exchanged as part of the merger consideration, all vested and unvestedGHz options exchanged for APT options are included as part of the purchaseprice based on their fair value.  Theestimated fair value of the options to be assumed by APT is based upon theBlack-Scholes model using the following assumptions: expected life of 5 years;expected volatility of 100%; risk-free interest rate of 4.3%; and expecteddividend rate of 0%.

 

GHz’s products complement APT’scurrent portfolio of RF products that operate at frequencies ranging from 1 MHzto 100 MHz and are sold into applications such as semiconductor capitalequipment, medical imaging, and industrial systems. The GHz products arecapable of frequencies ranging from 10 MHz to 3.5 GHz and are primarily soldinto applications such as avionics and radar as well as wireless communicationsand semiconductor capital equipment.

 

F-12

----

 

Theallocation of purchase price was as follows:

 
| Inventory                                                |   | $      | 1,943  |   |
|----------------------------------------------------------|--------|--------|--------|--------|
| Property and  equipment                                  |   | 2,029  |   |
| Other tangible  assets                                   |   | 8,653  |   |
| Deferred  compensation on unvested stock options assumed |   | 497    |   |
| Acquired  in-process research and development            |   | 1,897  |   |
| Acquired  intangible technology rights                   |   | 7,449  |   |
| Goodwill                                                 |   | 14,196 |   |
| Net deferred tax  liability                              |   | (1,988 | )      |
| Allocated  purchase price                                |   | $      | 34,676 |   |

 

In connection with thisacquisition, the APT recorded a charge of $1,897 for the write-off ofin-process research and development (IPR&D).  The value assigned to IPR&D related to research projects forwhich technological feasibility had not yet been established and for whichthere was no other feasible alternative use for the technology.  In addition, APT recorded an intangibleasset for acquired current technology rights in the amount of $7,449, to beamortized over ten years, the expected life of the technologies.  Total goodwill recorded was $14,196.  The IPR&D, technology rights andgoodwill amounts are not deductible for tax purposes.

 

The values of IPR&D andtechnology rights were determined by estimating the net cash flows from thesale of products from these technologies over a ten year period and discountingthe net cash flows back to their present value using risk adjusted interestrates of 15-20% for current technologies and 25-40% for in-processtechnologies.  The estimated net cashflows from these products were based on management’s estimates of relatedrevenues, costs of goods sold, operating expenses, income taxes, and additionalcosts to completion for in-process technologies.

 

                                                The nature of the efforts to develop thein-process technology into commercially viable products principally relate tothe completion of all designing, prototyping, verification and testingactivities that are necessary to establish that the product can be produced tomeet its design specifications, including function, features, and technicalperformance requirements.  GHz had threemain product groups under development at the acquisition date that met theminimum development requirements for IPR&D projects.  Each contributed from 11% to 62% of thetotal IPR&D value.  The projectsincluded L Band and S Band radar as well as commercial LDMOS applications.  The projects ranged from 65% to 75%complete.  All projects had expectedcompletion dates within 12 to 18 months and an estimated aggregate cost tocomplete of $1,200.  As of December 31,2003 the projects were complete and the related products were released toproduction.

 

***(b)Microsemi RF Products, Inc.***

 

On May 24, 2002, APT acquired theproduct lines and certain assets of Microsemi RF Products, Inc. (MSC RF), awholly-owned subsidiary of Microsemi Corporation, for $12,200 in cash.  The company was re-named to Advanced PowerTechnology RF Pennsylvania, Inc. (APTRF-PA). The transaction was accounted for by the purchase method of accounting,in accordance with SFAS 141 and SFAS 142. APT obtained a third party valuationstudy to estimate the fair value of the acquired intangible assets.  APT began to consolidate the financialresults of the acquired business on May 24, 2002 and forward.  The purchase price for accounting purposeswas $12,200 in cash and $260 in direct costs.

 

MSC RF produces and sells bipolarRF transistors that are used in a variety of radar, avionics, communicationsand general purpose applications.  MSCRF’s products complement GHz’s technology as well as APT’s current portfolio ofRF products.  The combination of thethree companies’ RF products and technologies positions APT as an emergingdominant supplier in bipolar RF power transistors for avionics, radar andnon-cellular communications applications.

