##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K

|                                                |  |                                                                                                 
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|þ                                               |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934        
|                                               
|For the fiscal year ended December 31,
    2002
|                                               
|or                                             
|                                               
|o                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|                                               
|                                                |  | For the transition period
    from           to           .                                     

Commission File Number 0-9653


Xicor, Inc.

(Exact name of Registrant as specified in its
Charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|California                                                         |  | 94-2526781                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|933 Murphy Ranch Road
    Milpitas, California                     |  | 95035(Zip Code)                         
|(Address of principal executive
    offices)                       |  |                                         

Registrants telephone number, including
area code:

(408) 432-8888


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, Without Par Value


Preferred Share Rights (currently attached to
and trading only with Common Stock)


(Title of Class)


Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been
subject to such filing requirements for the past
90 days.     Yes þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     þ

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

As of June 28, 2002, the last business day
of the Registrants most recently completed second fiscal
quarter, there were 23,610,984 shares of the Registrants
Common Stock outstanding and the aggregate market value of such
shares held by non-affiliates of the Registrant, based on the
closing sale price of such shares on the Nasdaq National Market
on June 28, 2002, was approximately $67,652,000. Shares of
Common Stock held by each executive officer and director and by
each person who beneficially owns more than 5% of the
outstanding Common Stock have been excluded in that such persons
may under certain circumstances be deemed to be affiliates. This
determination of executive officer or affiliate status is not
necessarily a conclusive determination for other purposes.

The aggregate number of outstanding shares of
Common Stock, without par value, of the Registrant was
23,914,172 on March 26, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the
Registrants 2003 Annual Meeting of Shareholders is
incorporated by reference in Part III of this Form 10-K.









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TABLE OF 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 the Registrants Common Stock 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. Consolidated Financial Statements and Supplementary Data                             
|             | Item 9. Changes In and Disagreements with Accountants On Accounting and Financial Disclosure 
|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. Controls and Procedures                                                             
|PART IV     
|             | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES  
|EXHIBIT 21  
|EXHIBIT 23  
|EXHIBIT 99.1



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XICOR, INC.

FORM 10-K

For the Year Ended December 31, 2002


TABLE OF CONTENTS

|                  |          |  |                                                                                           |      |  |    | 
|----------------- | -------- |  | ----------------------------------------------------------------------------------------- | ---- |  | -- | 
|                  |          |  |                                                                                           | Page
|                  |          |  |                                                                                           |     
|Part I            |          |  | 1                                                                                         |     
|                  | Item 1.  |  | Business                                                                                  |      |  | 1  | 
|                  | Item 2.  |  | Properties                                                                                |      |  | 8  | 
|                  | Item 3.  |  | Legal Proceedings                                                                         |      |  | 8  | 
|                  | Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |      |  | 8  | 
|Part II           |          |  | 9                                                                                         |     
|                  | Item 5.  |  | Market for the Registrants Common Stock and
    Related Stockholder Matters              |      |  | 9  | 
|                  | Item 6.  |  | Selected Financial Data                                                                   |      |  | 10 | 
|                  | Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |      |  | 11 | 
|                  | Item 7A. |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |      |  | 26 | 
|                  | Item 8.  |  | Consolidated Financial Statements and
    Supplementary Data                              |      |  | 27 | 
|                  | Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |      |  | 51 | 
|Part III          |          |  | 51                                                                                        |     
|                  | Item 10. |  | Directors and Executive Officers of the Registrant                                        |      |  | 51 | 
|                  | Item 11. |  | Executive Compensation                                                                    |      |  | 51 | 
|                  | Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |      |  | 51 | 
|                  | Item 13. |  | Certain Relationships and Related Transactions                                            |      |  | 51 | 
|                  | Item 14. |  | Controls and Procedures                                                                   |      |  | 51 | 
|Part IV           |          |  | 52                                                                                        |     
|                  | Item 15. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |      |  | 52 | 
|Signatures        |          |  | 53                                                                                        |     
|Index to Exhibits |          |  | 56                                                                                        |     



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PART I

This report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of
1934. Words such as anticipate,
believes, expects, future,
intends, assuming,
projected, plans and similar expressions
are used to identify forward-looking statements. Although we
believe the expectations reflected in the forward looking
statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Accordingly,
you should not place undue reliance on these forward-looking
statements, which in any case apply only as of the date of this
report. Actual results could differ materially from those
projected in the forward-looking statements for many reasons,
including the risk factors listed in the Factors Affecting
Future Results section of Managements
Discussion & Analysis of Financial Conditions and Results of
Operations included in Part II, Item 7 of this
report and the risk factors included in Item 1 below.






|        |         
|------- | --------
|Item 1. | Business

Overview

Xicor was founded in 1978. For many years our
primary focus was on the development of electrically erasable
programmable read only memory devices, or EEPROMs. During 1998
we began to develop and implement a manufacturing strategy to
leverage outside wafer fabrication technology and capacity. As a
fabless semiconductor company we also began the process of
transitioning our product development effort to the area of high
performance analog mixed-signal integrated circuits. Today we
have two major product areas, our core Analog Mixed-Signal
Products and our legacy Memory Products.

We design, develop and market high performance
analog mixed-signal integrated circuits used in communications,
computing, networking and industrial applications. We have three
fundamental technology approaches to differentiate ourselves
from competition and add value to our customers products.
First we have the ability to utilize EEPROM technology as a
feature in our integrated analog mixed-signal designs. This
integration provides significant flexibility and increases
performance in many applications. The second technology approach
utilizes the proprietary non-volatile technology that we
developed as an EEPROM supplier to implement precision analog
mixed-signal integrated circuits with significantly less power
consumption than traditional approaches. These products add
significant value in battery powered precision applications
where power consumption and heat dissipation are critical. The
third technology approach utilizes an industry standard
0.18-micron logic process to implement high frequency analog
mixed-signal designs for data conversion and signal processing
applications.

Our Mixed-Signal Products include data conversion
products, power management integrated circuits, application
specific standard products and interface devices. The increased
complexity of system design and higher levels of analog content
have created a greater need for programmability in the system.
Our programmable analog mixed-signal components regulate,
control, convert and manage various voltages and currents
without manual adjustment. The growth in portable digital
electronics has created a greater need for precision low-power
analog mixed-signal products to perform a variety of critical
analog tasks such as setting a voltage reference as a standard
in the system or comparing signals to determine appropriate
system response to a change in circumstances. The increased
processing power available to system designers today has created
a demand for more data. Incoming analog information must first
be converted to a digital code before it can be processed.
Commonly referred to as analog-to-digital conversion, this
application requires very fast or high-frequency products that
can convert millions of samples of analog information per
second. We are focused on providing innovative, differentiated
analog mixed-signal products that serve the needs of system
designers for flexibility, low power consumption and data
conversion to exploit the trends toward flexibility, portability
and increased processing power.

Our Memory Products are electrically erasable
programmable read-only memories, or EEPROMs. Generally, EEPROMs
are nonvolatile memory products that can be altered
(reprogrammed) electrically while the device is still installed
in a system. EEPROM products are divided into two broad
categories: parallel EEPROMs and serial EEPROMs. Because of
their performance characteristics, parallel EEPROMs tend to be
used in non-consumer devices, such as communications
infrastructure equipment, instrumentation

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and other industrial applications as well as
telemetry, avionics and military electronic equipment. Serial
EEPROMs are typically commodity parts. As a result, parallel
EEPROMs tend to have higher average selling prices and gross
margins than serial EEPROMs. In March 2001, we announced our
plan to exit the more commodity-like serial EEPROM business
while continuing to provide parallel EEPROM products to our
customers. We substantially completed our exit from the serial
EEPROM business in 2002.


Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and
amendments to such reports are available, free of charge,
through a hyperlink on our Internet website at
http://www.xicor.com as soon as practicable after we file
electronically such material with, or furnish it to, the United
States Securities and Exchange Commission, or SEC.

Industry Background

Integrated circuits may be divided into three
broad categories: analog, digital and mixed-signal. Analog
semiconductors condition and regulate real-world
physical properties, such as temperature, pressure, weight,
speed, sound and electrical current. This information can be
detected, measured and controlled using analog integrated
circuits that represent these real-world properties as
continuously varying voltages and currents. Digital circuits,
such as memory devices and microprocessors, use threshold
voltages which function as on and off switches expressed in
binary code as 1s and 0s
where voltages at or above the threshold voltage represent
on and voltages below the threshold voltage
represent off. The digital components process and
manipulate the data while the analog components condition the
voltages or condition and regulate signals after the data has
been processed. Mixed-signal devices incorporate both analog and
digital functions into a single integrated circuit. In most
cases, these devices can serve as either a bridge converting
analog signals to digital signals or may be used to improve the
performance of the specific analog application. Generally
speaking, mixed-signal products are more difficult to design
because they require designers to understand two fundamentally
different design processes. In many cases products with a large
amount of analog content in the mixed-signal market are referred
to as analog mixed-signal.

A growing opportunity in the analog mixed-signal
market is for innovation in system sensing technology that is
capable of automatically calibrating a system to adjust to
predetermined performance constraints or measured changes in the
environment. Traditionally, many analog devices, and systems
that incorporated these devices, were limited by the need to
make manual adjustments to tune or calibrate the analog
functions. Analog mixed-signal components with embedded memory
and a separate microcontroller are able to make the same
adjustments through programming, eliminating the costly,
time-consuming, and often inaccurate results associated with
manual tuning. For the system manufacturer, programmable
mixed-signal technology can: (1) mitigate the costly
physical malfunction of expensive equipment by detecting and
preventing failure before it occurs; (2) reduce system
downtime preventing large potential revenue loss;
(3) capture sensor-based data which may be analyzed; and
(4) enable smart system functionality, where
overall system utility is enhanced given performance and
hardware parameters. There are increasingly important
applications for system sensing technology within the power
management requirements of electronic systems and bias and
modulation current control within the signal path of
communications systems.

Another opportunity in the analog mixed-signal
market is for low power technology. As portable digital
electronics proliferate in communication, computing, and
industrial environments, the need to extend the operating time
between battery charging has become a crucial aspect of
differentiation for equipment providers. Laptop and notebook
computer users are particularly sensitive to the issue of
battery-life. Industrial applications for point-of-sale (POS)
terminals and test equipment are even more rigorous in their
requirements for low power precision analog mixed-signal
products. The availability of low power electronic components
provides a vehicle for extended run-time on similar battery
chemistry and configuration. As battery chemistry evolves, the
requirements for programmability and low-power consumption tend
to converge and drive a need for integrated solutions that are
both flexible and require minimum supply current for operation.

Additional growth opportunities for high
performance analog mixed-signal products have been created by
the advances in digital processing power. As microprocessor
technology improves and processing power grows,

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the requirement for real-word data increases.
This effect is compounded by the availability of low cost
digital signal processors (DSP) dedicated to specific
applications in communications, multimedia and computation. The
combination of precision and speed in data converter products is
an important facet in the design of high performance electronic
systems. With an increase in processing power, customers expect
a high degree of accuracy in their equipment. Digital imaging
products are expected to have finer resolution, flat panel
displays are expected to be larger and provide a better picture
and test equipment is expected to detect variations at a more
precise level. All of these requirements place demanding
criteria on the analog-to-digital converter (ADC) used in such
systems.


Xicors Mixed-Signal Solutions, Products
and Applications

Our products leverage proprietary nonvolatile
technology, industry standard EEPROM technology and industry
standard fine-line CMOS processes to provide differentiated high
performance analog mixed-signal products. We have three
technology approaches that provide customers a variety of
features and benefits. Many of our products leverage nonvolatile
EEPROM memory to provide a design engineer the ability to design
systems that are self-calibrating or that can be altered easily.
Other products utilize our proprietary nonvolatile technology to
provide very high precision and require extremely low power. We
also are developing high frequency analog mixed-signal products
utilizing an industry standard fine-line CMOS process to provide
data conversion products with high resolution, high speed, low
minimum operating voltage and low power for use in systems that
have large amounts of analog information that must be processed
digitally. By using our products, manufacturers and end-users
can customize microcontroller and microprocessor-based products
to address specific system sensing and signal processing
applications with flexibility, accuracy and high frequency
solutions that are cost effective while minimizing power supply
needs.

Analog mixed-signal product sales were
approximately 63% of total net sales in 2002, 50% in 2001, and
35% in 2000. Our Analog Mixed-Signal Products include the
following products:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Data Conversion
    Products:Digitally Controlled
    Potentiometers or XDCPs represent the most established product
    line in our Mixed-Signal Product group. XDCPs are digitally
    controlled solid-state electronic variable resistors that give a
    designer more flexibility and the system more accuracy.
    Applications for these devices include controlling the Liquid
    Crystal Display (LCD) brightness in cell phone handsets and
    laptop computers, power amplifier control for communications
    systems and wireless radio frequency power settings, and
    high-resolution data acquisition systems for industrial control,
    test instrumentation and medical equipment. We also are
    developing a family of high frequency analog-to-digital
    converters (ADC) using an industry-standard 0.18-micron logic
    process. The implementation of high performance analog circuit
    design in a fine-line logic process is relatively unique and
    provides advantages in cost to manufacture and performance
    relative to speed, lower minimum operating voltages and power
    consumption. We are developing a family of extremely low power
    precision voltage references based on proprietary Xicor process
    technology and design expertise. These devices address a wide
    range of applications in industrial test and measurement
    equipment, portable digital electronics as well as
    communications equipment. In addition to better overall accuracy
    than competing solutions, these products support the need for
    minimum power consumption in battery applications and low power
    dissipation where thermal regulation is important. Through the
    use of proprietary floating gate analog (FGA) technology we can
    achieve levels of performance that have been difficult to attain
    with traditional voltage reference products.
|
| | Power Management Products:Our power management products include
    central processing unit (CPU) supervisory or voltage monitoring
    chips for microcontroller and microprocessor based systems,
    battery management circuits, programmable hot swap and
    programmable power sequencing chips as well as nonvolatile
    random access memories (NOVRAMs) that include CPU and voltage
    monitoring functions. Power management products such as our CPU
    supervisor, programmable hot swap and programmable power
    sequencing products are targeted for systems that require
    controlled power-up and orderly, predictable power-down and
    reliable recovery in the event of system failure. Typical
    applications for these products include devices such as routers,
    LAN switches and cellular base stations. Our battery management
    semiconductors are targeted at three and four cell lithium ion
    and lithium polymer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | applications that require cell balancing for
    optimal performance such as laptop and notebook computers. Some
    of these products include EEPROM on the integrated circuit and
    enable the device to be reprogrammed to accommodate changing
    system design parameters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | Application Specific Standard
    Products:We market products targeted
    at the fiber optic market that integrate several major control
    and monitoring functions for laser diode modules and fiber optic
    applications in Local Area Network (LAN) and Metropolitan Area
    Networks (MAN) as well as long-haul transmission applications.
    These products support the requirements for bias and modulation
    current control of the laser diode in gigabit-Ethernet, fiber
    channel, 10-gigabit Xenpak and dense wave division multiplexing
    (DWDM) applications. Other application specific products for
    communications applications serve the needs of wireless
    applications in base stations for adjusting the power in an RF
    power amplifier by controlling bias current. We are developing a
    family of high performance analog-front-ends (AFE) for the flat
    panel display (FPD) market. These products convert analog
    signals sent from a computer to a high resolution FPD. We are
    focused on supporting the needs of larger format displays and
    supplying a family of analog-front-ends that can digitize analog
    signals at speeds above 200 million samples per second
    (MSPS). We recently received successful first silicon from
    Taiwan Semiconductor Manufacturing Company, LTD. (TSMC) on this
    product and will be demonstrating this product to customers in
    the second quarter of 2003.
|
| | Interface Products.We market real time clock products for
    timekeeping and date stamping in applications that require
    accuracy over time and temperature. Common applications are in
    utility meters, DVD players and recorders, set top boxes and
    cable modems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Nonvolatile Memory Products and
Applications

Memory Product sales were approximately 37% of
total net sales in 2002, 50% in 2001, and 65% of sales in 2000.
Our Memory Products consist of parallel and serial EEPROMs.

Nonvolatile Memory Products and Applications.Historically, we focused our efforts
on EEPROM products which are nonvolatile memories that can be
reprogrammed in-system hundreds of thousands of times and can be
altered one byte or several bytes at a time. EEPROMs are termed
serial or parallel depending on their connection to the
systems processor. Serial EEPROM devices transmit data
through a single input-output port while parallel devices
transmit data through multiple ports concurrently.



| |   |                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Parallel EEPROMs.We
    supply a broad line of parallel interface EEPROMs with densities
    ranging from 64KB to 1MB. Parallel interface EEPROMs are
    generally used to contain frequently updated data in
    communications infrastructure equipment, instrumentation,
    transportation and other industrial applications.
|
| |  | Serial EEPROMs.In
    March 2001, we announced our plan to exit the standalone
    low-density serial EEPROM market. We substantially completed our
    exit from the serial EEPROM business in 2002.                                                                                                                             

Marketing and Sales

Our products are sold worldwide for a broad range
of applications, including communications, computing, networking
and industrial applications. We sell our products to OEM
customers either directly or indirectly through distributors or
contract manufacturers.

In new applications, particularly for newly
introduced devices, our products generally require long
design-in cycles for customer applications and
extensive support by our field application engineers. We
consider close support of our customers design efforts to
be an important aspect of our marketing strategy.

We market our products directly from our
headquarters in Milpitas, California and from regional domestic
and foreign sales offices. Products are also marketed
domestically through a national network of independent sales
representatives, each of which has been granted an exclusive
sales territory, and through non-exclusive national stocking
distributors that also handle competitive products. Our products
are also marketed internationally through a network of
independent exclusive and non-exclusive sales representatives

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and non-exclusive stocking distributors. Certain
of our shipments are made to distributors under agreements that
allow a right of return and price protection on unsold
merchandise. Our policy is to defer recognition of sales and
related costs on such shipments until the distributors sell the
products.


Sales outside of North America constituted
approximately 64% of total net sales in 2002, 54% in 2001, and
48% in 2000. Our international sales are generally denominated
in U.S. dollars.

One distributor accounted for 28% of total net
sales in 2002, 23% in 2001 and 19% in 2000. Another distributor
accounted for 15% of total net sales in 2002. Distributors are
not themselves end users of our products, but rather serve as a
channel of sale to many end users of our products.

Manufacturing

Historically, we manufactured all silicon wafers
used to provide the semiconductor devices for our products.
However, the rapidly escalating capital investments necessary to
keep pace with technological advances and the increasing need
for larger factories in order to efficiently spread the high
level of fixed costs associated with complex semiconductor
manufacturing operations have led to the emergence of wafer
fabrication foundries, enabling many semiconductor companies to
outsource portions or all of their wafer requirements.

During 1998 we announced and began to implement a
restructuring plan to change our manufacturing and procurement
strategies to significantly increase outsourcing of wafer
fabrication and product testing to overseas subcontractors and
to streamline operations. This change was in response to market
conditions that made it more economical to outsource
manufacturing. Yamaha Corporation of Japan was qualified as our
initial outside foundry in the third quarter of 1998. In the
second quarter of 1999 we entered into foundry agreements with
Sanyo Electric Co., Ltd. of Japan and ZMD GmbH of Germany.
In November 2000, we completed the sale of our wafer fabrication
assets and inventory to Standard MEMS, Inc. (Standard
MEMS). At the time of the sale, we also entered into a
related foundry agreement with Standard MEMS. Effective November
2000, we became a fabless semiconductor company. Presently,
Yamaha Corporation and ZMD GmbH provide substantially all of our
wafers. We are in the process of qualifying two more foundries,
TSMC and Chartered Semiconductor, Singapore. We have received
first silicon from TSMC for our first high frequency
analog-to-digital converter and an application specific solution
for the high resolution flat panel display market. We also have
launched our first design effort using a Chartered Semiconductor
0.6 micron analog mixed-signal and EEPROM process.

Each device on the fabricated wafer is tested by
one of our subcontractors. Subcontractors in various countries
including Taiwan, Thailand, South Korea, the Philippines, China
and Malaysia separate the wafers into individual units. Each
functional chip is encapsulated in a plastic or ceramic package
having external leads to which the unit is connected by
extremely fine wires. The packaged units undergo comprehensive
electrical testing offshore at one of our independent
subcontractors located in various countries including Taiwan,
Thailand, South Korea, the Philippines and China. A limited
amount of testing is also performed in Milpitas. Chip-scale
products are processed by subcontractors based in the United
States and tested in Taiwan. In accordance with industry
practice, we provide a limited warranty for our devices against
defects in materials and workmanship for periods ranging from
90 days to one year.

We rely on overseas wafer fabrication, sort,
assembly and test contractors and maintenance of our inventories
at contractors facilities and our business depends on an
uninterrupted supply chain.

The principal raw materials utilized in the
production process are polished silicon wafers, ultra-pure
metals, chemicals and gases. Encapsulation materials that
enclose the chip and provide the external connecting leads are
provided by the independent assembly contractors or are
purchased by us and shipped to such contractors.

Research and Development

Our focus is on providing integrated circuits
with higher levels of analog mixed-signal integration. We
differentiate our products by virtue of leveraging our expertise
in nonvolatile technology and high frequency

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signal processing in standard logic processes.
This strategy requires process and design expertise as well as
applications engineering support. Continuing utilization of more
advanced processes and new product development are essential to
maintaining and enhancing our competitive position.


Research and development expenditures were
$13.1 million or 34% of sales in 2002, $13.6 million
or 19% of sales in 2001, and $15.9 million or 13% of sales
in 2000. Research and development activities require a high
degree of complexity in design and manufacturing process, and
consequently we must continuously invest a significant
percentage of sales in research and development and in the
pre-production engineering activity related to new products and
technologies. Approximately 40% of our workforce is engaged in
research and development activities, which is performed
primarily in the Silicon Valley.

Patents and Licenses

We hold a number of United States patents and
foreign patents covering various circuit designs and device
structures. Further, additional patent applications for products
are pending in the United States and abroad. Similar to other
semiconductor manufacturers, we have granted licenses under our
patents and may continue to do so in the future. We believe
that, due to the rapidly changing technology in the
semiconductor industry, our future success will be dependent
primarily upon the technical expertise and creative skills of
our personnel rather than patent protection.

Acquisition

In the second quarter of 2002 we established our
Signal Processing Group, with the acquisition of Analog
Integrated Partners, LLC (AIP), a privately held company.
Founded in 1999, AIP was led by engineering veterans from Exar
Corporation, Micropower Systems and Sage, Inc. Our Signal
Processing Group designs and develops high performance analog
mixed-signal products for signal processing and data conversion
applications. Applications for this technology include high
resolution flat panel displays (FPD), graphics and imaging
processing, wired and wireless communication systems and test
and measurement equipment.

Competition

The semiconductor industry is highly competitive.
Important elements determining success include product
performance, quality and reliability, delivery capability,
price, diversity of product line, application support, financial
strength and the ability to respond rapidly to technological
innovations. We compete with major semiconductor companies such
as Analog Devices, Atmel Corporation, Linear Technology
Corporation and Maxim Integrated Products. We pursue a strategy
of innovation and differentiation in order to compete in the
high performance analog mixed-signal market.

Insurance

We presently carry various insurance coverage
including property damage, business interruption and general
liability including certain product liability coverage. We have
been unable to obtain pollution and earthquake insurance at
reasonable costs and limits.

Employees

At December 31, 2002 we had 117 employees,
approximately 40% of whom were engaged in research and
development activities. None of our employees are represented by
a labor organization and we consider our employee relations to
be good. Many of our employees are highly skilled and we believe
our success will depend upon our ability to hire and retain key,
qualified human resources.

6



---



##### Table of Contents



Officers of the Registrant

Information regarding each of our current
officers is set forth below:

|                    |  |     |    |        |  |                                                                           
|------------------- |  | --- | -- | ------ |  | --------------------------------------------------------------------------
|Name                |  | Age |    | Office
|                    |  |     |    |       
|Louis DiNardo*      |  |     | 43 |        |  | President and Chief Executive Officer                                     
|Geraldine N. Hench* |  |     | 45 |        |  | Vice President, Finance and Administration and
    Chief Financial Officer
|R. Todd Smathers*   |  |     | 54 |        |  | Senior Vice President, Operations                                         
|Steven R. Bakos*    |  |     | 36 |        |  | Vice President, Sales                                                     
|Carlos Laber        |  |     | 51 |        |  | Vice President, Engineering, Linear Products                              
|John M. Caruso      |  |     | 52 |        |  | Vice President, Engineering, Signal Processing
    Products               
|Davin Lee           |  |     | 32 |        |  | Vice President, Marketing                                                 
|Jim McCreary        |  |     | 56 |        |  | Vice President, Technology                                                



---



|  |                           
|- | --------------------------
|* | Denotes Executive Officer.

Louis DiNardo, President and Chief Executive
Officer.Mr. DiNardo joined Xicor
as President and Chief Executive Officer in November 2000. He
has been involved in sales, marketing and operations within the
semiconductor industry for over 20 years. Mr. DiNardo
came to Xicor from Linear Technology Corporation (LTC), where he
was General Manager of Mixed-Signal Products. During his
13 years at LTC, Mr. DiNardo held positions as Vice
President  Marketing, Director of North American
Distribution, and Area Sales Manager. Prior to LTC,
Mr. DiNardo worked for 8 years at Analog Devices,
where he was involved primarily in Field Sales and Applications.
Mr. DiNardo received his bachelors degree from
Ursinus College.

Geraldine N. Hench, Vice President, Finance
and Administration and Chief Financial Officer.Ms. Hench, a certified public
accountant, joined Xicor in November 1987 and became a Vice
President in June 1993 and Xicors Chief Financial Officer
in January 1998. Prior to Xicor, Ms. Hench was an Audit
Manager at PricewaterhouseCoopers LLP. Ms. Hench
received the degree of Bachelor of Science in Accounting from
Santa Clara University and the degree of Master of Business
Administration from St. Marys College.

R. Todd Smathers, Senior Vice President,
Operations.Mr. Smathers joined
Xicor in October 2001 as Senior Vice President, Operations.
Mr. Smathers has over 30 years of industry experience
in engineering, operations and general management. During his
eighteen years with Linear Technology Corporation (LTC) he held
a variety of senior management positions including General
Manager of the Mixed-Signal Business Unit and Director of
Operations. Prior to his affiliation with LTC, Mr. Smathers
served at National Semiconductor Corporation where he assumed
increasing levels of responsibility in engineering management
for the linear products group. He holds a BS degree in
Electrical Engineering from Clemson University (SC).

Steven R. Bakos, Vice President, Sales.Mr. Bakos joined Xicor in October
2002 as Vice President, Sales. Mr. Bakos brings fourteen
years experience in the industry. He spent the last eleven years
at Linear Technology Corporation, where he most recently served
as Northwest Area Sales Manager. He also had other management
positions in sales and marketing, including responsibility for
North American Distribution Marketing. Prior to his affiliation
with Linear, Mr. Bakos spent three years at National
Semiconductor Corporation. He holds a B.S. degree in Engineering
from Cornell University (New York).

Carlos Laber, Vice President, Engineering,
Linear Products.Mr. Laber joined
Xicor in July 2002 as Vice President, Engineering, Linear
Products. Mr. Laber has more than 24 years of design and
management experience in mixed-signal analog circuit design and
new product definition. Mr. Laber came to Xicor from Micrel
Semiconductor where he was Vice President, Design Engineering
since March 2000. Prior to Micrel, Micro Linear Corporation
employed Mr. Laber from 1984 to 2000 where he held the
positions of Vice President of Design Engineering, Director of
Engineering, and Principal Engineer. Prior to 1984 National
Semiconductor and Intel Corporation employed Mr. Laber in
various design engineering positions. He holds a

7



---



##### Table of Contents



Masters Degree in Electrical Engineering from the
University of Minnesota (Minneapolis) and an Electrical
Engineering degree from the University of Buenos Aires,
Argentina.


John M. Caruso, Vice President, Engineering,
Signal Processing Products.Mr. Caruso joined Xicor in April 2002 as Vice President,
Technology in connection with our acquisition of Analog
Integration Partners, LLC (AIP) and was appointed Vice
President, Engineering, Signal Processing Products in February
2003. Mr. Caruso was one of the founders of AIP, where he
was President and CEO from late 1998 through January 2002. Prior
to founding AIP, Mr. Caruso was employed by Exar
Corporation as Director of Strategic Planning, and prior to that
as Director of the Video and Imaging business unit. Prior to
Exar, he was an owner and the Vice President of Design for Micro
Power Systems. Mr. Caruso has a BSEE from the University of
Cincinnati.

Davin Lee, Vice President, Marketing.Mr. Lee joined Xicor in December
2001 as Senior Director of Sales for North America and was
appointed Vice President, Marketing in February 2003.
Mr. Lee brings 12 years experience in the industry.
From 2000 to 2001 Mr. Lee was at Altera Corporation as a
Strategic Business Manager. From 1994 to 2000 he was employed by
National Semiconductor in a variety of sales and marketing
positions. He holds a B.S. degree in Electrical Engineering
from The University of Texas (Austin) and an M.B.A. from Kellogg
School of Management at Northwestern University (Illinois).

James McCreary, Vice President, Technology.Mr. McCreary joined Xicor in
October 1998 as Vice President, Engineering and was appointed
Vice President, Technology in February 2003. From 1996 through
1998 Mr. McCreary was involved in private business
ventures. In 1983 Mr. McCreary co-founded Micro Linear
Corporation where he was Vice President of Engineering from 1983
through 1995. Mr. McCreary received the degrees of Master
of Science in Electrical Engineering and Ph.D. from the
University of California, Berkeley and is the inventor of
several patents.






|        |           
|------- | ----------
|Item 2. | Properties

Our executive offices are located in an
approximately 62,000 square-foot building at 933 Murphy Ranch
Rd., Milpitas, California. This facility, which houses our
design, research and development and reliability operations and
executive, marketing, and administrative offices, is leased. The
lease expires in 2010 and provides for an annual base rental of
$948,587 increasing 3.5% annually, and requires us to pay all
real estate taxes, utilities and insurance and to maintain the
building and premises. We believe our facility is adequate for
our foreseeable needs.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Information regarding legal proceedings is set
forth in Note 12 of the Notes to Consolidated Financial
Statements which information is hereby incorporated by reference.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

No matters were submitted to a vote of the
security holders during the quarter ended December 31, 2002.

8



---



##### Table of Contents






PART II






|        |                                                                             
|------- | ----------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common
    Stock and Related Stockholder Matters

Our Common Stock trades on the Nasdaq National
Market tier of the Nasdaq Stock MarketSM under the
symbol XICO. The table below sets forth the high and low sales
prices for our Common Stock as reported by Nasdaq for each
calendar quarter.

|                                    |                |      |   |        |  |  |   |       | 
|----------------------------------- | -------------- | ---- | - | ------ |  |  | - | ----- | 
|                                    |                | High |   | Low   
|                                    |                |      |   |       
|Fiscal year ended December 31, 2002 |                |      |   |        |  |  |   |      
|                                    | First Quarter  |      | $ | 12.950 |  |  | $ | 7.500 | 
|                                    | Second Quarter |      |   | 11.450 |  |  |   | 3.970 | 
|                                    | Third Quarter  |      |   | 5.880  |  |  |   | 3.270 | 
|                                    | Fourth Quarter |      |   | 4.700  |  |  |   | 2.050 | 

|                                    |                |      |   |        |  |  |   |       | 
|----------------------------------- | -------------- | ---- | - | ------ |  |  | - | ----- | 
|                                    |                | High |   | Low   
|                                    |                |      |   |       
|Fiscal year ended December 31, 2001 |                |      |   |        |  |  |   |      
|                                    | First Quarter  |      | $ | 6.625  |  |  | $ | 3.281 | 
|                                    | Second Quarter |      |   | 11.150 |  |  |   | 2.620 | 
|                                    | Third Quarter  |      |   | 13.060 |  |  |   | 5.450 | 
|                                    | Fourth Quarter |      |   | 14.340 |  |  |   | 6.770 | 

There were approximately 925 shareholders of
record on December 31, 2002.

Dividend Policy

We have never declared or paid any cash dividend
on our capital stock and do not anticipate paying any cash
dividends on our capital stock in the foreseeable future. We
currently intend to retain future earnings, if any, for use in
our business.

Equity Compensation Plan Information

The following table summarizes the number of
outstanding options granted to employees and directors, as well
as the number of securities remaining available for future
issuance, under the Companys compensation plans as of
December 31, 2002.

|                                                                  |  |                         |       |                      |  |                           |      |  |  |  |       |    
|----------------------------------------------------------------- |  | ----------------------- | ----- | -------------------- |  | ------------------------- | ---- |  |  |  | ----- | ---
|                                                                  |  | (a)                     |       | (b)                  |  | (c)                      
|                                                                  |  |                         |       |                      |  | Number of Securities     
|                                                                  |  |                         |       |                      |  | Remaining Available for  
|                                                                  |  | Number of Securities to |       | Weighted-Average     |  | Future Issuance Under    
|                                                                  |  | be Issued Upon Exercise |       | Exercise Price of    |  | Equity Compensation Plans
|                                                                  |  | of Outstanding Options, |       | Outstanding Options, |  | (excluding securities    
|Plan Category                                                     |  | Warrants and Rights     |       | Warrants and Rights  |  | reflected in column (a)) 
|                                                                  |  |                         |       |                      |  |                          
|                                                                  |  | (In thousands)          |       |                      |  | (In thousands)           
|Equity compensation plans approved by security
    holders        |  |                         | 1,617 |                      |  | $                         | 4.73 |  |  |  | 3,024 | (1)
|Equity compensation plans not approved by
    security holders(2) |  |                         | 5,214 |                      |  |                           | 4.89 |  |  |  | 688   |    
|                                                                  |  |                         |       |                      |  |                           |      |  |  |  |       |    
|Total                                                             |  |                         | 6,831 |                      |  | $                         | 4.85 |  |  |  | 3,712 |    
|                                                                  |  |                         |       |                      |  |                           |      |  |  |  |       |    



---



|    |                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Included in this amount are 380,000 shares
    available for future issuance under Employee Stock Purchase Plan                                                   
|   
|(2) | Amounts correspond to the Companys 1998
    Plan, which is not subject to shareholder approval, described in
    Note 8 to the consolidated financial statements.

9



---



##### Table of Contents






Item 6.Selected
Financial Data

Financial Operating Information

|                                       |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |         |        | 
|-------------------------------------- | -------------------------------------------- | ---------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | ---- | ------ | ------- | ------ | - | ------- | ------- | ------ | - | ------- | ------- | ------ | 
|                                       |                                              |                                         
|                                       |                                              | Year Ended December 31,                 
|                                       |                                              |                                         
|                                       |                                              | 2002                                     |         | 2001   |        | 2000 |         | 1999   |        | 1998
|                                       |                                              |                                          |         |        |        |      |         |        |        |     
|                                       |                                              |                                         
|                                       |                                              | (In thousands, except per share amounts)
|Operations Data:                       |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|                                       | Net sales                                    |                                          | $       | 38,534 |        |      | $       | 70,073 |        |      | $      | 122,849 |        |   | $       | 114,887 |        |   | $       | 106,147 |       
|                                       | Cost of sales                                |                                          |         | 19,076 |        |      |         | 45,100 |        |      |        | 71,672  |        |   |         | 80,474  |        |   |         | 89,844  |       
|                                       |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|                                       |                                              | Gross profit                             |         |        | 19,458 |      |         |        | 24,973 |      |        |         | 51,177 |   |         |         | 34,413 |   |         |         | 16,303 | 
|                                       |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|Operating expenses:                    |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|                                       | Research and development                     |                                          |         | 13,056 |        |      |         | 13,613 |        |      |        | 15,880  |        |   |         | 14,560  |        |   |         | 17,429  |       
|                                       | Selling, general and administrative          |                                          |         | 11,033 |        |      |         | 18,235 |        |      |        | 26,122  |        |   |         | 22,360  |        |   |         | 22,634  |       
|                                       | Restructuring and facilities charge (credit) |                                          |         | 1,936  |        |      |         | 3,205  |        |      |        | (3,841  | )      |   |         | 23,719  |        |   |         | 4,985   |       
|                                       | Amortization of purchased intangible assets  |                                          |         | 739    |        |      |         |       |        |      |        |        |        |   |         |        |        |   |         |        |       
|                                       | In-process research and development          |                                          |         | 1,800  |        |      |         |       |        |      |        |        |        |   |         |        |        |   |         |        |       
|                                       |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|                                       |                                              |                                          | 28,564  |        |        |      | 35,053  |        |        |      | 38,161 |         |        |   | 60,639  |         |        |   | 45,048  |        
|                                       |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|Income (loss) from operations          |                                              |                                          | (9,106  | )      |        |      | (10,080 | )      |        |      | 13,016 |         |        |   | (26,226 | )       |        |   | (28,745 | )      
|Interest expense                       |                                              |                                          | (3,259  | )      |        |      | (524    | )      |        |      | (817   | )       |        |   | (1,407  | )       |        |   | (1,872  | )      
|Interest income                        |                                              |                                          | 789     |        |        |      | 1,237   |        |        |      | 1,458  |         |        |   | 704     |         |        |   | 1,086   |        
|Other income and (expense) net         |                                              |                                          | (1,206  | )      |        |      |        |        |        |      |       |         |        |   |        |         |        |   |        |        
|                                       |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|Income (loss) before income taxes      |                                              |                                          | (12,782 | )      |        |      | (9,367  | )      |        |      | 13,657 |         |        |   | (26,929 | )       |        |   | (29,531 | )      
|Provision for income taxes             |                                              |                                          |        |        |        |      | 102     |        |        |      | 491    |         |        |   |        |         |        |   |        |        
|                                       |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|Net income (loss)                      |                                              | $                                        | (12,782 | )      |        | $    | (9,469  | )      |        | $    | 13,166 |         |        | $ | (26,929 | )       |        | $ | (29,531 | )      
|                                       |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|Net income (loss) per share:           |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|                                       | Basic                                        |                                          | $       | (0.55  | )      |      | $       | (0.43  | )      |      | $      | 0.62    |        |   | $       | (1.32   | )      |   | $       | (1.53   | )     
|                                       |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|                                       | Diluted                                      |                                          | $       | (0.55  | )      |      | $       | (0.43  | )      |      | $      | 0.57    |        |   | $       | (1.32   | )      |   | $       | (1.53   | )     
|                                       |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|Shares used in per share calculations: |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|                                       | Basic                                        |                                          |         | 23,265 |        |      |         | 21,803 |        |      |        | 21,189  |        |   |         | 20,324  |        |   |         | 19,262  |       
|                                       |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        
|                                       | Diluted                                      |                                          |         | 23,265 |        |      |         | 21,803 |        |      |        | 23,286  |        |   |         | 20,324  |        |   |         | 19,262  |       
|                                       |                                              |                                          |         |        |        |      |         |        |        |      |        |         |        |   |         |         |        |   |         |        

|                    |                                             |                |   |          |   |      |   |          |   |      |   |          |   |  |   |          |   |  |   |         |  
|------------------- | ------------------------------------------- | -------------- | - | -------- | - | ---- | - | -------- | - | ---- | - | -------- | - |  | - | -------- | - |  | - | ------- | -
|                    |                                             |               
|                    |                                             | December 31,  
|                    |                                             |               
|                    |                                             | 2002           |   | 2001     |   | 2000 |   | 1999     |   | 1998
|                    |                                             |                |   |          |   |      |   |          |   |     
|                    |                                             |               
|                    |                                             | (In thousands)
|Balance Sheet Data: |                                             |                |   |          |   |      |   |          |   |      |   |          |   |  |   |          |   |  |   |        
|                    | Cash, cash equivalents and investments      |                | $ | 38,381   |   |      | $ | 56,367   |   |      | $ | 29,121   |   |  | $ | 22,233   |   |  | $ | 17,881  |  
|                    | Working capital                             |                |   | 28,835   |   |      |   | 38,563   |   |      |   | 11,559   |   |  |   | 3,573    |   |  |   | 5,382   |  
|                    | Total assets                                |                |   | 67,096   |   |      |   | 80,451   |   |      |   | 64,323   |   |  |   | 54,794   |   |  |   | 78,862  |  
|                    | Long-term obligations, less current portion |                |   | 32,976   |   |      |   | 32,634   |   |      |   | 715      |   |  |   | 9,794    |   |  |   | 13,137  |  
|                    | Accumulated deficit                         |                |   | (133,641 | ) |      |   | (120,859 | ) |      |   | (111,390 | ) |  |   | (124,556 | ) |  |   | (97,627 | )
|                    | Shareholders equity                        |                |   | 15,575   |   |      |   | 16,916   |   |      |   | 20,215   |   |  |   | 4,449    |   |  |   | 30,605  |  

10



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##### Table of Contents






Item 7.Managements
Discussion and Analysis of Financial Condition and Results of
Operations

The statements in this Managements
Discussion and Analysis of Financial Condition and Results of
Operations that are forward-looking are based on current
expectations and beliefs and involve numerous risks and
uncertainties that could cause actual results to differ
materially from expectations. See Safe Harbor
Statement and Factors Affecting Future Results
sections following.

The following discussion should be read in
conjunction with the Consolidated Financial Statements and Notes
thereto appearing on pages 27 to 48.

Results of Operations



| |      
| | -----
| | Sales

Our sales are derived from two product groups,
mixed-signal products and memory products. Mixed-signal product
sales represent our core market. Memory product sales comprise
our legacy businesses of serial EEPROMs, which we have
substantially exited, and parallel EEPROMs, which business we
are retaining. Annual sales by product group were:

|                             |  |                         |        |      |  |      |        |  |  |   |         | 
|---------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------- | 
|                             |  |                        
|                             |  | Year Ended December 31,
|                             |  |                        
|                             |  | 2002                    |        | 2001 |  | 2000
|                             |  |                         |        |      |  |     
|                             |  |                        
|                             |  | (In thousands)         
|Mixed-signal product sales   |  | $                       | 24,091 |      |  | $    | 34,942 |  |  | $ | 43,321  | 
|Mixed-signal royalty revenue |  |                         | 280    |      |  |      |       |  |  |   |        | 
|Memory product sales         |  |                         | 14,163 |      |  |      | 35,131 |  |  |   | 79,528  | 
|                             |  |                         |        |      |  |      |        |  |  |   |         | 
|Total sales                  |  | $                       | 38,534 |      |  | $    | 70,073 |  |  | $ | 122,849 | 
|                             |  |                         |        |      |  |      |        |  |  |   |         | 

Overall economic and industry-wide conditions
were weak throughout 2001 and 2002 which negatively impacted our
revenues in all product groups. In particular, the
communications market segments that we sell our products into
were adversely impacted by the severe economic downturn that was
characterized by a significant drop in end user demand and
exacerbated by excess inventory in global sales channels.