 

The allocation of purchase pricewas as follows:

 
| Inventory                                       |   | $     | 3,068  |   |
|-------------------------------------------------|--------|-------|--------|--------|
| Property and  equipment                         |   | 3,089 |   |
| Other tangible  assets                          |   | 1,168 |   |
| Acquired  in-process research & development |   | 211   |   |
| Acquired  intangible technology rights          |   | 3,314 |   |
| Goodwill                                        |   | 1,610 |   |
| Allocated purchase  price                       |   | $     | 12,460 |   |

 

In connection with thisacquisition, APT recorded a charge of $211 for the write-off of IPR&D.  The value assigned to IPR&D related toresearch projects for which technological feasibility had not yet been establishedand for which there was no other feasible alternative use for the

 

F-13

----

 

technology.  In addition, APTrecorded an intangible asset for acquired current technology rights in theamount of $3,314, to be amortized over ten years, the expected life of thetechnologies.  Total goodwill recordedwas $1,610.  The IPR&D, technologyrights and goodwill amounts are deductible for tax purposes.

 

The values of IPR&D andtechnology rights were determined by estimating the net cash flows from thesale of products from these technologies over a ten year period and discountingthe net cash flows back to their present value using risk adjusted interestrates of 30% for current technologies and 35-40% for in-process technologies.  The estimated net cash flows from theseproducts were based on management’s estimates of related revenues, costs ofgoods sold, operating expenses, income taxes, and additional costs tocompletion for in-process technologies.

 

The nature of the efforts todevelop the in-process technology into commercially viable products principallyrelated to the completion of all designing, prototyping, verification andtesting activities that are necessary to establish that the product can beproduced to meet its design specifications, including function, features, andtechnical performance requirements.  MSCRF had two main product groups under development at the acquisition date thatmet the minimum development requirements for IPR&D projects.  The two projects contributed 88% and 12% tothe total IPR&D value.  The projectsconsisted of Junction Field Effect Transistor and Powermite3 applications.  Each project had expected completion dateswithin 12 to 18 months and an estimated aggregate cost to complete of $30.  As of December 31, 2003 the projects werediscontinued in order to pursue other opportunities.

 

***(c)Pro Forma Condensed Consolidated Results***

 

The following table reflects theunaudited combined results of APT, GHz, and MSC RF as if the acquisitions hadtaken place as of January 1, 2001 and 2002, respectively.  The pro forma information includes non-cashcharges for amortization of technology rights, inventory fair valueadjustments, depreciation and deferred compensation related to theacquisitions, consistent with generally accepted accounting principles.  Both periods exclude a charge of $2,108 forin-process research and development expense. Both periods include the results of GHz and the acquired business of MSCRF beginning on January 1, 2002 and 2001, respectively, including an after-taxcharge of $1,077 for impairment of fixed assets recorded by GHz in the thirdquarter of 2001.  The pro formainformation does not necessarily reflect the actual results that would haveoccurred if the companies had been combined during the periods nor is itnecessarily indicative of future results of operations for the combinedcompanies.

 
|                                                                              |   | **Years  Ended December 31,** |   |
|-----------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                              |   | **2002**                      |   | **2001** |   |
|                                                                              |   |                          |   |   |   |
| Revenues, net                                                                     |   | $                             | 47,559 |   | $ | 58,546 |   |
| Net loss                                                                          |   | (2,183                        | )      | (2,193 | ) |
|                                                                              |   |                          |   |   |   |
| Net loss per share:                                                               |   |                          |   |   |   |
| Basic                                                                             |   | $                             | (0.21  | ) | $ | (0.21 | ) |
| Diluted                                                                           |   | $                             | (0.21  | ) | (0.21 | ) |
| Weighted average number  of shares used in the computation of net loss per share: |   |                          |   |   |   |
| Basic                                                                             |   | 10,352                        |   | 10,260 |   |
| Diluted                                                                           |   | 10,352                        |   | 10,260 |   |

 

 

**(5) Leases**

 

APT leases its facilities and certain officeequipment under non-cancelable operating leases, which expire over the nextnine years. Rental expense was $1,389, $1,534, and $526, for the years endedDecember 31, 2003, 2002, and 2001, respectively.

 

Future minimum lease payments under non-cancelableoperating leases (with initial or remaining lease terms in excess of one year)are as follows as of December 31, 2003:

 
| **Years ended December 31:** |   |   | ** ** |
|------------------------------|--------|--------|------------|
| 2004                         |   | $      | 1,151      |   |
| 2005                         |   | 1,156  |       |
| 2006                         |   | 1,210  |       |
| 2007                         |   | 1,230  |       |
| 2008                         |   | 1,096  |       |
| Total                        |   | $      | 5,843      |   |

 

F-14

----

 

During 1996, APT sold its fabrication facility inBend, Oregon for $1,550 and leased it back under a fifteen-year operating leaseagreement. The transaction produced a gain of approximately $259 that is beingdeferred and amortized over the fifteen-year lease period.

 

**(6) Taxes**

 

Domestic and foreign pre-tax income (loss)consists of the following:

 
|     |   | **Years  Ended December 31,** |   |
|----------|--------|-------------------------------|--------|
|     |   | **2003**                      |   | **2002** |   | **2001** |   |
|     |   |                          |   |   |   |   |   |
| Domestic |   | $                             | (2,026 | ) | $ | (5,968 | ) | $ | 1,599 |   |
| Foreign  |   | (683                          | )      | 510 |   | 764 |   |
|     |   | $                             | (2,709 | ) | $ | (5,458 | ) | $ | 2,363 |   |

 

Income tax expense (benefit) consists of thefollowing:

 
|      |   | **Years  Ended December 31,** |   |
|-----------|--------|-------------------------------|--------|
|      |   | **2003**                      |   | **2002** |   | **2001** |   |
|      |   |                          |   |   |   |   |   |
| Current:  |   |                          |   |   |   |   |   |
| Federal   |   | $                             | (186   | ) | $ | (46 | ) | $ | 226 |   |
| State     |   | (39                           | )      | (9 | ) | 43 |   |
| Foreign   |   | —                        |   | — |   | — |   |
|      |   | (225                          | )      | (55 | ) | 269 |   |
| Deferred: |   |                          |   |   |   |   |   |
| Federal   |   | 700                           |   | (1,455 | ) | 223 |   |
| State     |   | 146                           |   | (261 | ) | 75 |   |
|      |   | 846                           |   | (1,716 | ) | 298 |   |
| Total     |   | $                             | 621    |   | $ | (1,771 | ) | $ | 567 |   |

 

The actual income tax (benefit) expense differs from the expected tax(benefit) expense computed by applying the U.S. federal corporate income taxrate of 34% to income (loss) before income taxes as follows:

 
|                                        |   | **Years  Ended December 31,** |   |
|---------------------------------------------|--------|-------------------------------|--------|
|                                        |   | **2003**                      |   | **2002** |   | **2001** |   |
|                                        |   |                          |   |   |   |   |   |
| Expected income  tax (benefit) expense      |   | (34                           | )%     | (34 | )% | 34 | % |
| Tax exempt  municipal interest              |   | (2                            | )      | (2 | ) | (6 | ) |
| Change in  valuation allowance              |   | 70                            |   | (4 | ) | (11 | ) |
| State income  taxes, net of federal benefit |   | (4                            | )      | (3 | ) | 4 |   |
| Non deductible  IPR&D charges           |   | —                        |   | 12 |   | — |   |
| Other                                       |   | (7                            | )      | (1 | ) | 3 |   |
| Actual income  tax (benefit) expense        |   | 23                            | %      | (32 | )% | 24 | % |

 

F-15

----

 