Sales of mixed-signal products represented 63% of
total net sales in 2002, compared to 50% of total net sales in
2001 and 35% of total net sales in 2000. Mixed-signal product
sales decreased 31% from 2001 to 2002 and decreased 19% from
2000 to 2001. The decreases were primarily due to lower demand
in the communications market as well as an overall decrease in
the general economy. Mixed-signal sales were level sequentially
in the first two quarters of 2001 and then declined in the
second half of the year on lower unit sales. In the first
quarter of 2002, mixed-signal sales remained relatively stable
compared to the fourth quarter of 2001. Mixed-signal sales
increased 27% sequentially in the second quarter of 2002 on
higher unit sales, increased 8% sequentially in the third
quarter of 2002 on higher unit sales and then remained
relatively stable sequentially in the fourth quarter of 2002.

As shown in the table below, memory product sales
declined 60% in 2002 and 56% in 2001 compared to the immediately
preceding year:

|                              |  |                         |        |      |  |      |        |  |  |   |        | 
|----------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                              |  |                        
|                              |  | Year Ended December 31,
|                              |  |                        
|                              |  | 2002                    |        | 2001 |  | 2000
|                              |  |                         |        |      |  |     
|                              |  |                        
|                              |  | (In thousands)         
|Parallel EEPROM product sales |  | $                       | 9,901  |      |  | $    | 19,330 |  |  | $ | 28,601 | 
|Serial EEPROM product sales   |  |                         | 4,262  |      |  |      | 15,801 |  |  |   | 50,927 | 
|                              |  |                         |        |      |  |      |        |  |  |   |        | 
|Total memory product sales    |  | $                       | 14,163 |      |  | $    | 35,131 |  |  | $ | 79,528 | 
|                              |  |                         |        |      |  |      |        |  |  |   |        | 

Parallel EEPROM product sales decreased 49% from
2001 to 2002 and decreased 32% from 2000 to 2001 principally due
to lower unit shipments as the overall market for these products
contracted and weak economic conditions persisted. Serial EEPROM
product sales declined in 2002 as we continued to exit this
business. Serial sales decreased 73% from 2001 to 2002 and
decreased 69% from 2000 to 2001. The serial EEPROM

11



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##### Table of Contents



sales decreases were primarily due to lower unit
shipments and, to a lesser extent, lower average selling prices.
We believe that 2003 will be a challenging year as the overall
weak economic and industry conditions experienced in 2002 extend
into 2003. We expect little contribution to revenue from sales
of serial EEPROM products in 2003 as we have substantially
completed our exit from that business. We are focused on our
plans to grow our revenue in high performance mixed-signal
products in 2003 compared to 2002.




| |                                   
| | ----------------------------------
| | Cost of Sales and Gross
    Profit

Gross profit as a percentage of sales was 50% in
2002, 36% in 2001, and 42% in 2000. As discussed below, cost of
sales for the first quarter of 2001 included an
$8.2 million charge to write down inventories. Excluding
the inventory write-down, 2001 gross profit as a percentage of
sales was 47%. The gross profit percentage in 2002 benefited
from a shift in the product mix to a larger percentage of higher
margin mixed-signal and parallel EEPROM sales and a smaller
percentage of lower margin serial EEPROM sales, the amortization
of $1.9 million of the deferred gain on the sale of the fab
assets over a lower sales level and lower manufacturing costs
due to spending controls. These benefits were partially offset
by lower absorption of fixed costs as manufacturing volumes were
reduced in 2002 due to the weak industry-wide economic
conditions. Compared to 2000, the 2001 gross profit percentage
excluding the inventory write-down benefited from a shift in the
product mix to a larger percentage of higher margin mixed-signal
and parallel EEPROM sales and a smaller percentage of lower
margin serial EEPROM sales, the amortization of
$2.5 million of the deferred gain on the sale of the fab
assets and lower costs associated with our shift to fully
outsourced manufacturing completed in the second quarter of
2001. Cost of sales in 2000 included a $0.4 million credit
related to the amortization of the deferred gain on the fab
sale. The net benefit to gross margin resulting from the sale of
products that had been previously written down was less than
$0.5 million in each of the years ended December 31,
2002 and 2001. The gross profit percentage is expected to
fluctuate from quarter to quarter as a result in changes in
product mix, product costs and average selling prices.



| |                         
| | ------------------------
| | Research and Development

Research and development expenses amounted to
$13.1 million or 34% of sales in 2002, $13.6 million
or 19% of sales in 2001; and $15.9 million or 13% of sales
in 2000. The absolute dollar amount of research and development
expenses in 2002 was relatively consistent with the 2001 expense
level as the benefits from spending controls were largely offset
by the increased personnel costs resulting from the second
quarter 2002 acquisition of our Signal Processing Group,
formerly Analog Integration Partners LLC (AIP). While research
and development expenses increased as a percentage of sales in
2001 compared to 2000 due to the lower sales level, the dollar
amount of research and development expenses decreased in 2001
compared to 2000 primarily due to lower personnel costs and
spending controls. We intend to continue to invest in research
and development in 2003, although at a lower absolute dollar
level than in 2002 as we continue to monitor product development
expenses and pare back ancillary engineering projects.



| |                                        
| | ---------------------------------------
| | Selling, General and
    Administrative

Selling, general and administrative expenses
amounted to $11.0 million or 29% of sales in 2002,
$18.2 million or 26% of sales in 2001; and
$26.1 million or 21% of sales in 2000. The decrease in the
dollar amount of selling, general and administrative expenses in
2002 compared to 2001 is primarily due to reduced personnel
expenses of $2.5 million related to headcount reductions
and $1.6 million lower commission expenses related
primarily to the decreased sales in 2002 and to a lesser extent
overall spending controls. The decrease in the dollar amount of
selling, general and administrative expenses in 2001 compared to
2000 is due primarily to headcount reductions and lower
commission expenses related to the decreased sales in 2001,
partially offset by increased legal costs associated with
protecting our intellectual property rights.

12



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##### Table of Contents





| |                                    
| | -----------------------------------
| | Restructuring and Other
    Charges

|                             |  |                         |       |      |  |      |        |  |  |   |        |  
|---------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ------ |  |  | - | ------ | -
|                             |  |                        
|                             |  | Year Ended December 31,
|                             |  |                        
|                             |  | 2002                    |       | 2001 |  | 2000
|                             |  |                         |       |      |  |     
|                             |  |                        
|                             |  | (In thousands)         
|Restructuring and facilities |  | $                       | 1,936 |      |  | $    | 3,205  |  |  | $ | (3,841 | )
|Inventory write-down         |  |                         |      |      |  |      | 8,200  |  |  |   |       |  
|                             |  |                         |       |      |  |      |        |  |  |   |        |  
|Total                        |  | $                       | 1,936 |      |  | $    | 11,405 |  |  | $ | (3,841 | )
|                             |  |                         |       |      |  |      |        |  |  |   |        |  

At the beginning of 2000, we had restructuring
accruals of $8.3 million primarily related to the expected
costs to close our Milpitas in-house wafer fabrication facility.
In November 2000, we completed the sale of the wafer fabrication
assets and inventory to Standard MEMS, Inc. (Standard
MEMS) for a gross purchase price of $12.8 million.
During 2000 we utilized $1.9 million of restructuring
reserves. Related reductions in workforce of approximately 200
employees, primarily in manufacturing and related support
groups, occurred primarily in the fourth quarter of 2000. As a
result of the sale of the fab, we incurred restructuring charges
at levels significantly below amounts previously estimated and
accrued. The net restructuring credit of $3.8 million
recorded in 2000 consists of a reversal of $6.1 million of
costs originally included in the restructuring accrual not
utilized due primarily to the sale of the fab to Standard MEMS,
partially offset by $2.3 million principally related to
additional workforce reductions that we identified and committed
to in the fourth quarter of 2000 to streamline operations and
further implement our outsourced manufacturing strategy.

At the time of the sale of the wafer fabrication
assets and inventory, Xicor and Standard MEMS also entered into
a related foundry agreement for Standard MEMS to become a Xicor
foundry. The sale of the wafer fabrication assets and inventory
resulted in a net gain of $5.0 million, which was recorded
as a deferred gain on sale of fab assets. We established the
amortization period of the gain at two years, which was the
minimum term of the foundry agreement. Cost of sales for 2002,
2001 and 2000 included a $1.9 million, $2.5 million
and $0.4 million credit, respectively, related to the
amortization of the deferred gain on the sale of the fab assets.
The benefit from the amortization of the deferred gain ended in
the third quarter of 2002 due to the early termination of the
foundry agreement, and the remaining unamortized balance of
$0.2 million was included in other income in the third
quarter of 2002.

In the first quarter of 2001, we announced our
plan to exit from offering stand alone low-density serial EEPROM
memory products and complete the move to fully outsourced test
and assembly operations. Accordingly, our first quarter 2001
results included an $8.2 million charge to cost of sales to
write down inventories to their net realizable value and a
$3.2 million restructuring charge. The $3.2 million
restructuring charge consisted of $1.5 million of
severance-related costs for an additional reduction in our
workforce of approximately 95 employees, $1.2 million of
fixed asset write-offs principally related to leasehold
improvements in the facility that housed our test operation and
$0.5 million of other restructuring-related costs.

During 2001, we reduced our workforce by
approximately 140 employees and utilized $3.1 million
of the restructuring reserve for related severance costs and
$0.7 million for other restructuring related costs. At
December 31, 2001, the restructuring accrual of
$0.7 million consisted of $0.4 million of severance
costs (including costs to reduce the workforce by approximately
10 employees primarily in sales and administrative groups) and
$0.3 million of other costs associated with vacated sales
offices.

In 2002, due to the ongoing weak industry
conditions, we implemented two additional reductions in force
that affected employees in all areas of the company. In the
second quarter of 2002 we reduced our workforce by
33 employees, which resulted in a $0.8 million
restructuring charge for severance-related costs. Quarterly cost
reductions of approximately $0.7 million associated with
the second quarter 2002 reduction in workforce were partially
offset by increased research and development expenses. In the
fourth quarter of 2002, we notified 16 employees that their
employment would cease on various dates in the fourth quarter of
2002 and first quarter of 2003, which resulted in a
$0.2 million restructuring charge for severance-related
costs. A significant portion of the $0.4 million of
quarterly cost reductions resulting from the fourth quarter 2002
reduction in workforce are expected to be realized in the first
quarter of 2003.

13



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In the fourth quarter of 2002 we entered into a
lease agreement for a facility to be used as our corporate
headquarters. We vacated our prior headquarters facility in the
fourth quarter of 2002, and a third party assumed the related
lease in the first quarter of 2003. In the fourth quarter of
2002 we also vacated our leased Bay Area sales office facility
and the leased facility that we assumed as part of the AIP
acquisition and relocated the employees from both facilities to
our corporate headquarters.

Terminating our prior facility lease and entering
into the new facility lease allowed us to consolidate our
operations in a more efficient facility and reduce our future
minimum lease commitments, exclusive of restructuring related
lease payments, by approximately $0.3 million per year in
2003 through 2009. Our minimum lease commitment increased by
$1.2 million in 2010 as the new facility lease term is one
year longer than the prior facility lease term. The facilities
abandonments resulted in a fourth quarter 2002 facilities
related restructuring charge of $0.9 million consisting of
$0.5 million for the non-cash abandonment of leasehold
improvements, equipment and furniture and $0.4 million of
exit costs consisting primarily of rent after abandonment of the
facilities.

Rent expense in 2003 is expected to approximate
our 2002 net rent expense as the gross rent for the prior
facility was reduced by an 18-month sublease that was due to
expire in 2003.

During 2002, we reduced our workforce by
approximately 50 employees and utilized $1.1 million of the
restructuring reserve for related severance costs and
$0.3 million for other restructuring related costs. At
December 31, 2002, the restructuring accrual of
$0.7 million consisted of $0.2 million of severance
costs payable to terminated employees and $0.5 million of
costs associated with vacated facilities.



| |                                                   
| | --------------------------------------------------
| | Acquisition of Analog Integration Partners
    LLC

On April 16, 2002, we acquired Analog
Integration Partners LLC (AIP), a privately held company that
designs and develops high-performance analog signal processing
and data conversion circuits, for total consideration of
$15.5 million, consisting of $10.2 million of stock
(1,012,758 shares of Xicor common stock valued at $10.05
per share, the average closing price for the three consecutive
days ended April 16, 2002), $5.0 million in cash, and
direct acquisition costs of $0.3 million for legal,
appraisal and accounting fees. The $2.7 million of the
purchase price allocated to current technology and
$0.1 million allocated to customer contracts for
professional services are being amortized using the
straight-line method over their useful lives of 3 years and
8 months, respectively. The $10.8 million of the
purchase price allocated to goodwill is not expected to be
deductible for tax purposes, and in accordance with SFAS
No. 142 will not be amortized but instead evaluated
periodically to determine whether events or circumstances have
occurred indicating that goodwill might be impaired.

The $1.8 million of the purchase price
allocated to in-process research and development expense in the
second quarter of 2002 relates to AIPs current engineering
effort that is focused on developing the analog front-end for
the high-end flat panel display market using a standard digital
0.18 micron CMOS process. Management determined the value
of the in-process research and development based upon various
factors, including an independent appraisal. The appraisal used
a discounted cash flow method and several factors including
projected financial results, relative risk of successful
development, time value of money and level of completion.
Projected financial results were based on a number of estimates
including market growth rates, the companys competitive
position, the product roadmap, the companys cost
structure, development timelines, resource requirements and the
long-term effective tax rate. The risk-adjusted discount rate
used for projected cash flows was 50%. As of the acquisition
date, the project was estimated to be approximately 5% complete
and the estimated cost to complete the project was approximately
$3 million. Revenues related to products developed under
this project are planned to begin toward the end of 2003.
Uncertainties and risks associated with completing development
in a reasonable period of time include the remaining effort to
achieve technological feasibility, rapidly changing customer
markets and competition. Failure to bring these products to
market in a timely manner could adversely impact our sales and
profitability in the future and potentially impair the
$10.8 million assigned to goodwill.

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| |                         
| | ------------------------
| | Other Income and Expense

Interest expense increased in 2002 compared to
2001 due to interest expense and amortization resulting from our
November 2001 issuance of $35 million of 5.5% convertible
subordinated notes and warrants. Interest expense decreased in
2001 compared to 2000 due to the sale of the Milpitas wafer
fabrication assets and payoff of related equipment lease debt in
November 2000, partially offset by increased interest expense
and amortization due to our November 2001 issuance of
$35 million of 5.5% convertible subordinated notes and
warrants.

Interest income decreased in 2002 compared to
2001 primarily as a result of lower interest rates, partially
offset by an increase in the average balance invested. The
average cash and investments balance was higher in 2002 than in
2001 primarily due to funds generated from the November 2001
issuance of convertible subordinated notes and warrants,
partially offset by funds used in 2002 operating activities and
for the second quarter 2002 acquisition of AIP. Interest income
decreased in 2001 compared to 2000 primarily as a result of
lower interest rates. Interest income is expected to decrease in
2003 compared to 2002 due to the lower average cash and
investments balance and, to a lesser extent, lower interest
rates.

Other expense for the year ended
December 31, 2002 includes a non-cash impairment charge of
$2.5 million to write-off an investment held in a private
company. Other income for the year ended December 31, 2002
includes $700,000 from a favorable sales tax audit, a $400,000
benefit associated with the sale of our wafer fabrication
facility in 2000 and $194,000 from the early termination of a
wafer foundry agreement with Standard MEMS.



| |      
| | -----
| | Taxes

No taxes were provided in 2002 due to the net
loss. The provision for income taxes for 2001 and 2000 consisted
primarily of federal and state minimum taxes, which resulted
from limitations on the use of net operating loss carryforwards,
and foreign taxes. Net deferred tax assets of $58.4 million
at the end of 2002 remain fully reserved because of the
uncertainty regarding the ultimate realization of these assets.



| |                                
| | -------------------------------
| | Liquidity and Capital Resources

At December 31, 2002, we had
$37.3 million in cash, cash equivalents and short-term
investments. Corresponding balances at the end of 2001 and 2000
were $56.4 million and $29.1 million, respectively.

In 2002 we used $12.6 million of cash in
operating activities (including $1.4 million associated
with restructuring activities). Cash used in investing
activities was $11.7 million in 2002, consisting of net
investments in cash-based, available-for-sale securities of
$5.7 million, the $5.0 cash portion of the consideration
paid to acquire AIP and $0.9 million of equipment
purchases. We generated $0.6 million of net cash from
financing activities in 2002, consisting of $1.3 million of
cash generated from the issuance of common stock under employee
stock plans, partially offset by $0.7 million of cash used
to repay long-term capital lease obligations.

In 2001 we used $4.0 million of cash in
operating activities (including $3.8 million associated
with restructuring activities). Cash used in investing
activities was $2.8 million in 2001, consisting of
$2.5 million invested in Standard MEMS, and
$0.3 million for equipment purchases ($1.3 million of
equipment purchases, net of $1.0 million of equipment
financing). We generated $34.0 million of net cash from
financing activities in 2001, principally due to our November
2001 issuance of $35.0 million of 5.5% convertible notes
and warrants due November 2006, with semiannual interest
payments on May 19 and November 19 of each year. The
notes are convertible, at the option of the holder, into our
common stock at any time unless previously redeemed or
repurchased, at a conversion price of $11.22 per share, subject
to adjustment in certain events. The net proceeds of the
offering after payment of the underwriting discount and expenses
of the offering of $2.8 million were $32.2 million. We
also generated $2.6 million of cash from the issuance of
stock under employee stock plans and used $0.9 million to
repay long-term capital lease obligations in 2001.

In 2000 we generated $11.4 million of cash
from operating activities, $12.8 million of proceeds from
the sale of the wafer fabrication assets and inventory to
Standard MEMS and $2.3 million from the issuance of

15



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stock under employee stock plans. We used
$13.7 million of cash to repay long-term obligations and
$6.0 million for equipment purchases in 2000.


During 2003, we expect to use cash in operating
activities (including interest payments on the convertible note
and costs associated with restructuring activities), to repay
long-term obligations and purchase equipment. Capital
expenditures for 2003 are currently planned at approximately
$3.6 million and are primarily related to test and product
design equipment. At December 31, 2002, we had entered into
commitments for equipment purchases aggregating less than
$0.5 million. At December 31, 2002, our principal
source of liquidity was $37.3 million of cash, cash
equivalents and short-term investments. Management believes that
our existing sources of liquidity will be adequate to support
our activities for the next twelve months.

Below is a summary of fixed payments related to
certain contractual obligations. Payment timing may be subject
to change.

|                                                        |  |                        |      |      |  |             |     |             |  |            |     |  |  |   |      |  |  |   |     | 
|------------------------------------------------------- |  | ---------------------- | ---- | ---- |  | ----------- | --- | ----------- |  | ---------- | --- |  |  | - | ---- |  |  | - | --- | 
|                                                        |  |                       
|                                                        |  | Payments Due by Period
|                                                        |  |                       
|                                                        |  | Total                  |      | 2003 |  | 2004 - 2005 |     | 2006 - 2007 |  | After 2007
|                                                        |  |                        |      |      |  |             |     |             |  |           
|                                                        |  |                       
|                                                        |  | (In millions)         
|Convertible subordinated notes 
    including interest |  | $                      | 42.7 |      |  | $           | 1.9 |             |  | $          | 3.9 |  |  | $ | 36.9 |  |  |   |     | 
|Operating leases                                        |  |                        | 9.0  |      |  |             | 1.3 |             |  |            | 2.0 |  |  |   | 2.2  |  |  | $ | 3.5 | 
|Capital leases                                          |  |                        | 1.0  |      |  |             | 0.5 |             |  |            | 0.5 |  |  |   |      |  |  |   |     | 
|Purchase commitments(1)                                 |  |                        | 4.5  |      |  |             | 4.5 |             |  |            |     |  |  |   |      |  |  |   |     | 
|                                                        |  |                        |      |      |  |             |     |             |  |            |     |  |  |   |      |  |  |   |     | 
|Total                                                   |  | $                      | 57.2 |      |  | $           | 8.2 |             |  | $          | 6.4 |  |  | $ | 39.1 |  |  | $ | 3.5 | 
|                                                        |  |                        |      |      |  |             |     |             |  |            |     |  |  |   |      |  |  |   |     | 



---



|    |                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents open purchase orders at
    December 31, 2002 for which goods and services have not
    been received, of which less than $0.5 million relates to
    capital commitments.