The income tax effect of temporary differences andcarry forwards which give rise to significant portions of deferred tax assetsand liabilities are as follows:

 
|                                       |   | **December 31,** |   |
|--------------------------------------------|--------|------------------|--------|
|                                       |   | **2003**         |   | **2002** |   |
| Deferred tax  assets:                      |   |             |   |   |   |
| Reserves and  allowances                   |   | $                | 1,106  |   | $ | 965 |   |
| Accrued vacation  pay                      |   | 139              |   | 102 |   |
| Net operating  loss carry forwards         |   | 3,208            |   | 2,503 |   |
| R&E Credit  carry forwards             |   | 718              |   | 629 |   |
| Other                                      |   | 62               |   | 57 |   |
| Total gross  deferred tax assets           |   | 5,233            |   | 4,256 |   |
| Less valuation  allowance                  |   | (2,838           | )      | (840 | ) |
| Net deferred tax  asset                    |   | 2,395            |   | 3,416 |   |
| Deferred tax  liabilities:                 |   |             |   |   |   |
| Depreciation and  amortization differences |   | (2,395           | )      | (2,570 | ) |
| Net deferred tax  assets                   |   | $                | — |   | $ | 846 |   |

 

The Company recorded a tax provision of $621 forthe year ended December 31, 2003 reflecting a full valuation allowance againstits net deferred tax assets. In assessing the valuation of deferred tax assets,SFAS No. 109 requires a more likely than not standard. The ultimate realizationof deferred tax assets is dependent on the generation of future domestictaxable income during the periods in which the associated temporary differencesbecome deductible. Management considers the scheduled reversals of deferred taxliabilities, projected future taxable income, and tax planning strategies inmaking this assessment.   SFAS No. 109requires that recent historical operating performance weigh more heavily inassessing the valuation of deferred tax assets. The more likely than notassessment was principally based upon the losses generated during 2002 and 2003and the cyclical nature of the industry which make projections of industrytrends difficult.

 

The net changes in the valuation allowance for theyears ended December 31, 2003, 2002, and 2001, were an increase of $1,998and decreases of $189, and $282, respectively. As of December 31, 2003, the netdeferred tax asset was offset by a full valuation allowance.  As of December 31, 2002, the net deferredtax asset of $846 is recorded on the balance sheet as $1,124 in other currentassets and $278 in other long term liabilities. During the year ended December31, 2002, APT acquired a net deferred tax liability of $1,988 in connectionwith the acquisition of GHz Technology, Inc.

 

As of December 31, 2003, APT has federal and statenet operating loss carry forwards of $5,431 and $5,563, respectively, whichexpire beginning in years 2020 through 2023. In addition, APT has federal andstate research and experimentation credit carry forwards of $801 which expirebeginning in years 2019 through 2023. APT also has foreign net operating losscarry forwards for tax purposes available to offset future income of APT Europeof approximately (Euros) EUR3,247 ($2,585) based on the exchange rate as ofDecember 31, 2003; all of which are available indefinitely. The portion ofthe valuation allowance for deferred tax assets for which subsequentlyrecognized tax benefits will be applied directly to contributed capital is$124. This amount is attributable to differences between financial and taxreporting of employee stock option transactions.

 

**(7) Stockholders’ Equity**

 

***(a)Stock Option Plan***

 

The 1995 Stock Option Plan (the Plan) provides forthe granting of stock options to employees, directors and consultants topurchase up to 2,250,000 shares of common stock. Options granted under the Planare generally granted with exercise prices equal to the stock market price onthe date of grant, must generally be exercised while the individual is an employeeand within ten years of the date of grant. Options granted typically vest at arate of 20% per year for five years. As of December 31, 2003, optionsavailable for grant were 149,462.

 

Under the Black-Scholes option pricing model, theweighted average fair value of options granted during the year ended December31, 2003 was $5.11.  The weightedaverage fair value of options granted during the year ended December 31,2002 was $8.65 for options with exercise prices that were less than marketprice of the stock on date of grant and $8.09 for all other options which hadexercise prices equal to stock market price at the time of grant.  During 2002, 425,823 options were issuedwith exercise prices that were less than the stock market price on the date ofgrant in connection with the acquisition of GHz Technology, Inc and exchange ofoutstanding GHz options.  (See Note3(a)). For the year ended December 31, 2001, the weighted average fair value ofoptions granted was approximately $9.82. All options issued in 2003 and 2001 had exercise prices equal to marketprice of the stock on date of grant.

 

F-16

----

 

APT has recorded cumulative deferred stockcompensation of $1,094 through December 31, 2003. This deferred stockcompensation is based on the difference between the deemed fair market value ofcommon stock and the exercise price of the option or stock on the grant date.Deferred stock compensation is being amortized on an accelerated basis over thevesting period, generally five years, approximately 45%, 26%, 16%, 9% and 4% inyears one through five, respectively, consistent with the method described inFASB Interpretation No. 28, “Accounting for Stock Appreciation Rights andOther Variable Stock Options or Award Plans,” or FIN 28. APT recognizedcompensation expense of $150, $485, and $164, during the years endedDecember 31, 2003, 2002, and 2001, respectively, related to these grants.

 

Deferred stock compensation was $21 as ofDecember 31, 2003 and future amortization expense will be approximately$21 for the year ending December 31, 2004.

 

Stock option activity was as follows:

 
|                                      |   | **Number  of Shares** |   | **Weighted  Average  Exercise Price** |   |
|-------------------------------------------|--------|-----------------------|--------|---------------------------------------|--------|
|                                      |   |                  |   |                                  |   |
| Options  outstanding at December 31, 2000 |   | 1,057,032             |   | 3.06                                  |   |
| Granted                                   |   | 174,087               |   | 13.29                                 |   |
| Exercised                                 |   | (320,819              | )      | 1.50                                  |   |
| Forfeited                                 |   | (15,429               | )      | 4.63                                  |   |
| Options  outstanding at December 31, 2001 |   | 894,871               |   | 5.58                                  |   |
| Granted                                   |   | 923,875               |   | 7.17                                  |   |
| Exercised                                 |   | (143,606              | )      | 2.62                                  |   |
| Forfeited                                 |   | (98,878               | )      | 8.42                                  |   |
| Options  outstanding at December 31, 2002 |   | 1,576,172             |   | 6.61                                  |   |
| Granted                                   |   | 54,750                |   | 6.79                                  |   |
| Exercised                                 |   | (33,496               | )      | 2.26                                  |   |
| Forfeited                                 |   | (10,984               | )      | 8.63                                  |   |
| Options  outstanding at December 31, 2003 |   | 1,586,442             |   | 6.69                                  |   |

 

The following table summarizes information about stock options as ofDecember 31, 2003:

 
|                                     |   | **Options  Outstanding** |   |                                                        |   | **Options  Exercisable**                         |   |
|------------------------------------------|--------|--------------------------|--------|-------------------------------------------------------------|--------|--------------------------------------------------|--------|
| **Range of  Exercise Prices  Per Share** |   | **Number of  Options**   |   | **Weighted  Average  Remaining  Contractual  Life (Years)** |   | **Weighted  Average  Exercise Price  Per Share** |   | **Number of  Options** |   | **Weighted  Average  Exercise Price  Per Share** |   |
|                                     |   |                     |   |                                                        |   |                                             |   |   |   |   |   |
| $1.40-3.60                               |   | 669,801                  |   | 4.2                                                         |   | $                                                | 1.53   |   | 598,098 |   | $ | 1.53 |   |
| 3.61-10.80                               |   | 363,727                  |   | 8.1                                                         |   | 6.79                                             |   | 163,347 |   | 7.06 |   |
| 10.81 - 14.40                            |   | 442,364                  |   | 7.8                                                         |   | 11.78                                            |   | 195,868 |   | 12.42 |   |
| 14.41 - 36.00                            |   | 110,550                  |   | 7.1                                                         |   | 17.25                                            |   | 64,440 |   | 18.13 |   |
|                                     |   | 1,586,442                |   | 6.3                                                         |   | 6.69                                             |   | 1,021,753 |   | 5.55 |   |
|                                          |        |                          |        |                                                             |        |                                                  |        |  |  |  |  |  |  |  |

 

As of the December 31, 2002 and 2001 there were 790,629 and 404,470stock options exercisable with weighted average exercise price per share of$4.66 and $3.31, respectively.