Critical Accounting Policies

The preparation of financial statements requires
us to make estimates and assumptions that affect amounts
reported therein. We use a combination of historical results and
anticipated future events to estimate and make assumptions
relating to our financial statements. Actual results could
differ from our estimates. The Securities and Exchange
Commission defines critical accounting policies as those that
are, in managements view, most important to the portrayal
of the companys financial condition and results of
operations and most demanding in their calls on judgment. We
believe our most critical accounting policies relate to:



| |                    
| | -------------------
| | Revenue Recognition



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our customers include original equipment
    manufacturers, distributors and contract manufacturers. We
    recognize revenue from sales when the rights and risks of
    ownership have passed to the customer, when persuasive evidence
    of an arrangement exists, the product has been shipped, the
    price is fixed or determinable and collection of the resulting
    receivable is reasonably assured. Sales are reduced for
    estimated returns and adjustments. We base these estimates on
    historical data and other known factors. Actual results could be
    different from our estimates resulting in future charges or
    credits to earnings.               
|
| | Certain of our sales to distributors are
    contractually subject to rights of return and price concessions
    on unsold merchandise. Because of frequent sales price
    reductions on standard products, the distributors return
    rights and rapid technological obsolescence in the industry, we
    defer recognition of such sales until the distributors sell the
    merchandise. From time to time we terminate distributors,
    contractually eliminate their rights of return and price
    concessions or obsolete parts in the distribution channel. In
    such cases, we recognize revenue after the distributors
    return rights lapse and the price is fixed.
|
| | Amounts billed to the distributors, net of
    estimated price concessions, are included as accounts receivable
    and the related gross profit is deferred and reflected as a
    current liability until the revenue is                                                                                                                                                                                                                                                                                                                                                                                                                                                             

16



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##### Table of Contents



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | recognized. The amount of gross profit recognized
    by us in future periods could differ from the deferred income on
    shipments to distributors due to the distributors
    contractual rights of return and price concessions on unsold
    merchandise.



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We maintain allowances for doubtful accounts for
    estimated losses resulting from the inability of our customers
    to make required payments. Accounts receivable at
    December 31, 2002 and 2001 are presented net of an
    allowance for doubtful accounts of $0.5 million. If the
    financial condition of our customers were to deteriorate,
    resulting in an impairment of their ability to make payments,
    additional allowances may be required.



| |                    
| | -------------------
| | Inventory Valuation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Inventories are stated at the lower of cost or
    market. Each quarter we evaluate our inventories for excess
    quantities and obsolescence. Inventories on hand in excess of
    forecasted demand are not valued and we write off inventories
    that are considered obsolete. Remaining inventory balances are
    adjusted to approximate the lower of cost or market value.
    Product and technology transitions announced by us or our
    competitors, changes in the purchasing patterns of our customers
    and distribution partners, or adverse global economic conditions
    may materially affect estimates of our inventory reserve
    requirements resulting in additional inventory write downs.
    During 2001, we recorded an $8.2 million charge to cost of
    sales to write down inventories to their net realizable value in
    connection with our plan to exit from offering stand alone
    low-density serial EEPROM memory products.



| |                  
| | -----------------
| | Long-Lived Assets



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Long-lived assets are principally comprised of
    investments, fixed assets and goodwill and purchased intangible
    assets from acquisitions accounted for under the purchase
    method. The purchase method of accounting for acquisitions
    requires extensive use of accounting estimates and judgments to
    allocate the purchase price paid to the fair value of the net
    tangible and intangible assets acquired, including in-process
    research and development. The amounts and useful lives assigned
    to intangible assets impact future amortization. The amount
    assigned to in-process research and development is expensed
    immediately. We review long-lived assets for impairment whenever
    events or changes in circumstances indicate that the carrying
    amount of an asset may not be recoverable. Factors impacting the
    impairment review include significant negative industry trends,
    significant underutilization of the assets, significant changes
    in how we use the assets or our plans for their use,
    underperformance relative to historical or projected future
    operating results, changes in market demand and competition and
    significant changes in company strategy. If our review
    determines the future undiscounted cash flows related to these
    assets will not be sufficient to recover their carrying value,
    we will reduce the carrying values of these assets down to our
    estimate of fair market value and continue depreciating them
    over their remaining useful lives. Our estimates of fair market
    value are generally based on discounted cash flow analyses or
    outside appraisals.



| |              
| | -------------
| | Restructuring



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In connection with restructuring plans, we are
    required to make estimates about the effects of matters, or
    future events, that are inherently uncertain. Among other items,
    we estimate the salvage value of assets impaired, which requires
    judgments concerning such factors as fluctuating equipment
    markets and timing and method of disposal and the cost and
    timing of closing leased facilities, which requires judgments
    concerning such factors as fluctuating real estate markets and
    timing of disposal. In 2000, we recorded a net restructuring
    credit of $3.8 million consisting of $6.1 million of
    costs originally included in the restructuring accrual not
    utilized primarily due to the unanticipated sale of the
    fabrication facility, partially offset by $2.3 million
    related principally to additional workforce reductions to
    streamline operations and further implement our outsourced
    manufacturing strategy. In 2001, we recorded a $3.2 million
    restructuring charge associated with the move to fully
    outsourced test and assembly operations and the exit from
    offering stand alone low-density serial EEPROM memory products.
    In 2002,

17



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##### Table of Contents



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | we recorded $1.9 million of restructuring
    and facilities charges associated with workforce reductions and
    the relocation of our corporate headquarters.



| |             
| | ------------
| | Income Taxes



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management judgment is required in determining
    our provision for income taxes, our deferred tax assets and
    liabilities and the valuation allowance recorded against our net
    deferred tax assets. Our net deferred tax assets of
    $58.4 million at December 31, 2002 remain fully
    reserved because of the uncertainty regarding the ultimate
    realization of these assets. In the event we determine that we
    will be able to realize our deferred tax assets in the future,
    an adjustment to the deferred tax assets will be recorded as a
    credit to income in the period the determination is made.



| |                             
| | ----------------------------
| | Contingencies and Litigation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | From time to time, we are a defendant or
    plaintiff in various legal actions, which arise in the normal
    course of business. We are required to assess the likelihood of
    any adverse judgments or outcomes to these matters as well as
    potential ranges of probable losses. A determination of the
    amount of reserves required for these contingencies, if any,
    which would be charged to earnings, is made after careful
    analysis of each individual issue. The required reserves may
    change in the future due to new developments in each matter or
    changes in circumstances. Changes in required reserves could
    increase or decrease our earnings in the period the changes are
    made.

Recent Accounting Pronouncements

In August 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations
(SFAS 143). This Statement addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. SFAS 143 applies to legal obligations associated
with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations
of lessees. SFAS 143 is effective for financial statements
issued for fiscal years beginning after June 25, 2002. We
believe that the adoption of this standard will have no material
impact on our financial statements.

In April 2002, the FASB issued
SFAS No. 145, Rescission of FASB Statements
Nos. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections
(SFAS No. 145). Among other things, SFAS No. 145
rescinds various pronouncements regarding early extinguishment
of debt and allows extraordinary accounting treatment for early
extinguishment only when the provisions of APB
Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions are met.
This statement is effective for fiscal years beginning after May
2002 for the provisions related to the rescission of
Statements 4 and 64, and for all transactions entered into
beginning May 2002 for the provision related to the amendment of
Statement 13. This standard would require any gain or loss
from the early extinguishment of debt to be included in the
Other income and (expense), net line of our
consolidated statement of operations.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Exit or Disposal
Activities (SFAS 146). SFAS 146 addresses
significant issues regarding the recognition, measurement, and
reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are
currently accounted for under EITF No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The scope of
SFAS 146 includes costs related to terminating a contract
that is not a capital lease and termination benefits that
employees who are involuntarily terminated receive under the
terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation
contract. SFAS 146 will be effective for exit or disposal
activities that are initiated after December 31, 2002. We
plan to adopt SFAS 146 for our fiscal year beginning
January 1, 2003. The effect on adoption of
SFAS No. 146 will change on a

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prospective basis the timing of when
restructuring charges are recorded from a commitment date
approach to when the liability is incurred.


In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that a liability be recorded
in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about
the guarantees that an entity has issued, including a
reconciliation of changes in the entitys product warranty
liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002,
irrespective of the guarantors fiscal year-end. The
disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after
December 15, 2002. We believe that the adoption of this
standard will have no material impact on our financial
statements.

In November 2002, the Emerging Issues Task Force
(EITF) reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables.
EITF Issue No. 00-21 provides guidance on how to account
for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003. We believe that the adoption of this
standard will have no material impact on our financial
statements.

In December 2002, the FASB issued Statement of
Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation, Transition and Disclosure
(SFAS No. 148). SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures
of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed
more prominently and in a tabular format. Additionally, SFAS
No. 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for
fiscal years ended after December 15, 2002. The interim
disclosure requirements are effective for interim periods
beginning after December 15, 2002. We believe that the
adoption of this standard will have no material impact on our
financial statements.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51
(FIN 46). FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective immediately for all
new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of
FIN 46 must be applied for the first interim or annual
period beginning after June 15, 2003. We believe that the
adoption of this standard will have no material impact on our
financial statements.

Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995

This Annual Report contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the belief
that 2003 will be a challenging year as the overall weak
economic and industry conditions experienced in 2002 continue in
2003; the expectation that there will be little contribution to
revenue from the sales of serial EEPROM products in 2003; our
plan to grow our revenue in high performance mixed-signal
products in 2003 compared to 2002; the expectation that the
gross profit percentage will fluctuate from quarter to quarter
as a result of changes in product mix, product costs and average
selling prices; the plan to continue to invest in research and
development in 2003, although at a lower absolute dollar level
than in 2002 as we continue to monitor product development
expenses and pare back ancillary engineering projects; the plan
to begin generating revenues from products developed using the
in-process research and development acquired from AIP toward the
end of 2003; the expectation that interest income will decrease
in 2003 compared to 2002 due to lower average cash and
investment balances and, to a lesser extent, lower interest
rates; the

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expectation to use cash in 2003; the projection
that 2003 capital expenditures will approximate
$3.6 million; and the expectation that our existing sources
of liquidity will be adequate to support operations for the next
twelve months.


Except for historical information, the matters
discussed in this Annual Report on Form 10-K are
forward-looking statements that are subject to certain risks and
uncertainties that could cause the actual results to differ
materially from those projected. Factors that could cause actual
results to differ materially include the following: general
economic conditions and conditions specific to the semiconductor
industry; fluctuations in customer demand, including loss of key
customers, order cancellations or reduced bookings; product mix;
competitive factors such as pricing pressures on existing
products and the timing and market acceptance of new product
introductions (both by us and our competitors); our ability to
have available an appropriate amount of low cost foundry
production capacity in a timely manner; our foundry
partners timely ability to successfully manufacture
products for us using our proprietary technology; any
disruptions of our foundry relationships; manufacturing
efficiencies; the ability to continue effective cost reductions;
currency fluctuations; the successful and timely development and
introduction of new products and submicron processes; and the
risk factors listed from time to time in our SEC reports,
including but not limited to the Factors Affecting Future
Results section following and Part I, Item 1. of
this Annual Report on Form 10-K. Readers are cautioned not
to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. We undertake no
obligation to publicly release or otherwise disclose the result
of any revision to these forward-looking statements that may be
made as a result of events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

Factors Affecting Future Results

The risks described below are not the only
ones facing our Company. Additional risks not presently known to
us or that we currently believe are not material may also impair
our business operations.

Our operating results fluctuate significantly,
and an unanticipated decline in revenue may disappoint
securities analysts or investors and result in a decline in our
stock price.

You should not use our past financial performance
to predict future operating results. We have incurred net losses
in three of the last four years. Our recent quarterly and annual
operating results have fluctuated, and will continue to
fluctuate, due to the following factors, all of which are
difficult to forecast and many of which are out of our control:
the cyclical nature of both the semiconductor industry and the
markets addressed by our products, including the current severe
business down cycle; competitive pricing pressures and related
changes in selling prices; new product announcements and
introductions of competing products by us or our competitors;
market acceptance and subsequent design-in of new products; the
near and long-term impact of terrorist attacks and incidents and
any military response to those attacks, or a war with Iraq or
other countries perceived as a threat by the United States
government; unpredictability of changes in demand for, or in the
mix of, our products; the timing of significant orders including
the fact that the sales level in any specific quarter depends
significantly on orders received during that quarter; the gain
or loss of significant customers; the availability, timely
deliverability and cost of products manufactured on our behalf
by third-party suppliers; product obsolescence; lower of cost or
market inventory adjustments; changes in the channels through
which our products are distributed; exchange rate fluctuations;
general economic, political and environmental-related
conditions, such as natural disasters; difficulties in
forecasting, planning and managing of inventory levels; and
unanticipated research and development expenses associated with
new product introductions.

The exit from a portion of our memory business
has changed our business model and caused a reduction in our
revenues.

In the first quarter of 2001, we announced our
plan to exit from offering stand-alone low-density serial EEPROM
memory products. We were unable to secure a buyer for the
business, particularly in light of the current weak economic
conditions, and substantially completed our exit from that
business in 2002.

The transition out of the serial EEPROM memory
business has reduced our revenues and we have become a smaller
company with limited resources and a reduced workforce. We may
not be able to effectively

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use our limited resources to increase new product
development and build our mixed-signal product business. This
could cause a further decline in our revenues.


The selling prices for our products are
volatile and have historically declined over the life of a
product. In addition, the cyclical nature of the semiconductor
industry produces fluctuations in our operating
results.

The semiconductor industry has historically been
cyclical, characterized by wide fluctuations in product supply
and demand. From time to time, the industry has also experienced
significant downturns, often in connection with, or in
anticipation of, maturing product cycles and declines in general
economic conditions. Downturns are generally characterized by
diminished product demand, production over-capacity and
accelerated decline of average selling prices, and in some cases
have lasted for more than one year. We are presently
experiencing an economic downturn that is harming our business.
Our success depends on a better supply and demand balance within
the industry and the various electronics industries that use
semiconductors, including networking, communications and
industrial companies, returning to more normal buying patterns.

We do not typically enter into long-term
contracts with our customers and we cannot be certain as to
future order levels from our customers.

The composition of our major customer base
changes as the market demand for our customers products
change. A small number of customers have accounted for a
substantial portion of our sales. A reduction, delay, or
cancellation of orders from a large customer could harm our
business. The loss of, or reduced orders by, any of our key
customers could result in a significant decline in our sales.

We depend on distributors and
manufacturers representatives to generate a majority of
our sales.

Distributors serve as a channel of sale to many
end users of our products. Our distributors and
manufacturers representatives could discontinue selling
our products at any time. The loss of any significant
distributor or manufacturers representative could
seriously harm our operating results by impairing our ability to
sell our products.

Our backlog may not result in future revenue,
which would seriously harm our business.

Due to possible customer changes in delivery
schedules and cancellations of orders, our backlog at any
particular date is not necessarily indicative of actual sales
for any succeeding period. A reduction of backlog during any
particular period, or the failure of our backlog to result in
future revenue, could harm our business.

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

The markets for our products are characterized by
rapidly changing technologies; evolving and competing industry
standards; changing customer needs; frequent new product
introductions and enhancements; increased integration with other
functions; and rapid product obsolescence.

To develop new products for our target markets,
we must develop, gain access to and use leading technologies in
a cost-effective and timely manner and continue to expand our
technical and design expertise. In addition, we must have our
products designed into our customers future products and
maintain close working relationships with key customers in order
to develop new products that meet their rapidly changing needs.

We cannot assure you that we will be able to
identify new product opportunities successfully, develop and
bring to market new products at competitive costs, achieve
design wins or respond effectively to new technological changes
or product announcements by our competitors. Furthermore, we may
not be successful in developing or using new technologies or in
developing new products or product enhancements that achieve
market acceptance. Our pursuit of necessary technological
advances may require substantial time and expense. Failure in
any of these areas could harm our business, operating results
and financial condition.

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Our future success depends in part on the
continued services of our key design, engineering, sales,
marketing and executive personnel and our ability to identify,
recruit and retain qualified personnel.

There is significant competition for qualified
personnel in the semiconductor industry, in particular for the
highly skilled engineers involved in the design and development
of our mixed-signal products. At times competition has been
especially intense in Silicon Valley, where our design, research
and development, and corporate headquarters are located. The
failure to recruit and retain key design engineers or other
technical and management personnel would likely harm our
business.

Our dependence on third-party foundries to
manufacture our products and on subcontractors to sort, assemble
and test our products and ship our products to customers
subjects us to a number of risks.

We out-source all manufacturing operations. Our
reliance on third-party foundries and subcontractors to
manufacture, sort, assemble and test our products and to ship
our products to customers involves the following significant
risks:



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | reduced control over delivery schedules and
    quality;                             
|
| |  | the potential lack of adequate capacity during
    periods of strong demand;         
|
| |  | difficulties selecting and integrating new
    foundries and subcontractors;         
|
| |  | limited warranties by third-party manufacturers
    on products supplied to us; and  
|
| |  | potential increases in product costs due to
    capacity shortages and other factors.

These risks may lead to a possible loss of sales,
increased costs, delayed product delivery or loss of competitive
advantage, which would harm our profitability and customer
relationships. Additionally, as we shift manufacturing of
existing products between foundries and third-party
subcontractors, certain customers require requalification of
such products prior to accepting delivery. Delays in customer
qualification schedules or lack of qualification of such
products could result in the loss of sales, which could
seriously harm our operating results.

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

Our operating expenses are relatively fixed, and
we therefore have limited ability to reduce expenses quickly in
response to any revenue shortfalls. Consequently, our operating
results will be harmed if our sales do not meet our revenue
projections. Revenue shortfalls can occur for any of the
following reasons: economic slowdowns in the markets we serve;
significant pricing pressures that occur because of declines in
selling prices over the life of a product; the reduction,
rescheduling or cancellation of customer orders; and sudden
shortages of raw materials or fabrication, sort, test or
assembly capacity constraints that lead our suppliers to
allocate available supplies or capacity to other customers
which, in turn, harms our ability to meet our sales obligations.

In addition, we typically plan our production and
inventory levels based on internal forecasts of customer demand,
which are highly unpredictable and can fluctuate substantially.
From time to time, in response to anticipated long lead times to
obtain inventory and materials from our outside suppliers and
foundries, we order materials and produce finished products in
advance of anticipated customer demand. This advance ordering
and production has resulted in, and may continue to result in,
excess inventory levels or inventory write-downs if expected
orders fail to materialize or prices decrease substantially.

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We presently have minimum wafer purchase
commitments with a foundry that were made in exchange for a
capacity commitment from them. Should demand for our products be
less than the capacity commitment, we may be required to make
payments for unused capacity which would cause our costs to
increase.

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

Due to the length of the product design-in cycle,
we usually require more than nine months to realize volume
shipments after a customer first samples our product. We first
work with customers to achieve a design win, which may take
three months or longer. Our customers then complete the design,
testing and evaluation process and begin to ramp up production,
a period which typically lasts an additional six months or
longer. As a result, a significant period of time may elapse
between our research and development efforts and our realization
of revenue, if any, from volume purchasing of our products by
our customers.

We face intense competition from companies
with significantly greater financial, technical and marketing
resources that could adversely affect our ability to increase
sales of our products.

We compete with major semiconductor companies
such as Analog Devices, Atmel Corporation, Linear Technology
Corporation and Maxim Integrated Products, that have
substantially greater financial, technical, marketing,
distribution, and other resources than we do and have their own
facilities for the production of semiconductor components. In
addition, our foundry partners have the right to develop and
fabricate products based on our process technology.

From time to time, we may have to defend
lawsuits in connection with the operation of our
business.

We are subject to litigation in the ordinary
course of our business. If we do not prevail in any lawsuit
which may occur we could be subject to significant liability for
damages, our patents and other proprietary rights could be
invalidated, and we could be subject to injunctions preventing
us from taking certain actions. If any of the above occur, our
business and financial position could be harmed.

Our cost of sales may increase if we are
required to purchase additional manufacturing capacity in the
future.

To obtain additional manufacturing capacity in
the future, we may be required to make deposits, equipment
purchases and loans and enter into joint ventures, equity
investments or technology licenses in or with wafer fabrication
companies. These transactions could involve a commitment of
substantial amounts of our capital and technology licenses in
return for production capacity. We may be required to seek
additional debt or equity financing in order to secure this
capacity and we may not be able to obtain such financing.

Our ability to compete successfully will
depend, in part, on our ability to protect our intellectual
property rights, which we may not be able to do
successfully.

We rely on a combination of patents, trade
secrets, copyright and mask work production laws and rights,
nondisclosure agreements and other contractual provisions and
technical measures to protect our intellectual property rights.
Our business, operating results and financial condition could be
seriously harmed by the failure to be able to protect our
intellectual property. Policing unauthorized use of our
intellectual property, however, is difficult, especially in
foreign countries. Litigation may be necessary to enforce our
intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or
invalidity. Litigation of this type can result in substantial
costs and diversion of resources and can harm our business,
operating results and financial condition regardless of the
outcome of the litigation.

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If we or any of our foundries or third-party
subcontractors is accused of infringing the intellectual
property rights of other parties, we may become subject to
time-consuming and costly litigation. If we lose or settle
claims, we could suffer a significant negative impact on our
business and be forced to pay royalties and damages.

Third parties have and may continue to assert
that our products infringe their proprietary rights, or may
assert claims for indemnification resulting from infringement
claims against us. Any such claims may cause us to delay or
cancel shipment of our products or pay royalties and damages
that could seriously harm our business, financial condition and
results of operations. In addition, irrespective of the validity
or the successful assertion of such claims, we could incur
significant costs in defending against such claims.