 

***(b)Warrants***

 

On September 6, 1995, APT issued threewarrants to financing companies and a bank. Two of the warrants permit theholders to purchase 35,715 shares each and one warrant permits the holder topurchase 35,714 shares of APT’s common stock, each at exercise prices of $1.40per share. The fair value of $77 was determined using the Black-Scholesmethodology using the refinancing date as the measurement date, a risk-freerate of 5.2%, expected dividend yield of 0%, 2-year term and expectedvolatility of 65%. One warrant to purchase 35,715 shares was exercised inAugust 2000 and the warrant to purchase 35,714 shares was exercised inSeptember 2000. The final warrant to purchase 35,715 shares was exercisedNovember 2003.

 

F-17

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On November 5, 1998, APT issued warrants totwo financing companies in connection with the renegotiations of certaincommitments. The warrants permitted the holders to purchase a total of 10,000shares of APT’s common stock at $1.40 per share. The fair value of the warrantsissued of $87 was determined by applying the Black-Scholes methodology usingthe issuance date as the measurement date, a risk-free rate of 5.15%, expecteddividend yield of 0%, a seven-year term and expected volatility of 80%. Thewarrant values represented a deferred financing cost and were amortized overthe term of the debt facility of sixteen months. Warrants to purchase 2,500shares were exercised in August 2000. The remaining warrant to purchase7,500 shares was exercised in November 2003.

 

On January 25, 2002, APT issued warrants topurchase 5,000 shares of common stock at $1.16 in exchange for an existingoutstanding warrant for GHz shares in connection with the purchase of GHz byAPT (See Note 3).  The deemed fair valueof the warrant issued was immaterial as determined by applying theBlack-Scholes methodology, and was capitalized as part of the acquisitioncosts.  The warrant is exercisablethrough July 31, 2006. As of December 31, 2003, this is the only warrantoutstanding.

 

**(8) Retirement Benefit Plan**

 

APT has a defined contribution 401(k) plan (401k).Employees in the United States who are at least eighteen years old and have sixmonths of service are eligible to participate in the 401k. Participants maydefer up to 15% of eligible compensation. During 2003 and 2002, APT did notprovide any matching contributions to the plan.  During 2001, APT provided matching contributions for the 401k atthe rate of 25% of each dollar contributed up to 3% of eligible compensation.Contributions by APT in 2001 were $59.

 

**(9) Related Party Transactions**

 

The chief executive officer of Advanced EnergyIndustries, Inc (Advanced Energy), who is a substantial shareholder of AdvancedEnergy, serves as a director of APT. For the years ended December 31,2003, 2003, and 2001, revenues to Advanced Energy were approximately $4,530,$4,122, and $4,140, respectively. Accounts receivable from Advanced Energy were$321 and $319 at December 31, 2003 and 2002, respectively.

 

**(10) Commitments and Contingencies**

 

From time to time the Company is involved in various legal matters thatarise out of the ordinary conduct of our business, including those related tolitigation over intellectual property rights, commercial transactions,contracts, product liability, environmental, safety and health, and employmentmatters.  The Company is currentlyinvolved in various legal proceedings. The Company does not believe that the ultimate resolution of such litigationwill have a material adverse effect on the Company’s financial position, resultsof operations or cash flows. However, the length of time and legal feesassociated with such litigation may be significant. The Company accrues losscontingencies in connection with its litigation when it is probable that a losshas occurred and the amount of the loss can be reasonably estimated.

 

On August 15, 2002, IXYSCorporation filed a patent infringement lawsuit against APT with the UnitedStates District Court, Northern District of California.  The claim filed by IXYS alleges that APTinfringes on their United States Patent No. 5,486,715 and 5,801,419.  The IXYS claim also requested that damagesbe determined at trial and that such damages be trebled. On October 1, 2002,APT filed its answer to the IXYS complaint, denying the allegations of patentinfringement.  In addition, APT filed apatent infringement counterclaim against IXYS, alleging that IXYS infringes onAPT United States Patent No. 5,283,202, entitled “IGBT Device With PlatinumLifetime Control Having Gradient Or Profile Tailored Platinum DiffusionRegions.”  APT has filed with the courtseveral affirmative defenses related to the validity of the IXYS patents.  Trial is scheduled to commence in July of2004. As stated above, APT does not believe that it infringes upon the IXYSpatents cited in the claim and intends to vigorously defend itself in thislawsuit.  The length of time and legalfees associated with the patent infringement litigation with IXYS may besignificant.

 

APT has agreements with foundry partners in Europeand Taiwan to process wafers. APT also has agreements with subcontractors inthe Philippines, Malaysia, and Mexico for assembly and testing of most of itsplastic encapsulated products. In addition, APT enters purchase orderobligations in the normal course of business for the purchase of raw materials,capital equipment, and other supplies. At December 31, 2003, APT’s totalcommitments under these purchase obligations was approximately $5,170.

 

F-18

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**(11) Segment Information**

 

APT operates in one segment andis engaged in the manufacture and marketing of high-performance powersemiconductors and modules for switching and RF applications.

 

***(a)Geographic Information***

 

APT’s geographic revenues, operating income (loss)and identifiable assets are summarized as follows:

 
|                      |   | **Years  Ended December 31,** |   |
|---------------------------|--------|------------------------------------|--------|
|                      |   | **2003**                           |   | **2002** |   | **2001** |   |
|                      |   |                               |   |   |   |   |   |
| Geographic  revenues:     |   |                               |   |   |   |   |   |
| United States             |   | $                                  | 31,768 |   | $ | 27,831 |   | $ | 19,722 |   |
| China                     |   | 4,144                              |   | 2,293 |   | 3,534 |   |
| Germany                   |   | 2,517                              |   | 2,828 |   | 3,288 |   |
| United Kingdom            |   | 1,976                              |   | 849 |   | 928 |   |
| Austria                   |   | 1,967                              |   | 2,889 |   | 3,189 |   |
| Other                     |   | 6,520                              |   | 6,735 |   | 6,194 |   |
|                      |   | $                                  | 48,892 |   | $ | 43,425 |   | $ | 36,855 |   |
| Operating income  (loss): |   |                               |   |   |   |   |   |
| United States             |   | $                                  | (2,282 | ) | $ | (6,628 | ) | $ | (54 | ) |
| France                    |   | (615                               | )      | 586 |   | 808 |   |
|                      |   | $                                  | (2,897 | ) | $ | (6,042 | ) | $ | 754 |   |

 
|                  |   | **December  31,** |   |
|-----------------------|--------|-------------------|--------|
|                  |   | **2003**          |   | **2002** |   |
|                  |   |              |   |   |   |
| Identifiable  assets: |   |              |   |   |   |
| United States         |   | $                 | 72,008 |   | $ | 74,038 |   |
| France                |   | 2,495             |   | 2,910 |   |
|                  |   | $                 | 74,503 |   | $ | 76,948 |   |

 

***(b)Significant Customers***

 

During 2003, the largest customer was our keydistributor, Richardson Electronics Ltd., representing 15.8%, 12.0%, and 7.9%,of our revenues in 2003, 2002, and 2001, respectively. Revenues from AdvancedEnergy represented 9.3%, 9.5%, and 10.8%, of revenues in 2003, 2002, and 2001,respectively.

 

F-19

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**(12) Quarterly Financial Data (Unaudited)**

** **
|                                  |   | **Year Ended  December 31, 2003**          |   |
|---------------------------------------|--------|--------------------------------------------|--------|
|                                  |   | **(In  thousands, except per share data)** |   |
|                                  |   | **1st Qtr**                                |   | **2nd Qtr** |   | **3rd Qtr** |   | **4th Qtr** |   |
|                                  |   |                                       |   |   |   |   |   |   |   |
| Revenues, net                         |   | $                                          | 11,159 |   | $ | 12,487 |   | $ | 12,708 |   | $ | 12,538 |   |
| Gross profit (2)                      |   | 3,123                                      |   | 4,430 |   | 4,067 |   | 3,892 |   |
| Operating income  (loss) (2)          |   | (1,641                                     | )      | 59 |   | (155 | ) | (1,160 | ) |
| Net loss (2)                          |   | (1,009                                     | )      | (119 | ) | (338 | ) | (1,864 | ) |
| Basic and  diluted net loss per share |   | $                                          | (0.10  | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.18 | ) |