We have received notices claiming infringement of
patents from third parties with respect to certain aspects of
our processes and devices, and these matters are under
investigation and review. Although patent holders typically
offer licenses and we have entered into such license agreements
in the past, we may not be able to obtain licenses on acceptable
terms, and disputes may not be resolved without costly
litigation.

Our business may suffer due to risks
associated with international sales and operations.

Sales outside of North America, based upon the
location to which the product was shipped, accounted for
approximately 64% of total net sales in 2002. Our international
business activities are subject to a number of risks, any of
which could impose unexpected costs on us that would have an
adverse effect on our operating results. These risks include
difficulties in complying with regulatory requirements and
standards; tariffs and other trade barriers; costs and risks of
localizing products for foreign countries; severe currency
fluctuations and economic deflation; reliance on third parties
to distribute our products; longer accounts receivable payment
cycles; potentially adverse tax consequences; adverse economic
impact of terrorist attacks and incidents and any military
response to those attacks, or a war with Iraq or other countries
perceived as a threat by the United States government and
burdens of complying with a wide variety of foreign laws.

We may face interruption of production and
services due to increased security measures in response to
recent and potential future terrorist activities.

Our business depends on the free flow of products
and services through the channels of commerce. In response to
terrorists activities and threats aimed at the United
States, transportation, mail, financial and other services have
at times been slowed or stopped altogether. Further delays or
stoppages in transportation, mail, financial or other services,
particularly any such delays or stoppages which harm our ability
to obtain an adequate supply of wafers and products from our
foreign foundries or contractors, could harm our business,
results of operations and financial condition. Furthermore, we
may experience an increase in operating costs, such as costs for
transportation, insurance and security as a result of the
activities and potential activities. We may also experience
delays in receiving payments from customers that have been
affected by the terrorist activities and potential activities.
The United States economy in general is being adversely affected
by terrorist activities and potential terrorist activities. The
economic downturn we are currently experiencing is adversely
impacting our results of operations, and may impair our ability
to raise capital or otherwise adversely affect our ability to
grow our business. Moreover, we cannot determine whether other
attacks may occur in the future and the effects of such attacks
on our business could be severe.

Our November 2001 debt financing substantially
increased our indebtedness which may make it more difficult to
obtain financing in the future and cause our business to
suffer.

As a result of our November 2001 sale of notes
and warrants, we incurred $35 million of additional
indebtedness. The level of our indebtedness, among other things,
could make it difficult for us to obtain any necessary financing
in the future for working capital, capital expenditures, debt
service requirements or other purposes; limit our flexibility in
planning for, or reacting to changes in, our business; and make
us more vulnerable in the event of a downturn in our business.
If any of these risks materialize, we may be unable to
successfully execute our business plan.

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Our business could be harmed if the net
proceeds from the November 2001 debt financing are used
ineffectively.

We have flexibility in applying the net proceeds
of the debt financing. We intend to use the proceeds of this
offering for working capital and general corporate purposes. We
may also use the proceeds for acquisitions, including
acquisitions of intellectual property and design teams, such as
our April 2002 acquisition of AIP. In addition, we may also use
proceeds from the debt financing for research, development,
sales and marketing and capital expenditures. The failure to
apply these net proceeds effectively could harm our business,
results of operations and financial condition.

The conversion of our outstanding convertible
debt and exercise of warrants issued in connection with our
convertible debt may result in dilution to holders of our common
stock and a reduction in the price of our common
stock.

In November 2001 we issued $35 million in
convertible notes and related warrants. The convertible notes
enable the holders to convert principal amounts owed under the
notes into an aggregate of approximately 3.1 million shares
of common stock at a conversion price of $11.22 per share. In
connection with the issuance of the convertible notes we also
issued warrants for the purchase of approximately one million
shares of common stock that are exercisable at a price of $12.24
per share. If the price of our common stock exceeds the
conversion price of the notes and exercise price of the
warrants, holders of the notes and warrants may convert the debt
and exercise the warrants. We may force the conversion of all or
a portion of the notes and warrants in certain circumstances.
Our issuance of common stock at prices of $11.22 per share upon
conversion of the debt and $12.24 per share upon exercise of the
warrants may result in dilution to other holders of common stock
and may cause the price of our common stock to fall. In
addition, if note and warrant holders elect to sell the common
stock issued upon the conversion of the debt and exercise of the
warrants, the price of our common stock may fall.

We may require additional capital in order to
bring new products to market, and the issuance of new equity
securities will dilute your investment in our common
stock.

To implement our strategy of diversified product
offerings, we need to bring new products to market. Bringing new
products to market and ramping up production requires
significant working capital. We may sell additional shares of
our stock or seek additional borrowings or outside capital
infusions. We cannot assure you that such financing options will
be available on terms acceptable to us, if at all. In addition,
if we issue shares of our common stock, our shareholders will
experience dilution of their investment.

Changes in stock option accounting rules may
adversely impact our operating results prepared in accordance
with generally accepted accounting principles.

Technology companies like ours have a history of
using broad based employee stock option programs to hire,
incentivize and retain our workforce in a competitive
marketplace. Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation, allows companies the choice of either using
a fair value method of accounting for options which would result
in expense recognition for all options granted, or use an
intrinsic value method, as prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), with a pro forma disclosure of
the impact on net income (loss) of using the fair value option
expense recognition method. We have elected to apply APB 25
and accordingly we generally do not recognize any expense with
respect to employee stock options as long as such options are
granted at exercise prices equal to the fair value of our common
stock on the date of grant.

On March 12, 2003, the Financial Accounting
Standards Board (FASB) announced its plans to re-deliberate the
appropriate accounting for employee stock options with a goal to
have one standard applicable to all companies. The FASB
announced its goal to have the new standard become effective
sometime in 2004. If the FASB were to require expensing of
employee stock options by all companies, our results of
operations prepared in accordance with generally accepted
accounting principles would be adversely impacted.

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Business interruptions could harm our
business.

Our operations and those of our foundries and
other manufacturing subcontractors are vulnerable to
interruption by fire, earthquake, power loss, telecommunications
failure and other events beyond our control. Our facility in the
State of California may be subject to electrical blackouts due
to a shortage of available electrical power. If these blackouts
were to occur, they could disrupt our operations. Business
interruption insurance may not provide protection due to the
deductible periods or be enough to compensate us for losses that
may occur. Additionally, we have been unable to obtain
earthquake insurance of reasonable costs and limits.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

We do not use derivative financial instruments in
our investment portfolio. We have an investment portfolio of
fixed income securities that are classified as
available-for-sale securities. These securities,
like all fixed income instruments, are subject to interest rate
risk and will fall in value if market interest rates increase.
We attempt to limit this exposure by investing primarily in
short-term securities. Due to the short duration and
conservative nature of our investment portfolio a movement of
10% by market interest rates would not have a material impact on
our operating results and the total value of the portfolio over
the next fiscal year.

We are exposed to risks associated with foreign
exchange rate fluctuations due to our international
manufacturing and sales activities. We generally have not hedged
currency exposures. These exposures may change over time as
business practices evolve and could negatively impact our
operating results and financial condition. All of our sales are
denominated in U.S. dollars. An increase in the value of the
U.S. dollar relative to foreign currencies could make our
products more expensive and therefore reduce the demand for our
products. Such a decline in the demand could reduce sales and/or
result in operating losses.

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|        |                                                             
|------- | ------------------------------------------------------------
|Item 8. | Consolidated Financial Statements and
    Supplementary Data

XICOR, INC.

CONSOLIDATED BALANCE SHEETS

|                                                                         |                                                                                                            |                           |        |          |        |   |        |          |        | 
|------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------- | ------------------------- | ------ | -------- | ------ | - | ------ | -------- | ------ | 
|                                                                         |                                                                                                            |                          
|                                                                         |                                                                                                            | December 31,             
|                                                                         |                                                                                                            |                          
|                                                                         |                                                                                                            | 2002                      |        | 2001    
|                                                                         |                                                                                                            |                           |        |         
|                                                                         |                                                                                                            |                          
|                                                                         |                                                                                                            | (In thousands)           
|ASSETS                                                                  
|Current assets:                                                          |                                                                                                            |                           |        |          |        |   |        |         
|                                                                         | Cash and cash equivalents                                                                                  |                           | $      | 32,648   |        |   | $      | 56,367   |       
|                                                                         | Short-term investments                                                                                     |                           |        | 4,648    |        |   |        |         |       
|                                                                         | Accounts receivable, net                                                                                   |                           |        | 4,606    |        |   |        | 3,501    |       
|                                                                         | Inventories                                                                                                |                           |        | 4,939    |        |   |        | 9,404    |       
|                                                                         | Prepaid expenses and other current assets                                                                  |                           |        | 539      |        |   |        | 192      |       
|                                                                         |                                                                                                            |                           |        |          |        |   |        |         
|                                                                         |                                                                                                            | Total current assets      |        |          | 47,380 |   |        |          | 69,464 | 
|Long-term investments                                                    |                                                                                                            |                           | 1,085  |          |        |   |       |         
|Property, plant and equipment, at cost less
    accumulated depreciation |                                                                                                            |                           | 3,041  |          |        |   | 5,223  |         
|Goodwill                                                                 |                                                                                                            |                           | 10,762 |          |        |   |       |         
|Purchased intangible assets, net                                         |                                                                                                            |                           | 2,062  |          |        |   |       |         
|Other assets                                                             |                                                                                                            |                           | 2,766  |          |        |   | 5,764  |         
|                                                                         |                                                                                                            |                           |        |          |        |   |        |         
|Total assets                                                             |                                                                                                            | $                         | 67,096 |          |        | $ | 80,451 |         
|                                                                         |                                                                                                            |                           |        |          |        |   |        |         
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                
|Current liabilities:                                                     |                                                                                                            |                           |        |          |        |   |        |         
|                                                                         | Accounts payable                                                                                           |                           | $      | 6,215    |        |   | $      | 9,646    |       
|                                                                         | Accrued expenses                                                                                           |                           |        | 6,136    |        |   |        | 7,867    |       
|                                                                         | Deferred income on shipments to distributors                                                               |                           |        | 5,762    |        |   |        | 10,465   |       
|                                                                         | Deferred gain on sale of fab assets                                                                        |                           |        |         |        |   |        | 2,082    |       
|                                                                         | Current portion of long-term obligations                                                                   |                           |        | 432      |        |   |        | 841      |       
|                                                                         |                                                                                                            |                           |        |          |        |   |        |         
|                                                                         |                                                                                                            | Total current liabilities |        |          | 18,545 |   |        |          | 30,901 | 
|Convertible subordinated notes                                           |                                                                                                            |                           | 32,506 |          |        |   | 31,896 |         
|Long-term obligations                                                    |                                                                                                            |                           | 470    |          |        |   | 738    |         
|                                                                         |                                                                                                            |                           |        |          |        |   |        |         
|Total liabilities                                                        |                                                                                                            |                           | 51,521 |          |        |   | 63,535 |         
|                                                                         |                                                                                                            |                           |        |          |        |   |        |         
|Commitments and contingencies (Notes 6 and 12)                           |                                                                                                            |                           |        |          |        |   |        |         
|Shareholders equity:                                                    |                                                                                                            |                           |        |          |        |   |        |         
|                                                                         | Preferred stock, no par value; 5,000 shares
    authorized; none issued or outstanding                     |                           |        |         |        |   |        |         |       
|                                                                         | Common stock, no par value; 200,000 shares
    authorized; 23,737 and 22,339 shares issued and outstanding |                           |        | 149,216  |        |   |        | 137,775  |       
|                                                                         | Accumulated deficit                                                                                        |                           |        | (133,641 | )      |   |        | (120,859 | )     
|                                                                         |                                                                                                            |                           |        |          |        |   |        |         
|Total shareholders equity                                               |                                                                                                            |                           | 15,575 |          |        |   | 16,916 |         
|                                                                         |                                                                                                            |                           |        |          |        |   |        |         
|Total liabilities and shareholders equity                               |                                                                                                            | $                         | 67,096 |          |        | $ | 80,451 |         
|                                                                         |                                                                                                            |                           |        |          |        |   |        |         

See accompanying notes to consolidated financial
statements.

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XICOR, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                      |                                              |                                 |         |        |   |      |         |        |   |   |         |        |  
|------------------------------------- | -------------------------------------------- | ------------------------------- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                      |                                              |                                
|                                      |                                              | Year Ended December 31,        
|                                      |                                              |                                
|                                      |                                              | 2002                            |         | 2001   |   | 2000
|                                      |                                              |                                 |         |        |   |     
|                                      |                                              |                                
|                                      |                                              | (In thousands, except per share
|                                      |                                              | amounts)                       
|Net sales                             |                                              | $                               | 38,534  |        |   | $    | 70,073  |        |   | $ | 122,849 |       
|Cost of sales                         |                                              |                                 | 19,076  |        |   |      | 45,100  |        |   |   | 71,672  |       
|                                      |                                              |                                 |         |        |   |      |         |        |   |   |         |       
|                                      | Gross profit                                 |                                 |         | 19,458 |   |      |         | 24,973 |   |   |         | 51,177 |  
|                                      |                                              |                                 |         |        |   |      |         |        |   |   |         |       
|Operating expenses:                   |                                              |                                 |         |        |   |      |         |        |   |   |         |       
|                                      | Research and development                     |                                 |         | 13,056 |   |      |         | 13,613 |   |   |         | 15,880 |  
|                                      | Selling, general and administrative          |                                 |         | 11,033 |   |      |         | 18,235 |   |   |         | 26,122 |  
|                                      | Restructuring and facilities charge (credit) |                                 |         | 1,936  |   |      |         | 3,205  |   |   |         | (3,841 | )
|                                      | Amortization of purchased intangible assets  |                                 |         | 739    |   |      |         |       |   |   |         |       |  
|                                      | In-process research and development          |                                 |         | 1,800  |   |      |         |       |   |   |         |       |  
|                                      |                                              |                                 |         |        |   |      |         |        |   |   |         |       
|                                      |                                              |                                 | 28,564  |        |   |      | 35,053  |        |   |   | 38,161  |       
|                                      |                                              |                                 |         |        |   |      |         |        |   |   |         |       
|Income (loss) from operations         |                                              |                                 | (9,106  | )      |   |      | (10,080 | )      |   |   | 13,016  |       
|Interest expense                      |                                              |                                 | (3,259  | )      |   |      | (524    | )      |   |   | (817    | )     
|Interest income                       |                                              |                                 | 789     |        |   |      | 1,237   |        |   |   | 1,458   |       
|Other income and (expense), net       |                                              |                                 | (1,206  | )      |   |      |        |        |   |   |        |       
|                                      |                                              |                                 |         |        |   |      |         |        |   |   |         |       
|Income (loss) before income taxes     |                                              |                                 | (12,782 | )      |   |      | (9,367  | )      |   |   | 13,657  |       
|Provision for income taxes            |                                              |                                 |        |        |   |      | 102     |        |   |   | 491     |       
|                                      |                                              |                                 |         |        |   |      |         |        |   |   |         |       
|Net income (loss)                     |                                              | $                               | (12,782 | )      |   | $    | (9,469  | )      |   | $ | 13,166  |       
|                                      |                                              |                                 |         |        |   |      |         |        |   |   |         |       
|Net income (loss) per share:          |                                              |                                 |         |        |   |      |         |        |   |   |         |       
|                                      | Basic                                        |                                 | $       | (0.55  | ) |      | $       | (0.43  | ) |   | $       | 0.62   |  
|                                      |                                              |                                 |         |        |   |      |         |        |   |   |         |       
|                                      | Diluted                                      |                                 | $       | (0.55  | ) |      | $       | (0.43  | ) |   | $       | 0.57   |  
|                                      |                                              |                                 |         |        |   |      |         |        |   |   |         |       
|Shares used in per share calculation: |                                              |                                 |         |        |   |      |         |        |   |   |         |       
|                                      | Basic                                        |                                 |         | 23,265 |   |      |         | 21,803 |   |   |         | 21,189 |  
|                                      |                                              |                                 |         |        |   |      |         |        |   |   |         |       
|                                      | Diluted                                      |                                 |         | 23,265 |   |      |         | 21,803 |   |   |         | 23,286 |  
|                                      |                                              |                                 |         |        |   |      |         |        |   |   |         |       

See accompanying notes to consolidated financial
statements.

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XICOR, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                            |  |                |        |             |  |         |         |       |  |   |          |   |  |   |         |  
|----------------------------------------------------------- |  | -------------- | ------ | ----------- |  | ------- | ------- | ----- |  | - | -------- | - |  | - | ------- | -
|                                                            |  |                |        |             |  |        
|                                                            |  | Common Stock   |        |             |  |        
|                                                            |  |                |        | Accumulated |  |        
|                                                            |  | Shares         |        | Amount      |  | Deficit |         | Total
|                                                            |  |                |        |             |  |         |         |      
|                                                            |  |               
|                                                            |  | (In thousands)
|Balance at December 31, 1999                                |  |                | 20,595 |             |  | $       | 129,005 |       |  | $ | (124,556 | ) |  | $ | 4,449   |  
|Issuance of shares under employee stock plans and
    other |  |                | 871    |             |  |         | 2,600   |       |  |   |         |   |  |   | 2,600   |  
|Net income                                                  |  |                |       |             |  |         |        |       |  |   | 13,166   |   |  |   | 13,166  |  
|                                                            |  |                |        |             |  |         |         |       |  |   |          |   |  |   |         |  
|Balance at December 31, 2000                                |  |                | 21,466 |             |  |         | 131,605 |       |  |   | (111,390 | ) |  |   | 20,215  |  
|Issuance of shares under employee stock plans               |  |                | 873    |             |  |         | 2,648   |       |  |   |         |   |  |   | 2,648   |  
|Issuance of warrants                                        |  |                |       |             |  |         | 3,522   |       |  |   |         |   |  |   | 3,522   |  
|Net loss                                                    |  |                |       |             |  |         |        |       |  |   | (9,469   | ) |  |   | (9,469  | )
|                                                            |  |                |        |             |  |         |         |       |  |   |          |   |  |   |         |  
|Balance at December 31, 2001                                |  |                | 22,339 |             |  |         | 137,775 |       |  |   | (120,859 | ) |  |   | 16,916  |  
|Issuance of shares under employee stock plans               |  |                | 385    |             |  |         | 1,259   |       |  |   |         |   |  |   | 1,259   |  
|Issuance of shares for acquisition of AIP                   |  |                | 1,013  |             |  |         | 10,182  |       |  |   |         |   |  |   | 10,182  |  
|Net loss                                                    |  |                |       |             |  |         |        |       |  |   | (12,782  | ) |  |   | (12,782 | )
|                                                            |  |                |        |             |  |         |         |       |  |   |          |   |  |   |         |  
|Balance at December 31, 2002                                |  |                | 23,737 |             |  | $       | 149,216 |       |  | $ | (133,641 | ) |  | $ | 15,575  |  
|                                                            |  |                |        |             |  |         |         |       |  |   |          |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