 
|                                 |   | **Year Ended  December 31, 2002**          |   |
|--------------------------------------|--------|--------------------------------------------|--------|
|                                 |   | **(In  thousands, except per share data)** |   |
|                                 |   | **1st Qtr**                                |   | **2nd Qtr** |   | **3rd Qtr** |   | **4th Qtr** |   |
|                                 |   |                                       |   |   |   |   |   |   |   |
| Revenues, net                        |   | $                                          | 8,239  |   | $ | 10,694 |   | $ | 13,052 |   | $ | 11,440 |   |
| Gross profit (1)                     |   | 2,235                                      |   | 3,055 |   | 3,908 |   | 3,039 |   |
| Operating loss  (1)                  |   | (3,193                                     | )      | (1,139 | ) | (446 | ) | (1,264 | ) |
| Net income  (loss) (1)               |   | (2,565                                     | )      | (545 | ) | 64 |   | (641 | ) |
| Basic net income  (loss) per share   |   | $                                          | (0.26  | ) | $ | (0.05 | ) | $ | 0.01 |   | $ | (0.06 | ) |
| Diluted net  income (loss) per share |   | $                                          | (0.26  | ) | $ | (0.05 | ) | $ | 0.01 |   | $ | (0.06 | ) |

 
|                                 |   | **Year Ended  December 31, 2001**          |   |
|--------------------------------------|--------|--------------------------------------------|--------|
|                                 |   | **(In  thousands, except per share data)** |   |
|                                 |   | **1st Qtr**                                |   | **2nd Qtr** |   | **3rd Qtr** |   | **4th Qtr** |   |
|                                 |   |                                       |   |   |   |   |   |   |   |
| Revenues, net                        |   | $                                          | 13,158 |   | $ | 11,526 |   | $ | 6,838 |   | $ | 5,333 |   |
| Gross profit                         |   | 5,214                                      |   | 4,252 |   | 1,309 |   | 1,057 |   |
| Operating income  (loss)             |   | 2,137                                      |   | 1,119 |   | (1,020 | ) | (1,482 | ) |
| Net income  (loss)                   |   | 1,782                                      |   | 1,143 |   | (417 | ) | (712 | ) |
| Basic net income  (loss) per share   |   | $                                          | 0.21   |   | $ | 0.13 |   | $ | (0.05 | ) | $ | (0.08 | ) |
| Diluted net  income (loss) per share |   | $                                          | 0.19   |   | $ | 0.12 |   | $ | (0.05 | ) | $ | (0.08 | ) |

 

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(1)          In 2002, we acquired GHz Technology, Inc. (effective January 25) and theproduct lines and certain assets of Microsemi RF Products, Inc. (effective May24).  As a result of these transactions,during fiscal 2002 we recorded acquisition related charges for purchased in-processresearch and development (IPR&D), amortization of intangible assets,inventory fair value adjustments and deferred compensation amortization of$4,330, of which $1,974 was included in costs of good sold and $2,356 inoperating expenses.  The total amountnet of taxes was $3,544. The total charges by quarter were pre-tax $2,353,$842, $603, $532 and after tax $2,178, $519, $483, $364 in the first, second,third and fourth quarters, respectively.

 

(2)          As a result of the acquisitions made in 2002, during the year ended 2003we recorded acquisition related charges for amortization of intangible assetsand deferred compensation amortization of $1,168, of which $1,118 was includedin costs of goods sold and $50 in operating expenses.  Also recorded in 2003 was $645 of restructuring related chargesincluded in operating expenses. During 2003 we acquired the administrativebuilding we leased in Santa Clara, California in order to avoid future leasepayments which were above market. The building is reported as assets held forsale, and accordingly we took a $350 impairment charge to adjust the carryingvalue to fair market value.  Alsoincluded in restructuring charges is severance related to downsizing andorganizational changes. During 2003 we recorded a tax expense for a valuationallowance against our net deferred tax assets for $846. The total amount forthese items net of taxes was $2,659. The total charges by quarter were pre-tax$541, $294, $289, $689 and after tax $346, $191, $587, $1,535 in the first, second,third and fourth quarters, respectively. We recorded a tax benefit of $480 in the first and second quarter of2003 which was reversed in the third quarter of 2003.  The remaining deferred tax asset was fully reserved in the fourthquarter of 2003.

 

F-20

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