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XICOR, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |         |       |        |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------------- | -------------------------------------------- | ------- | ------ | ------ | ------ | ------ | ------ | ------ | ------- | ------- | ----- | ------ | -
|                                                         |                                                                                          |                                                               
|                                                         |                                                                                          | Year Ended December 31,                                       
|                                                         |                                                                                          |                                                               
|                                                         |                                                                                          | 2002                                                           |                                              | 2001    |        | 2000  
|                                                         |                                                                                          |                                                                |                                              |         |        |       
|                                                         |                                                                                          |                                                               
|                                                         |                                                                                          | (In thousands)                                                
|Cash flows from operating activities:                    |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |        
|                                                         | Net income (loss)                                                                        |                                                                | $                                            | (12,782 | )      |        | $      | (9,469 | )      |        | $       | 13,166  |      
|                                                         | Adjustments to reconcile net income
    (loss) to cash provided by operating activities: |                                                                |                                              |         |        |        |        |        |        |        |         |         |      
|                                                         |                                                                                          | Depreciation                                                   |                                              |         | 2,645  |        |        |        | 3,925  |        |         |         | 4,031 |       
|                                                         |                                                                                          | Amortization of fab gain                                       |                                              |         | (2,082 | )      |        |        | (2,518 | )      |         |         | (436  | )     
|                                                         |                                                                                          | Amortization of debt issuance costs and warrants               |                                              |         | 1,216  |        |        |        | 140    |        |         |         |      |       
|                                                         |                                                                                          | Amortization of purchased intangible                           |                                              |         | 739    |        |        |        |       |        |         |         |      |       
|                                                         |                                                                                          | Write off of purchased in-process research and
    development |                                              |         | 1,800  |        |        |        |       |        |         |         |      |       
|                                                         |                                                                                          | Loss on impairment of investment                               |                                              |         | 2,500  |        |        |        |       |        |         |         |      |       
|                                                         |                                                                                          | Non-cash restructuring charge                                  |                                              |         | 473    |        |        |        | 1,249  |        |         |         |      |       
|                                                         |                                                                                          | Changes in assets and liabilities:                             |                                              |         |        |        |        |        |        |        |         |         |       |       
|                                                         |                                                                                          |                                                                | Accounts receivable                          |         |        | (968   | )      |        |        | 7,311  |         |         |       | (2,304 | )
|                                                         |                                                                                          |                                                                | Inventories                                  |         |        | 4,465  |        |        |        | 4,976  |         |         |       | (3,709 | )
|                                                         |                                                                                          |                                                                | Prepaid expenses and other current assets    |         |        | (347   | )      |        |        | 447    |         |         |       | (259   | )
|                                                         |                                                                                          |                                                                | Other assets                                 |         |        | (109   | )      |        |        | 19     |         |         |       | 76     |  
|                                                         |                                                                                          |                                                                | Accounts payable and accrued expenses        |         |        | (5,479 | )      |        |        | (6,256 | )       |         |       | (558   | )
|                                                         |                                                                                          |                                                                | Deferred income on shipments to distributors |         |        | (4,703 | )      |        |        | (3,793 | )       |         |       | 1,430  |  
|                                                         |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |        
|Net cash provided by (used in) operating
    activities  |                                                                                          |                                                                | (12,632                                      | )       |        |        | (3,969 | )      |        |        | 11,437  |        
|                                                         |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |        
|Cash flows from investing activities:                    |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |        
|                                                         | Purchase of investments                                                                  |                                                                |                                              | (6,733  | )      |        |        |       |        |        |         |        |      
|                                                         | Sales or maturities of investments                                                       |                                                                |                                              | 1,000   |        |        |        |       |        |        |         |        |      
|                                                         | Investments in plant and equipment, net                                                  |                                                                |                                              | (936    | )      |        |        | (262   | )      |        |         | (6,020  | )    
|                                                         | Investment in Standard MEMS                                                              |                                                                |                                              |        |        |        |        | (2,500 | )      |        |         |        |      
|                                                         | Acquisition of Analog Integration Partners LLC                                           |                                                                |                                              | (5,000  | )      |        |        |       |        |        |         |        |      
|                                                         | Proceeds from the sale of the fab                                                        |                                                                |                                              |        |        |        |        |       |        |        |         | 12,825  |      
|                                                         |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |        
|Net cash provided by (used in) investing
    activities  |                                                                                          |                                                                | (11,669                                      | )       |        |        | (2,762 | )      |        |        | 6,805   |        
|                                                         |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |        
|Cash flows from financing activities:                    |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |        
|                                                         | Repayments of long-term obligations                                                      |                                                                |                                              | (677    | )      |        |        | (871   | )      |        |         | (13,675 | )    
|                                                         | Proceeds from sale of common stock, net of
    issuance costs, to employees and others   |                                                                |                                              | 1,259   |        |        |        | 2,648  |        |        |         | 2,321   |      
|                                                         | Proceeds from issuance of convertible
    subordinated notes and warrants                |                                                                |                                              |        |        |        |        | 32,200 |        |        |         |        |      
|                                                         |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |        
|Net cash provided by (used in) financing
    activities  |                                                                                          |                                                                | 582                                          |         |        |        | 33,977 |        |        |        | (11,354 | )      
|                                                         |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |        
|Increase (decrease) in cash and cash
    equivalents     |                                                                                          |                                                                | (23,719                                      | )       |        |        | 27,246 |        |        |        | 6,888   |        
|Cash and cash equivalents at beginning of year           |                                                                                          |                                                                | 56,367                                       |         |        |        | 29,121 |        |        |        | 22,233  |        
|                                                         |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |        
|Cash and cash equivalents at end of year                 |                                                                                          | $                                                              | 32,648                                       |         |        | $      | 56,367 |        |        | $      | 29,121  |        
|                                                         |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |        
|Supplemental information:                                |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |        
|Cash paid (refunded) during the year for:                |                                                                                          |                                                                |                                              |         |        |        |        |        |        |        |         |        
|                                                         | Interest expense                                                                         |                                                                | $                                            | 2,050   |        |        | $      | 178    |        |        | $       | 810     |      
|                                                         | Income taxes                                                                             |                                                                |                                              | 3       |        |        |        | (15    | )      |        |         | 305     |      
|Equipment acquired pursuant to long-term
    obligations |                                                                                          |                                                                |                                             |         |        |        | 969    |        |        |        |        |        
|Common stock issued for acquisition                      |                                                                                          |                                                                | 10,182                                       |         |        |        |       |        |        |        |        |        

See accompanying notes to consolidated financial
statements.

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XICOR, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1  The Company and Its
Significant Accounting Policies

Xicor, Inc. (Xicor) is a fabless semiconductor
company that designs, markets and sells programmable
mixed-signal and nonvolatile memory semiconductor devices.

We operate in one reportable segment based on our
internal organization. Our sales are derived from two product
groups, mixed-signal products and memory products. Mixed-signal
product sales represent our core market. Memory product sales
comprise our legacy businesses of serial EEPROMs, which we
substantially exited in 2002, and parallel EEPROMs, which
business we are retaining. Annual sales by product group were:

|                              |  |               |    |      |  |      |    |  |  |   |     | 
|----------------------------- |  | ------------- | -- | ---- |  | ---- | -- |  |  | - | --- | 
|                              |  |              
|                              |  | Year Ended   
|                              |  | December 31, 
|                              |  |              
|                              |  | 2002          |    | 2001 |  | 2000
|                              |  |               |    |      |  |     
|                              |  |              
|                              |  | (In millions)
|Mixed-signal product sales    |  | $             | 25 |      |  | $    | 35 |  |  | $ | 43  | 
|Parallel EEPROM product sales |  |               | 10 |      |  |      | 19 |  |  |   | 29  | 
|Serial EEPROM product sales   |  |               | 4  |      |  |      | 16 |  |  |   | 51  | 
|                              |  |               |    |      |  |      |    |  |  |   |     | 
|Total sales                   |  | $             | 39 |      |  | $    | 70 |  |  | $ | 123 | 
|                              |  |               |    |      |  |      |    |  |  |   |     | 

Sales by geographic region, based on the location
to which the product was shipped, were as follows:

|              |  |               |    |      |  |      |    |  |  |   |     | 
|------------- |  | ------------- | -- | ---- |  | ---- | -- |  |  | - | --- | 
|              |  |              
|              |  | Year Ended   
|              |  | December 31, 
|              |  |              
|              |  | 2002          |    | 2001 |  | 2000
|              |  |               |    |      |  |     
|              |  |              
|              |  | (In millions)
|North America |  | $             | 14 |      |  | $    | 32 |  |  | $ | 64  | 
|Asia Pacific  |  |               | 14 |      |  |      | 14 |  |  |   | 31  | 
|Europe        |  |               | 11 |      |  |      | 24 |  |  |   | 28  | 
|              |  |               |    |      |  |      |    |  |  |   |     | 
|Total sales   |  | $             | 39 |      |  | $    | 70 |  |  | $ | 123 | 
|              |  |               |    |      |  |      |    |  |  |   |     | 

One distributor accounted for 28% of total net
sales in 2002, 23% in 2001 and 19% in 2000. Another distributor
accounted for 15% of total net sales in 2002.

We have adopted generally accepted accounting
principles that are customary in the industry in which we
operate. Following are our significant accounting policies:

Fiscal
Year

Our fiscal year ends on the Sunday nearest
December 31. For purposes of financial statement
presentation, each fiscal year is deemed to have ended on
December 31. Fiscal years 2002, 2001, and 2000 each
consisted of 52 weeks.

31



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XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Basis of
Presentation

The consolidated financial statements include the
accounts of Xicor and our wholly-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated.

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.

Cash
Equivalents

Highly liquid investments with maturities of
three months or less at the time of purchase are considered cash
equivalents.

Investments

All investments are classified as
available-for-sale. Investments in available-for-sale securities
are reported at fair value with unrealized gains and losses, net
of related tax, as a component of stockholders equity.
Unrealized gains and losses net of related tax were not material
at December 31, 2002 or 2001.

Concentrations
of Credit Risk

Financial instruments that potentially subject us
to concentrations of credit risk consist principally of cash,
cash equivalents, investments and accounts receivable. Our
investment policy requires cash, cash equivalents and
investments to be placed with high-credit quality institutions
and specifies concentration limits according to investment type
and issuer.

Our accounts receivable are derived from sales to
original equipment manufacturers and distributors serving a
variety of industries located primarily in the United States,
Europe and Asia. At December 31, 2002 and 2001 we had an
allowance for doubtful accounts of $0.5 million. We perform
ongoing credit evaluations of our customers and to date have not
experienced any material losses. Bad debt expense in each of the
years ended December 31, 2002, 2001 and 2000 was less than
$0.1 million.

Concentration
of Other Risks

The semiconductor industry is characterized by
rapid technological change, competitive pricing pressures and
cyclical market patterns. Our financial results are affected by
a wide variety of factors, including general economic conditions
worldwide, economic conditions specific to the semiconductor
industry, the timely implementation of new manufacturing process
technologies and the ability to safeguard patents and
intellectual property in a rapidly evolving market. In addition,
the semiconductor market has historically been cyclical and
subject to significant economic downturns at various times. As a
result, we may experience significant period-to-period
fluctuations in future operating results due to the factors
mentioned above or other factors. We believe that our existing
sources of liquidity, including our cash, cash equivalents and
investments, will be adequate to support our operating and
capital investment activities for the next twelve months.

Fair Value of
Financial Instruments

We measure our financial assets and liabilities
in accordance with generally accepted accounting principles. For
financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable, accounts payable
and accrued expenses, the carrying amounts approximate fair
value due to their short maturities.

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XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Inventories

Inventories are stated at the lower of cost or
market. Cost is determined using the first-in, first-out basis
for raw materials and supplies, and a standard cost basis (which
approximates first-in, first-out) for work in process and
finished goods.

Property and
Equipment

Depreciation for financial reporting purposes is
computed using the straight-line method and the assets
estimated useful lives, principally five years. Amortization of
leasehold improvements is computed over the shorter of the
remaining terms of the leases or the estimated useful lives of
the improvements. Construction in progress consists of leasehold
improvements not completed and equipment received but not yet
placed in service.

Goodwill and
Other Intangibles

Goodwill represents the excess of the purchase
price of net tangible and intangible assets acquired in business
combinations over their estimated fair value. Other intangibles
include developed technology and customer contracts for
professional services acquired in business combinations. In
accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(SFAS 142), we do not amortize goodwill, but instead evaluate it
periodically to determine whether events or circumstances have
occurred indicating that goodwill might be impaired.
Identifiable intangible assets are amortized using the
straight-line method over their useful lives.

Long-lived
Assets

We review long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. We review
the recoverability of our long-lived assets, such as fixed
assets, goodwill, intangible assets and investments, when events
or changes in circumstances occur that indicate that the
carrying value of the asset or asset group may not be
recoverable. The assessment of possible impairment is based on
our ability to recover the carrying value of the asset or asset
group from the expected future pre-tax cash flows (undiscounted
and without interest charges) of the related operations. If
these cash flows are less than the carrying value of such asset,
an impairment loss is recognized for the difference between the
estimated fair value and carrying value. The measurement of
impairment requires management to estimate future cash flows and
the fair value of long-lived assets.

Revenue
Recognition

Our customers include original equipment
manufacturers, distributors and contract manufacturers. We
recognize revenue from sales when the rights and risks of
ownership have passed to the customer, when persuasive evidence
of an arrangement exists, the product has been shipped, the
price is fixed or determinable and collection of the resulting
receivable is reasonably assured. Sales are reduced for
estimated returns and adjustments. Certain of our sales to
distributors are contractually subject to rights of return and
price concessions on unsold merchandise. Because of frequent
sales price reductions on standard products, the
distributors return rights and rapid technological
obsolescence in the semiconductor industry, we defer recognition
of such sales until the distributors sell the merchandise. From
time to time we terminate distributors, contractually eliminate
their rights of return and price concessions or obsolete parts
in the distribution channel. In such cases, we recognize revenue
after the distributors return rights lapse and the price
is fixed. Amounts billed to the distributors, net of estimated
price concessions, are included as accounts receivable and the
related gross profit is deferred and reflected as a current
liability until the revenue is recognized.

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XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Product
Warranties

In accordance with industry practice, we provide
a limited warranty for our devices against defects in materials
and workmanship for periods ranging from 90 days to one
year. We accrue for warranty costs based on historical trends in
product failure rates and the expected costs to provide warranty
replacements. The following table summarizes the activity
related to the product warranty liability during the year ended
December 31, 2002 (in thousands).

|                             |                                               |        |     |      |  
|---------------------------- | --------------------------------------------- | ------ | --- | ---- | -
|                             |                                               | Amount
|                             |                                               |       
|Balance at December 31, 2001 |                                               | $      | 250 |     
|                             | Accrual for Warranties issued during the year |        |     | 158  |  
|                             | Warranty replacements                         |        |     | (158 | )
|                             |                                               |        |     |     
|Balance at December 31, 2002 |                                               | $      | 250 |     
|                             |                                               |        |     |     

Net Income
(Loss) Per Share and Comprehensive Net Income
(Loss)

Basic net income (loss) per share is
computed using the weighted average number of common shares
outstanding. Diluted net income (loss) per share is
computed using the weighted average number of common shares and
all dilutive potential common shares outstanding. The same net
income (loss) amounts were used for Basic Earnings Per
Share (EPS) and Diluted EPS for each of the three years in
the period ended December 31, 2002.

Potential common shares consisting of 2,097,000
stock options were the only reconciling items between the number
of shares used to calculate Basic EPS and Diluted EPS for the
year ended December 31, 2000. For the years ended
December 31, 2002 and 2001, the number of shares used in
the calculations of both EPS amounts were the same since stock
options aggregating 6,831,000 at a weighted average price of
$4.85 per share and 4,984,000 at a weighted average price of
$5.06 per share, respectively, were excluded as they were
antidilutive.

The net income (loss) for the periods
reported also represented the comprehensive net income
(loss) for such periods.

Accounting
for Stock Options

In accordance with Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), we apply Accounting
Principles Board Opinion No. 25 as interpreted in Financial
Accounting Standards Board Interpretation No. 44 for
purposes of accounting for employee stock options. Because the
exercise prices of our employee stock options equal the market
price of the underlying stock on the date of grant, no
compensation expense at time of grant is recognized in the
financial statements. We provide additional pro forma
disclosures as required under SFAS 123 in Note 8. The following
table

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XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

summarizes the effect on net income and earnings
per share if we applied the fair value provisions of SFAS 123 to
stock-based employee compensation.

|                               |                                                               |                         |         |        |   |      |         |        |   |   |        |        |  
|------------------------------ | ------------------------------------------------------------- | ----------------------- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------ | ------ | -
|                               |                                                               |                        
|                               |                                                               | Year Ended December 31,
|                               |                                                               |                        
|                               |                                                               | 2002                    |         | 2001   |   | 2000
|                               |                                                               |                         |         |        |   |     
|                               |                                                               |                        
|                               |                                                               | (In thousands)         
|Net income (loss), as reported |                                                               | $                       | (12,782 | )      |   | $    | (9,469  | )      |   | $ | 13,166 |       
|                               | Total pro forma stock-based employee compensation
    expense |                         |         | (4,410 | ) |      |         | (3,741 | ) |   |        | (3,528 | )
|                               |                                                               |                         |         |        |   |      |         |        |   |   |        |       
|Pro forma net income (loss)    |                                                               | $                       | (17,192 | )      |   | $    | (13,210 | )      |   | $ | 9,638  |       
|                               |                                                               |                         |         |        |   |      |         |        |   |   |        |       
|Net income (loss) per share:   |                                                               |                         |         |        |   |      |         |        |   |   |        |       
|                               | Basic  as reported                                           |                         | $       | (0.55  | ) |      | $       | (0.43  | ) |   | $      | 0.62   |  
|                               |                                                               |                         |         |        |   |      |         |        |   |   |        |       
|                               | Basic  pro forma                                             |                         | $       | (0.74  | ) |      | $       | (0.61  | ) |   | $      | 0.45   |  
|                               |                                                               |                         |         |        |   |      |         |        |   |   |        |       
|                               | Diluted  as reported                                         |                         | $       | (0.55  | ) |      | $       | (0.43  | ) |   | $      | 0.57   |  
|                               |                                                               |                         |         |        |   |      |         |        |   |   |        |       
|                               | Diluted  pro forma                                           |                         | $       | (0.74  | ) |      | $       | (0.61  | ) |   | $      | 0.41   |  
|                               |                                                               |                         |         |        |   |      |         |        |   |   |        |       

New
Accounting Pronouncements

In August 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations (SFAS
143). This Statement addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. SFAS 143 applies to legal obligations associated with the
retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations
of lessees. SFAS 143 is effective for financial statements
issued for fiscal years beginning after June 25, 2002. We
believe that the adoption of this standard will have no material
impact on our financial statements.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements Nos. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS No. 145). Among other things, SFAS
No. 145 rescinds various pronouncements regarding early
extinguishment of debt and allows extraordinary accounting
treatment for early extinguishment only when the provisions of
APB Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions are met.
This statement is effective for fiscal years beginning after May
2002 for the provisions related to the rescission of Statements
4 and 64, and for all transactions entered into beginning May
2002 for the provision related to the amendment of Statement 13.
This standard would require any gain or loss from the early
extinguishment of debt to be included in the Other income
and (expense), net line of our consolidated statement of
operations.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Exit or Disposal
Activities (SFAS 146). SFAS 146 addresses
significant issues regarding the recognition, measurement, and
reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are
currently accounted for under EITF No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The scope of SFAS 146
includes costs related to terminating a contract that is not a
capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement
or an individual deferred-compensation contract. SFAS 146
will be effective for exit or disposal activities that are
initiated after December 31, 2002. We plan to adopt
SFAS 146 for our fiscal year beginning January 1,
2003. The effect on adoption of SFAS No. 146 will
change on a

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XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

prospective basis the timing of when
restructuring charges are recorded from a commitment date
approach to when the liability is incurred.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
requires that a liability be recorded in the guarantors
balance sheet upon issuance of a guarantee. In addition,
FIN 45 requires disclosures about the guarantees that an
entity has issued, including a reconciliation of changes in the
entitys product warranty liabilities. The initial
recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the
guarantors fiscal year-end. The disclosure requirements of
FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. We believe
that the adoption of this standard will have no material impact
on our financial statements.

In November 2002, the Emerging Issues Task Force
(EITF) reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables.
EITF Issue No. 00-21 provides guidance on how to account
for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003. We believe that the adoption of this
standard will have no material impact on our financial
statements.

In December 2002, the FASB issued Statement of
Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation, Transition and Disclosure
(SFAS No. 148). SFAS No. 148 provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that
disclosures of the pro forma effect of using the fair value
method of accounting for stock-based employee compensation be
displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the
pro forma effect in interim financial statements. The transition
and annual disclosure requirements of SFAS No. 148 are
effective for fiscal years ended after December 15, 2002.
The interim disclosure requirements are effective for interim
periods beginning after December 15, 2002. We believe that
the adoption of this standard will have no material impact on
our financial statements.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51
(FIN 46). FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective immediately for all
new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of
FIN 46 must be applied for the first interim or annual
period beginning after June 15, 2003. We believe that the
adoption of this standard will have no material impact on our
financial statements.

Note 2  Restructuring

In December 1999, our Board of Directors approved
a plan to reduce manufacturing costs by closing our Milpitas
in-house wafer fabrication facility in favor of outsourcing all
of our wafer production to third party foundries. We began
pursuing the sale of the Milpitas manufacturing operations but
believed at that time the most likely outcome would be a
piecemeal sale of the equipment. At the beginning of 2000, the
restructuring liability balance related to the closure of the
fabrication facility was approximately $8.3 million.

In the fourth quarter of 2000, we sold the wafer
fabrication assets and inventory to Standard MEMS, Inc.
(Standard MEMS) for a gross purchase price of
$12.8 million. As a result of the sale of the fab, we
incurred restructuring charges at levels significantly below the
amount previously estimated and accrued.

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XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During 2000 we utilized $1.9 million of
restructuring reserves, which included reductions in workforce
of approximately 200 employees, primarily in manufacturing and
related support groups. The net restructuring credit of
$3.8 million recorded in 2000 consists of a reversal of
$6.1 million of costs originally included in the
restructuring accrual not utilized due primarily to the sale of
the fab to Standard MEMS, partially offset by $2.3 million
principally related to additional workforce reductions that we
committed to in the fourth quarter of 2000 to streamline
operations and further implement our outsourced manufacturing
strategy.

At December 31, 2000, the restructuring
accrual consisted of $2.0 million of severance costs to
further reduce the workforce by approximately 50 employees
primarily in administrative, manufacturing and support groups
and $0.5 million of other restructuring related costs.

In the first quarter of 2001, we announced our
plan to exit from offering stand alone low-density serial EEPROM
memory products and complete the move to fully outsourced test
and assembly operations. Accordingly, our first quarter 2001
results included a $3.2 million restructuring charge and an
$8.2 million charge to cost of sales to write down
inventories to their net realizable value. The restructuring
charge included a $2.0 million accrual consisting of
$1.5 million of severance-related costs for an additional
reduction in our workforce of approximately 95 employees,
primarily in manufacturing, sales and support groups, and
$0.5 million of other restructuring-related costs. The
$1.2 million balance of the restructuring charge recorded
in the first quarter of 2001 related principally to the
write-off of leasehold improvements in the facility that was
vacated as a result of the restructuring plan.

During 2001, we reduced our workforce by
approximately 140 employees and utilized $3.1 million of
the restructuring reserve for related severance costs and
$0.7 million for other restructuring related costs. At
December 31, 2001, the restructuring accrual of
$0.7 million consisted of $0.4 million of severance
costs (including costs to reduce the workforce by approximately
10 employees primarily in sales and administrative groups) and
$0.3 million of other costs associated with vacated sales
offices.

In 2002, due to the ongoing weak industry
conditions, we implemented two additional reductions in force
that affected employees in all areas of the company. In the
second quarter of 2002 we reduced our workforce by 33 employees,
which resulted in a $0.8 million restructuring charge for
severance-related costs. In the fourth quarter of 2002, we
notified 16 employees that their employment would cease on
various dates in the fourth quarter of 2002 and first quarter of
2003, which resulted in a $0.2 million restructuring charge
for severance-related costs.

In the fourth quarter of 2002 we entered into a
lease agreement for a facility to be used as our corporate
headquarters. We vacated our prior headquarters facility in the
fourth quarter of 2002, and a third party assumed the related
lease in the first quarter of 2003. We also vacated our leased
Bay Area sales office facility and the leased facility that we
assumed as part of the AIP acquisition in the fourth quarter of
2002 and relocated the employees to our corporate headquarters.
The abandonment of these facilities resulted in a fourth quarter
2002 facilities related restructuring charge of
$0.9 million consisting of $0.5 million for the
non-cash abandonment of leasehold improvements, equipment and
furniture and $0.4 million of exit costs consisting
primarily of future rent payable for periods subsequent to
abandonment of the facilities.

During 2002, we reduced our workforce by
approximately 50 employees and utilized $1.1 million of the
restructuring reserve for related severance costs and
$0.3 million for other restructuring related costs. At
December 31, 2002, the restructuring accrual of
$0.7 million consisted of $0.2 million of severance
costs payable to terminated employees and $0.5 million
of costs associated with vacated facilities. We expect to
complete these restructuring activities in 2003.

37



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##### Table of Contents



XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the restructuring
reserve activity for the three years ended December 31,
2002 (in thousands):

|                             |  |           |        |           |  |         |        |            |  |               |        |               |  |               |      |   |  |   |        |   |  |   |       |  |  |   |        |  
|---------------------------- |  | --------- | ------ | --------- |  | ------- | ------ | ---------- |  | ------------- | ------ | ------------- |  | ------------- | ---- | - |  | - | ------ | - |  | - | ----- |  |  | - | ------ | -
|                             |  | Employee  |        |           |  |         |        |            |  |               |        |               |  |              
|                             |  | Severance |        | Equipment |  | Fab     |        |            |  | Total         |        | Non-Cash      |  | Net          
|                             |  | and       |        | Lease     |  | Closure |        | Facilities |  | Restructuring |        | Restructuring |  | Restructuring
|                             |  | Other     |        | Costs     |  | Costs   |        | Charge     |  | Liability     |        | Charge        |  | Expense      
|                             |  |           |        |           |  |         |        |            |  |               |        |               |  |              
|Balance at December 31, 1999 |  | $         | 2,365  |           |  | $       | 1,484  |            |  | $             | 3,555  |               |  | $             | 878  |   |  | $ | 8,282  |   |  |   |       |  |  |   |        |  
|(Utilized)                   |  |           | (727   | )         |  |         | (1,107 | )          |  |               | (24    | )             |  |               | (46  | ) |  |   | (1,904 | ) |  |   |       |  |  |   |        |  
|(Credit)/Expense             |  |           | 899    |           |  |         | (377   | )          |  |               | (3,531 | )             |  |               | (832 | ) |  |   | (3,841 | ) |  | $ |      |  |  | $ | (3,841 | )
|                             |  |           |        |           |  |         |        |            |  |               |        |               |  |               |      |   |  |   |        |   |  |   |       |  |  |   |        |  
|Balance at December 31, 2000 |  |           | 2,537  |           |  |         |       |            |  |               |       |               |  |               |     |   |  |   | 2,537  |   |  |   |       |  |  |   |        |  
|(Utilized)                   |  |           | (3,802 | )         |  |         |       |            |  |               |       |               |  |               |     |   |  |   | (3,802 | ) |  |   |       |  |  |   |        |  
|(Credit)/Expense             |  |           | 1,956  |           |  |         |       |            |  |               |       |               |  |               |     |   |  |   | 1,956  |   |  |   | 1,249 |  |  |   | 3,205  |  
|                             |  |           |        |           |  |         |        |            |  |               |        |               |  |               |      |   |  |   |        |   |  |   |       |  |  |   |        |  
|Balance at December 31, 2001 |  |           | 691    |           |  |         |       |            |  |               |       |               |  |               |     |   |  |   | 691    |   |  |   |       |  |  |   |        |  
|(Utilized)                   |  |           | (1,419 | )         |  |         |       |            |  |               |       |               |  |               | (17  | ) |  |   | (1,436 | ) |  |   |       |  |  |   |        |  
|(Credit)/Expense             |  |           | 1,009  |           |  |         |       |            |  |               |       |               |  |               | 454  |   |  |   | 1,463  |   |  |   | 473   |  |  |   | 1,936  |  
|                             |  |           |        |           |  |         |        |            |  |               |        |               |  |               |      |   |  |   |        |   |  |   |       |  |  |   |        |  
|Balance at December 31, 2002 |  | $         | 281    |           |  | $       |       |            |  | $             |       |               |  | $             | 437  |   |  | $ | 718    |   |  |   |       |  |  |   |        |  
|                             |  |           |        |           |  |         |        |            |  |               |        |               |  |               |      |   |  |   |        |   |  |   |       |  |  |   |        |  

Note 3  Deferred Gain on
Sale of Fab Assets

In November 2000, we completed the sale of the
wafer fabrication assets and inventory located in Milpitas,
California to Standard MEMS for a gross purchase price of
$12.8 million. Under a related agreement, Standard MEMS
became an additional foundry for us and committed to supply and
we committed to purchase certain minimum quantities of wafers at
fixed prices. We deferred the $5.0 million net gain related
to the sale of the fab and established the amortization period
of the gain at two years, which was the minimum term of the
foundry agreement. Cost of sales for 2002, 2001 and 2000
included a $1.9 million, $2.5 million and
$0.4 million credit, respectively, related to the
amortization of the deferred gain on the sale of the fab assets.
The benefit from the amortization of the deferred gain ended in
the third quarter of 2002 due to the early termination of the
foundry agreement, and the remaining unamortized balance of
$0.2 million was included in other income in the third
quarter of 2002.

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XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 4  Balance Sheet
Components

|                                                                           |                                     |                |       |        |  |   |        |        | 
|-------------------------------------------------------------------------- | ----------------------------------- | -------------- | ----- | ------ |  | - | ------ | ------ | 
|                                                                           |                                     |               
|                                                                           |                                     | December 31,  
|                                                                           |                                     |               
|                                                                           |                                     | 2002           |       | 2001  
|                                                                           |                                     |                |       |       
|                                                                           |                                     |               
|                                                                           |                                     | (In thousands)
|Available-For-Sale Securities:                                             |                                     |                |       |        |  |   |        |       
|                                                                           | U.S. corporate notes and bonds      |                | $     | 5,482  |  |   | $      |       | 
|                                                                           | Short-term floating rate notes      |                |       | 6,004  |  |   |        |       | 
|                                                                           | U.S. government agency securities   |                |       | 251    |  |   |        |       | 
|                                                                           |                                     |                |       |        |  |   |        |       
|                                                                           | Total Available-For-Sale Securities |                | $     | 11,737 |  |   | $      |       | 
|                                                                           |                                     |                |       |        |  |   |        |       
|Held-to-Maturity Securities:                                               |                                     |                |       |        |  |   |        |       
|                                                                           | U.S. Government Agency securities   |                | $     |       |  |   | $      | 34,591 | 
|                                                                           |                                     |                |       |        |  |   |        |       
|                                                                           | Total Held-to-Maturity Securities   |                |       |       |  |   | $      | 34,591 | 
|                                                                           |                                     |                |       |        |  |   |        |       
|Less amount included in cash equivalents                                   |                                     | $              | 6,004 |        |  | $ | 34,591 |       
|Less amount included in short-term investments
    (due in 1 year or less) |                                     |                | 4,648 |        |  |   |       |       
|                                                                           |                                     |                |       |        |  |   |        |       
|Amount included in long-term investments (all due
    in 1-2 years)        |                                     | $              | 1,085 |        |  | $ |       |       
|                                                                           |                                     |                |       |        |  |   |        |       

Unrealized gains and losses net of related tax
for investment securities were not material at December 31,
2002 and December 31, 2001. Proceeds from sales of
investment securities available-for-sale during the year ended
December 31, 2002 were $1.0 million. No gains or
losses were realized on the sales. No investment securities were
sold during the year ended December 31, 2001.

39



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XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                               |                                     |                |        |         |   |   |        |         |  
|------------------------------ | ----------------------------------- | -------------- | ------ | ------- | - | - | ------ | ------- | -
|                               |                                     |               
|                               |                                     | December 31,  
|                               |                                     |               
|                               |                                     | 2002           |        | 2001   
|                               |                                     |                |        |        
|                               |                                     |               
|                               |                                     | (In thousands)
|Inventories:                   |                                     |                |        |         |   |   |        |        
|                               | Raw materials and supplies          |                | $      | 49      |   |   | $      | 212     |  
|                               | Work in process                     |                |        | 3,370   |   |   |        | 7,252   |  
|                               | Finished goods                      |                |        | 1,520   |   |   |        | 1,940   |  
|                               |                                     |                |        |         |   |   |        |        
|                               |                                     | $              | 4,939  |         |   | $ | 9,404  |        
|                               |                                     |                |        |         |   |   |        |        
|Property, plant and equipment: |                                     |                |        |         |   |   |        |        
|                               | Leasehold improvements              |                | $      | 49      |   |   | $      | 2,725   |  
|                               | Equipment                           |                |        | 25,319  |   |   |        | 37,118  |  
|                               | Furniture and fixtures              |                |        | 92      |   |   |        | 345     |  
|                               | Construction in progress            |                |        |        |   |   |        | 39      |  
|                               |                                     |                |        |         |   |   |        |        
|                               |                                     |                | 25,460 |         |   |   | 40,227 |        
|                               | Accumulated depreciation            |                |        | (22,419 | ) |   |        | (35,004 | )
|                               |                                     |                |        |         |   |   |        |        
|                               |                                     | $              | 3,041  |         |   | $ | 5,223  |        
|                               |                                     |                |        |         |   |   |        |        
|Accrued expenses:              |                                     |                |        |         |   |   |        |        
|                               | Accrued wages and employee benefits |                | $      | 1,136   |   |   | $      | 1,412   |  
|                               | Accrued restructuring liabilities   |                |        | 718     |   |   |        | 691     |  
|                               | Other accrued expenses              |                |        | 4,282   |   |   |        | 5,764   |  
|                               |                                     |                |        |         |   |   |        |        
|                               |                                     | $              | 6,136  |         |   | $ | 7,867  |        
|                               |                                     |                |        |         |   |   |        |        



| |                     
| | --------------------
| | Accounts Receivable:

Accounts receivable at December 31, 2002 and
2001 are presented net of an allowance for doubtful accounts of
$0.5 million.



|         |                                                   
|-------- | --------------------------------------------------
|Note 5  | Acquisition of Analog Integration Partners
    LLC

On April 16, 2002, we acquired Analog
Integration Partners, LLC (AIP), a privately held company
that designs and develops high-performance analog signal
processing and data conversion circuits. AIP implements high
frequency analog front-end technology and signal processing
solutions in standard digital logic processes. The AIP
acquisition brings us analog mixed-signal design talent and core
technology on which we plan to build.

The acquisition was accounted for using the
purchase method of accounting per Statement of Financial
Accounting Standards (SFAS) No. 141. Accordingly, the
estimated fair value of the assets acquired and liabilities
assumed were included in our consolidated balance sheet as of
April 16, 2002, the effective date of the purchase. The
results of operations are included in our consolidated results
of operations since the effective date of the purchase. We
acquired AIP for total consideration of $15.5 million,
consisting of $10.2 million of stock (1,012,758 shares of
Xicor common stock valued at $10.05 per share, the average
closing price for the three days ended April 16, 2002),
$5.0 million in cash, and direct acquisition costs of
$0.3 million for legal, appraisal and accounting fees. The
total purchase price was allocated by management to the
estimated fair

40



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##### Table of Contents



XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

value of assets acquired and liabilities assumed
as follows based upon various factors, including an independent
appraisal (in thousands):

|                                             |  |   |        | 
|-------------------------------------------- |  | - | ------ | 
|Current technology                           |  | $ | 2,700  | 
|Net tangible assets acquired                 |  |   | 105    | 
|Customer contracts for professional services |  |   | 100    | 
|Goodwill                                     |  |   | 10,762 | 
|                                             |  |   |        | 
|Net assets acquired                          |  |   | 13,667 | 
|In-process research and development          |  |   | 1,800  | 
|                                             |  |   |        | 
|Total consideration                          |  | $ | 15,467 | 
|                                             |  |   |        | 

The amounts allocated to current technology and
customer contracts for professional services are being amortized
using the straight-line method over their useful lives of
3 years and 8 months, respectively. During 2002,
$0.6 million of current technology and all of the customer
contracts for professional services were amortized to expense.
Amortization of purchased intangible assets is expected to be
$0.9 million in each of 2003 and 2004 and $0.3 million in
2005 related to the unamortized current technology balance as of
December 21, 2002. The net tangible assets acquired consist
primarily of accounts receivable, partially offset by accounts
payable. None of the $10.8 million in goodwill is expected
to be deductible for tax purposes, and in accordance with
SFAS No. 142 will not be amortized but instead
evaluated periodically to determine whether events or
circumstances have occurred indicating that goodwill might be
impaired.

The $1.8 million of in-process research and
development expensed in the second quarter of 2002 relates to
AIPs current engineering effort that is focused on
developing the analog front end for the high-end flat panel
display market using a standard digital 0.18 micron CMOS
process. Management determined the value of the in-process
research and development based upon various factors, including
an independent appraisal. The appraisal used a discounted cash
flow method and factors including projected financial results,
relative risk of successful development, time value of money and
level of completion. Projected financial results were based on a
number of estimates including market growth rates, the
companys competitive position, the product roadmap, the
companys cost structure, development timelines, resource
requirements and the long-term effective tax rate. The
risk-adjusted discount rate used for projected cash flows was
50%. Revenues related to products developed under this project
are planned to begin toward the end of 2003.

Note 6  Commitments

We lease our facilities and certain equipment
under non-cancelable lease agreements that expire at various
dates through 2010. These leases require us to pay taxes,
insurance, maintenance and other expenses with respect to the
facilities and equipment.

Leases that meet certain specific criteria are
considered capital leases and, accordingly, are accounted for as
the acquisition of an asset and the incurrence of a liability.
Assets recorded under capital leases were as follows:

|                               |  |                |        |      |  |   |        |  
|------------------------------ |  | -------------- | ------ | ---- |  | - | ------ | -
|                               |  |               
|                               |  | December 31,  
|                               |  |               
|                               |  | 2002           |        | 2001
|                               |  |                |        |     
|                               |  |               
|                               |  | (In thousands)
|Equipment                      |  | $              | 2,356  |      |  | $ | 2,821  |  
|Less: accumulated depreciation |  |                | (1,742 | )    |  |   | (1,670 | )
|                               |  |                |        |      |  |   |        |  
|                               |  | $              | 614    |      |  | $ | 1,151  |  
|                               |  |                |        |      |  |   |        |  

41



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##### Table of Contents



XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In the fourth quarter of 2002 we entered into a
lease agreement for a facility to be used as our corporate
headquarters. The lease is for eight years and provides for
lower annual lease payments than our prior lease. We vacated our
prior headquarters facility in the fourth quarter of 2002, and
the related lease was assumed in full by a third party in the
first quarter of 2003. Excluding the minimum future payments
that were assumed by a third party, our minimum future lease
payments under non-cancelable leases as of December 31,
2002 were:

|                                        |           |                |       |           |  |   |       |       |    
|--------------------------------------- | --------- | -------------- | ----- | --------- |  | - | ----- | ----- | ---
|                                        |           | Capital        |       | Operating
|                                        |           | Leases         |       | Leases   
|                                        |           |                |       |          
|                                        |           |               
|                                        |           | (In thousands)
|Years:                                  |           |                |       |           |  |   |       |      
|                                        | 2003      |                | $     | 490       |  |   | $     | 1,343 | (1)
|                                        | 2004      |                |       | 269       |  |   |       | 987   |    
|                                        | 2005      |                |       | 242       |  |   |       | 1,016 |    
|                                        | 2006      |                |       |          |  |   |       | 1,052 |    
|                                        | 2007      |                |       |          |  |   |       | 1,088 |    
|                                        | 2008-2010 |                |       |          |  |   |       | 3,499 |    
|                                        |           |                |       |           |  |   |       |      
|Total minimum lease payments            |           |                | 1,001 |           |  | $ | 8,985 |      
|                                        |           |                |       |           |  |   |       |      
|Less amount representing interest       |           |                | 99    |           |  |   |       |      
|                                        |           |                |       |           |  |   |       |      
|Present value of minimum lease payments |           |                | 902   |           |  |   |       |      
|Less current portion                    |           |                | 432   |           |  |   |       |      
|                                        |           |                |       |           |  |   |       |      
|Long-term lease obligation              |           | $              | 470   |           |  |   |       |      
|                                        |           |                |       |           |  |   |       |      



---



|    |                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes $380 of lease payments for vacated
    facilities which were accrued in restructuring liabilities at
    December 31, 2002.

Total rental expense under all operating leases
was as follows (including month-to-month rentals):
2002  $1.1 million, 2001 
$1.8 million, and 2000  $3.9 million.

Purchase commitments for open purchase orders at
December 31, 2002 for which goods and services had not been
received were approximately $4.5 million.

Note 7  Debt



| |                                   
| | ----------------------------------
| | Convertible Subordinated
    Notes

In November 2001, we completed a private
placement to qualified institutional investors of
$35.0 million of 5.5% Convertible Subordinated Notes due in
2006 (the Notes) and related warrants to purchase
approximately one million shares of our common stock during the
next five years at an exercise price of $12.24 per share and
filed a registration statement on Form S-3 with the
Securities and Exchange Commission to register the shares
underlying the Notes and warrants.

Interest on the Notes is payable semi-annually on
May 19 and November 19 of each year. The Notes are
convertible at the option of the holders at any time into
approximately 3.1 million shares of our common stock at
$11.22 per share, which represents a 10% premium to the closing
price of our stock on November 15, 2001. We may redeem some
or all of the Notes, at any time before maturity, at a
redemption price, in cash, of $1,000 principal amount of the
notes, plus accrued and unpaid interest, if any, to, but
excluding, the redemption date, if the closing price of our
common stock exceeds $19.64 for any 15 out of 20 consecutive
trading days. At any time on or after November 19, 2004, we
may redeem some or all of the notes at declining

42



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##### Table of Contents



XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

redemption prices expressed as a percentage of
the principal (representing approximately 100% plus one-fifth of
the annual interest expense times the number of years from
maturity) plus accrued and unpaid interest. The Note holders may
require us to repurchase the Notes, in cash, upon a repurchase
event at 105% of the principal amount of the Notes, plus accrued
unpaid interest. Such repurchase events include certain changes
of control.

Using the Black-Scholes pricing model, we
determined that the debt discount associated with the fair value
of the warrants approximated $3.1 million. The amortization
of the note discount is being reflected as a non-cash charge to
interest expense over the term of the warrants. We recognized
interest expense associated with amortization of the debt
discount of $610,000 and $70,000 during the years ended
December 31, 2002 and December 31, 2001, respectively.
The note discount, net of accumulated amortization, is reflected
as a reduction in the face value of the Notes. The cost of
issuing the Notes totaled $3.1 million, which was recorded
in other long-term assets and is being amortized to interest
expense over the term of the Notes. We recognized interest
expense associated with amortization of the deferred note
issuance costs of $606,000 and $70,000 during the years ended
December 31, 2002 and December 31, 2001, respectively.

Note 8  Shareholders
Equity



| |             
| | ------------
| | Option Plans

We have three stock option plans for our
employees, the 1990 Plan, the 1998 Plan and the 2002 Plan, and a
Director Plan. The 2000 Director Option Plan provides for an
initial grant of 25,000 options to each of our outside directors
and automatic annual grants of 10,000 options thereafter.
Directors may also be granted options under the 1998 Plan. The
total number of shares of common stock authorized for issuance
under the 1990 Employee Plan, the 1998 Employee Plan, the 2002
Employee Plan and the 2000 Director Plan are 5,000,000,
6,250,000, 1,000,000 and 500,000, respectively.

Options granted under the 1990, 1998 and 2002
plans generally vest over four years and expire no later than
ten years from date of grant. Options under the 2000 Director
Plan vest over a three-year period for initial grants and after
one year for subsequent grants and expire no later than ten
years from date of grant. All

43



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##### Table of Contents



XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

outstanding options were granted at 100% of the
fair market value of the stock at the date of grant. The
following table summarizes the option activity under all plans.

|                                 |  |                |        |              |  |   |      | 
|-------------------------------- |  | -------------- | ------ | ------------ |  | - | ---- | 
|                                 |  |                |        | Average     
|                                 |  | Number         |        | Option Price
|                                 |  | of Shares      |        | Per Share   
|                                 |  |                |        |             
|                                 |  | (In thousands) |        |             
|Outstanding at December 31, 1999 |  |                | 3,259  |              |  | $ | 3.02 | 
|Granted                          |  |                | 2,951  |              |  |   | 6.76 | 
|Exercised                        |  |                | (742   | )            |  |   | 2.48 | 
|Canceled                         |  |                | (757   | )            |  |   | 6.23 | 
|                                 |  |                |        |              |  |   |      | 
|Outstanding at December 31, 2000 |  |                | 4,711  |              |  |   | 4.93 | 
|Granted                          |  |                | 2,226  |              |  |   | 4.65 | 
|Exercised                        |  |                | (756   | )            |  |   | 2.92 | 
|Canceled                         |  |                | (1,197 | )            |  |   | 5.14 | 
|                                 |  |                |        |              |  |   |      | 
|Outstanding at December 31, 2001 |  |                | 4,984  |              |  |   | 5.06 | 
|Granted                          |  |                | 3,183  |              |  |   | 4.57 | 
|Exercised                        |  |                | (286   | )            |  |   | 3.15 | 
|Canceled                         |  |                | (1,050 | )            |  |   | 5.46 | 
|                                 |  |                |        |              |  |   |      | 
|Outstanding at December 31, 2002 |  |                | 6,831  |              |  | $ | 4.85 | 
|                                 |  |                |        |              |  |   |      | 

In 2000, we recorded stock based compensation of
$279,000 for the accelerated vesting and extended terms of
certain previously granted options.

The number of stock options available for grant
was 3,332,085 at December 31, 2002, 2,966,258 at
December 31, 2001, and 1,537,550 at December 31, 2000.
At December 31, 2002, 10,163,480 shares of common stock
were reserved for issuance upon exercise of stock options.
Options outstanding at December 31, 2002 and related
weighted average price and life information follows:

|                |  |                     |       |                     |  |              |       |                |  |        |     |  |  |  |       |  |  |   |       | 
|--------------- |  | ------------------- | ----- | ------------------- |  | ------------ | ----- | -------------- |  | ------ | --- |  |  |  | ----- |  |  | - | ----- | 
|                |  |                     |       |                    
|                |  | Options Outstanding |       | Options Exercisable
|                |  |                     |       |                    
|Range of        |  |                     |       | Remaining           |  |             
|Exercise Prices |  | Shares              |       | Price               |  | Life (years) |       | Shares         |  | Prices
|                |  |                     |       |                     |  |              |       |                |  |       
|                |  | (In thousands)      |       |                     |  |              |       | (In thousands) |  |       
|$ 0.78 - $ 0.78 |  |                     | 110   |                     |  | $            | 0.78  |                |  |        | 5.8 |  |  |  | 110   |  |  | $ | 0.78  | 
|1.44 -   2.13   |  |                     | 173   |                     |  |              | 1.56  |                |  |        | 6.2 |  |  |  | 139   |  |  |   | 1.56  | 
|2.25 -   2.98   |  |                     | 1,605 |                     |  |              | 2.66  |                |  |        | 8.3 |  |  |  | 553   |  |  |   | 2.85  | 
|3.54 -   5.06   |  |                     | 3,130 |                     |  |              | 4.38  |                |  |        | 8.9 |  |  |  | 609   |  |  |   | 4.06  | 
|5.44 -   7.56   |  |                     | 1,125 |                     |  |              | 6.71  |                |  |        | 8.1 |  |  |  | 639   |  |  |   | 6.68  | 
|8.25 -  11.69   |  |                     | 415   |                     |  |              | 8.76  |                |  |        | 8.9 |  |  |  | 120   |  |  |   | 8.97  | 
|12.50 -  12.63  |  |                     | 240   |                     |  |              | 12.50 |                |  |        | 7.3 |  |  |  | 142   |  |  |   | 12.51 | 
|17.44 -  18.38  |  |                     | 33    |                     |  |              | 17.78 |                |  |        | 7.2 |  |  |  | 17    |  |  |   | 17.78 | 
|                |  |                     |       |                     |  |              |       |                |  |        |     |  |  |  |       |  |  |   |       | 
|$ 0.78 - $18.38 |  |                     | 6,831 |                     |  | $            | 4.85  |                |  |        | 8.4 |  |  |  | 2,329 |  |  | $ | 5.06  | 
|                |  |                     |       |                     |  |              |       |                |  |        |     |  |  |  |       |  |  |   |       | 

The fair value of options at date of grant was
estimated using the Black-Scholes model. The weighted average
grant date fair value of options granted was $2.46, $2.57, and
$3.86 for the three years in the period ended December 31,
2002. The estimated pro forma stock-based compensation cost
calculated using the assumptions indicated below totaled
$4,243,000 in 2002, $3,546,000 in 2001 and $3,408,000 in 2000.

44



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##### Table of Contents



XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following weighted average assumptions are
included in the estimated fair value grant date calculation of
our stock options:

|                      |  |      |      |      |  |      |      |   |  |  |      |  
|--------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                      |  | 2002 |      | 2001 |  | 2000
|                      |  |      |      |      |  |     
|Expected life (years) |  |      | 3.5  |      |  |      | 3.5  |   |  |  | 3.5  |  
|Interest rate         |  |      | 3.30 | %    |  |      | 3.97 | % |  |  | 5.89 | %
|Volatility            |  |      | 80   | %    |  |      | 80   | % |  |  | 80   | %
|Dividend yield        |  |      | 0    | %    |  |      | 0    | % |  |  | 0    | %



| |                    
| | -------------------
| | Stock Purchase Plan

Our Employee Stock Purchase Plan
(ESPP), allows eligible employees to purchase shares
of common stock through payroll deductions. The ESPP consists of
consecutive 24-month Offering Periods composed of four 6-month
Purchase Periods. The shares can be purchased at the lower of
85% of the fair market value of the common stock at the date of
commencement of a two-year Offering Period or at the last day of
each 6-month Purchase Period. Purchases are limited to the
lesser of 10% of the employees compensation or $25,000 per
year and may not exceed 1,000 shares during each 6-month
Offering Period. At December 31, 2002, 380,000 shares had
been reserved for issuance under the ESPP. The number of shares
issued under the ESPP amounted to 99,000 shares in 2002, 117,000
shares in 2001 and 116,000 in 2000.

The fair value of purchase rights granted under
the ESPP at grant date was estimated using the Black-Scholes
model. The weighted average grant date fair value of purchase
rights granted under the ESPP was $3.14 in 2002, $1.68 in 2001
and $1.10 in 2000.

The following weighted average assumptions are
included in the estimated fair value grant date calculation of
our ESPP:

|                      |  |      |      |      |  |      |      |   |  |  |      |  
|--------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                      |  | 2002 |      | 2001 |  | 2000
|                      |  |      |      |      |  |     
|Expected life (years) |  |      | 0.7  |      |  |      | 1.1  |   |  |  | 1.2  |  
|Interest rate         |  |      | 2.45 | %    |  |      | 4.76 | % |  |  | 4.93 | %
|Volatility            |  |      | 80   | %    |  |      | 80   | % |  |  | 80   | %
|Dividend yield        |  |      | 0    | %    |  |      | 0    | % |  |  | 0    | %



| |                                                                
| | ---------------------------------------------------------------
| | Pro Forma Net Income (Loss) and Net
    Income (Loss) Per Share

|                                                              |                       |                         |         |       |   |      |         |       |   |   |        |      | 
|------------------------------------------------------------- | --------------------- | ----------------------- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------ | ---- | 
|                                                              |                       |                        
|                                                              |                       | Year Ended December 31,
|                                                              |                       |                        
|                                                              |                       | 2002                    |         | 2001  |   | 2000
|                                                              |                       |                         |         |       |   |     
|                                                              |                       |                        
|                                                              |                       | (In thousands)         
|Net income (loss), as reported                                |                       | $                       | (12,782 | )     |   | $    | (9,469  | )     |   | $ | 13,166 |     
|Total pro forma stock-based employee compensation
    expense |                       |                         | (4,410  | )     |   |      | (3,741  | )     |   |   | (3,528 | )   
|                                                              |                       |                         |         |       |   |      |         |       |   |   |        |     
|Pro forma net income (loss)                                   |                       | $                       | (17,192 | )     |   | $    | (13,210 | )     |   | $ | 9,638  |     
|                                                              |                       |                         |         |       |   |      |         |       |   |   |        |     
|Net income (loss) per share:                                  |                       |                         |         |       |   |      |         |       |   |   |        |     
|                                                              | Basic  as reported   |                         | $       | (0.55 | ) |      | $       | (0.43 | ) |   | $      | 0.62 | 
|                                                              |                       |                         |         |       |   |      |         |       |   |   |        |     
|                                                              | Basic  pro forma     |                         | $       | (0.74 | ) |      | $       | (0.61 | ) |   | $      | 0.45 | 
|                                                              |                       |                         |         |       |   |      |         |       |   |   |        |     
|                                                              | Diluted  as reported |                         | $       | (0.55 | ) |      | $       | (0.43 | ) |   | $      | 0.57 | 
|                                                              |                       |                         |         |       |   |      |         |       |   |   |        |     
|                                                              | Diluted  pro forma   |                         | $       | (0.74 | ) |      | $       | (0.61 | ) |   | $      | 0.41 | 
|                                                              |                       |                         |         |       |   |      |         |       |   |   |        |     

45



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##### Table of Contents



XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |         
| | --------
| | Warrants

At December 31, 2002 warrants to purchase
approximately one million shares of our common stock at an
exercise price of $12.24 per share were outstanding. (See
Note 7.)



| |                
| | ---------------
| | Preferred Stock

We have 5,000,000 authorized shares of no par
value Preferred Stock. The Board of Directors is authorized to
fix designations, relative rights, preferences and limitations
on the preferred stock at the time of issuance. An aggregate of
75,000 shares of preferred stock have been designated as
Series A Participating Preferred Stock for issuance in
connection with the Companys Stockholder Rights Plan.



| |                             
| | ----------------------------
| | Common Stock Purchase Rights

In October 2001, the Board of Directors adopted a
Stockholder Rights Plan (the Stockholder Rights Plan). Pursuant
to the Stockholder Rights Plan, each share of our Common Stock
(Common Stock) currently has an associated right. Under certain
circumstances, each right would entitle the registered holder to
purchase from us one one-thousandth share of Series A
Participating Preferred Stock at a purchase price of $60 in
cash, subject to adjustment.

The rights are not exercisable and cannot be
transferred separately from the Common Stock until ten business
days (or such later date as may be determined by the Board of
Directors) after (a) the tenth day (or such later date as
may be determined by our Board of Directors) after a person or
group of affiliated or associated persons (Acquiring
Person) has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the Common Shares then
outstanding, or (b) the tenth business day (or such later
date as may be determined by our Board of Directors) after a
person or group announces a tender or exchange offer, the
consummation of which would result in ownership by a person or
group of 15% or more of our then outstanding Common Shares.

If and when the rights become exercisable, each
holder of a right shall have the right to receive, upon
exercise, that number of shares of Common Stock (or in certain
circumstances, cash property or other securities of Xicor) that
equals the exercise price of the right divided by 50% of the
current market price (as defined in the Stockholder Rights Plan)
per share of Common Stock at the date of the occurrence of such
event. In the event at any time after any person becomes an
acquiring person, (i) we are consolidated with, or merged
with and into, another entity and we are not the surviving
entity of such consolidation or merger or if we are the
surviving entity, but shares of our outstanding common stock are
changed or exchanged for stock or securities or cash or any
other property, or (ii) 50% or more of our assets or
earning power is sold or transferred, each holder of a right
shall thereafter have the right to receive upon exercise, that
number of shares of common stock of the acquiring company that
equals the exercise price of the right divided by 50% of the
current market price of such common stock at the date of the
occurrence of the event.

The rights have certain anti-takeover effects, in
that they would cause substantial dilution to a person or group
that attempts to acquire a significant interest in Xicor on
terms not approved by the Board of Directors. The rights expire
on October 19, 2011 but may be redeemed by Xicor for $.001
per right at any time prior to the fifth day (or such later date
as may be determined by our Board of Directors) following a
persons acquisition of 15% or more of our Common Stock. As
long as the rights are not separately transferable, each new
share of Common Stock issued will have one right associated with
it.

Note 9  Employee Incentive Cash
Bonus Profit Sharing Program

We have an Employee Incentive Cash Bonus Profit
Sharing Program (the Program). Under the Program,
twice a year (two profit sharing periods) up to 15% of our
consolidated operating income, excluding certain non-product
sales and restructuring charges and credits, is distributed to
employees. The exact

46



---



##### Table of Contents



XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

percentage to be distributed is determined by a
Committee of the Board of Directors. No profit sharing bonuses
were paid relating to 2002 or 2001. Profit sharing bonuses
relating to 2000 totaled $0.5 million.

Note 10  Other Income and
Expense

Other expense for the year ended
December 31, 2002 includes a non-cash impairment charge of
$2.5 million to write-off an investment held in a private
company. Other income for the year ended December 31, 2002
includes $700,000 from a favorable sales tax audit, a $400,000
benefit associated with the sale of our wafer fabrication
facility in 2000 and $194,000 from the early termination of a
wafer foundry agreement with Standard MEMS.

Note 11  Income Taxes

The income tax provision consists of the
following:

|        |  |                |   |      |  |      |     |  |  |   |     | 
|------- |  | -------------- | - | ---- |  | ---- | --- |  |  | - | --- | 
|        |  |               
|        |  | Year Ended    
|        |  | December 31,  
|        |  |               
|        |  | 2002           |   | 2001 |  | 2000
|        |  |                |   |      |  |     
|        |  |               
|        |  | (In thousands)
|Federal |  | $              |  |      |  | $    | 56  |  |  | $ | 173 | 
|State   |  |                |  |      |  |      | 10  |  |  |   | 197 | 
|Foreign |  |                |  |      |  |      | 36  |  |  |   | 121 | 
|        |  |                |   |      |  |      |     |  |  |   |     | 
|        |  | $              |  |      |  | $    | 102 |  |  | $ | 491 | 
|        |  |                |   |      |  |      |     |  |  |   |     | 

The reconciliation between the amount computed by
applying the U.S. Federal statutory rate and the reported
tax expense is as follows:

|                                                                 |  |              |       |      |  |      |       |    |  |  |       |  
|---------------------------------------------------------------- |  | ------------ | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | -
|                                                                 |  |             
|                                                                 |  | Year Ended  
|                                                                 |  | December 31,
|                                                                 |  |             
|                                                                 |  | 2002         |       | 2001 |  | 2000
|                                                                 |  |              |       |      |  |     
|Federal statutory rate                                           |  |              | (35.0 | )%   |  |      | (35.0 | )% |  |  | 35.0  | %
|Operating losses with no current benefit                         |  |              | 35.0  |      |  |      | 35.0  |    |  |  |      |  
|Net benefit of deferred tax assets not previously
    recognized |  |              |      |      |  |      |      |    |  |  | (32.2 | )
|Foreign, alternative minimum and other taxes                     |  |              |      |      |  |      | 1.1   |    |  |  | 0.8   |  
|                                                                 |  |              |       |      |  |      |       |    |  |  |       |  
|                                                                 |  |              | 0.0   | %    |  |      | 1.1   | %  |  |  | 3.6   | %
|                                                                 |  |              |       |      |  |      |       |    |  |  |       |  

47



---



##### Table of Contents



XICOR, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred tax assets (liabilities) are comprised
of the following:



|                                        |                                                 |                |         |        |  |   |         |        | 
|--------------------------------------- | ----------------------------------------------- | -------------- | ------- | ------ |  | - | ------- | ------ | 
|                                        |                                                 |               
|                                        |                                                 | December 31,  
|                                        |                                                 |               
|                                        |                                                 | 2002           |         | 2001  
|                                        |                                                 |                |         |       
|                                        |                                                 |               
|                                        |                                                 | (In thousands)
|Deferred tax assets:                    |                                                 |                |         |        |  |   |         |       
|                                        | Federal and state loss and credit carryforwards |                | $       | 37,906 |  |   | $       | 32,323 | 
|                                        | Capitalized research and development            |                |         | 7,327  |  |   |         | 8,323  | 
|                                        | Inventory valuation                             |                |         | 12,791 |  |   |         | 12,040 | 
|                                        | Deferred income on shipments to distributors    |                |         | 402    |  |   |         | 1,636  | 
|                                        | Restructuring                                   |                |         | 295    |  |   |         | 1,430  | 
|                                        | Depreciation                                    |                |         | 888    |  |   |         | 1,034  | 
|                                        | Other                                           |                |         | 1,907  |  |   |         | 2,252  | 
|                                        |                                                 |                |         |        |  |   |         |       
|                                        |                                                 |                | 61,516  |        |  |   | 59,038  |       
|Deferred tax liabilities                |                                                 |                | (3,093  | )      |  |   | (3,284  | )     
|Deferred tax assets valuation allowance |                                                 |                | (58,423 | )      |  |   | (55,754 | )     
|                                        |                                                 |                |         |        |  |   |         |       
|Net deferred taxes                      |                                                 | $              |        |        |  | $ |        |       
|                                        |                                                 |                |         |        |  |   |         |       

The deferred tax assets valuation allowance is
attributed to U.S. Federal and state deferred tax assets.
Management believes sufficient uncertainty exists regarding the
realizability of the net deferred tax assets such that a full
valuation allowance is required.

At December 31, 2002, we had Federal tax net
operating loss carryforwards and general business credit
carryforwards of approximately $90.0 million and
$2.0 million, respectively. These carryforwards expire in
varying amounts through 2022. The net operating loss
carryforward includes approximately $18.4 million resulting
from employee exercises of non-qualified stock options, the tax
benefit of which, when realized, will be accounted for as an
addition to common stock rather than as a reduction of the
provision for income taxes. At December 31, 2002, we also
had California state tax net operating loss and credit
carryforwards of approximately $10.0 million and
$3.8 million, respectively. These carryforwards expire in
varying amounts through 2012. Availability of the net operating
loss and credit carryforwards may potentially be reduced in the
event of certain substantial changes in equity ownership.

Note 12  Contingencies

In the normal course of business, we receive and
make inquiries with regard to possible patent infringement.
Where deemed advisable, we may seek to enter into or extend
licenses or negotiate settlements. Outcomes of such negotiations
may not be determinable at any one point in time; however,
management currently does not believe that such licenses or
settlements will materially affect our financial position or
results of operations.

In June 2002, we settled a patent infringement
case we filed against Catalyst Semiconductor in 2001 in Delaware
Federal District Court. As part of the overall settlement,
Catalyst acknowledged the validity of our patent and agreed to
certain royalty payments in exchange for a license to
manufacture the disputed products.

48



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of
Xicor, Inc.

In our opinion, the consolidated financial
statements listed in the index appearing under Item 15(a)(1) on
page 52 present fairly, in all material respects, the financial
position of Xicor, Inc. and its subsidiaries at
December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Companys management; our responsibility is to express
an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP




PricewaterhouseCoopers LLP


San Jose, California

January 23, 2003


49



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##### Table of Contents



FINANCIAL INFORMATION BY QUARTER
(UNAUDITED)

The following table sets forth unaudited
financial information for each quarterly reporting period in the
fiscal years ended December 31, 2002 and 2001:

|                                       |         |                                          |        |        |   |       |        |        |   |   |       |        |   |   |        |        |  
|-------------------------------------- | ------- | ---------------------------------------- | ------ | ------ | - | ----- | ------ | ------ | - | - | ----- | ------ | - | - | ------ | ------ | -
|                                       |         |                                         
|                                       |         | 2002                                    
|                                       |         |                                         
|                                       |         | First                                    |        | Second |   | Third |        | Fourth
|                                       |         |                                          |        |        |   |       |        |       
|                                       |         |                                         
|                                       |         | (In thousands, except per share amounts)
|Net sales                              |         | $                                        | 10,047 |        |   | $     | 9,534  |        |   | $ | 9,651 |        |   | $ | 9,302  |       
|Cost of sales                          |         |                                          | 5,012  |        |   |       | 4,815  |        |   |   | 4,392 |        |   |   | 4,857  |       
|Research and development               |         |                                          | 3,006  |        |   |       | 3,191  |        |   |   | 3,440 |        |   |   | 3,419  |       
|Selling, general and administrative    |         |                                          | 2,996  |        |   |       | 2,876  |        |   |   | 2,750 |        |   |   | 2,411  |       
|Restructuring and facilities charge    |         |                                          |       |        |   |       | 758    |        |   |   |      |        |   |   | 1,178  |       
|Net income (loss)                      |         |                                          | (1,148 | )      |   |       | (7,244 | )      |   |   | (927  | )      |   |   | (3,463 | )     
|Net income (loss) per share:           |         |                                          |        |        |   |       |        |        |   |   |       |        |   |   |        |       
|                                       | Basic   |                                          |        | (0.05  | ) |       |        | (0.31  | ) |   |       | (0.04  | ) |   |        | (0.15  | )
|                                       | Diluted |                                          |        | (0.05  | ) |       |        | (0.31  | ) |   |       | (0.04  | ) |   |        | (0.15  | )
|Shares used in per share calculations: |         |                                          |        |        |   |       |        |        |   |   |       |        |   |   |        |       
|                                       | Basic   |                                          |        | 22,377 |   |       |        | 23,375 |   |   |       | 23,625 |   |   |        | 23,685 |  
|                                       | Diluted |                                          |        | 22,377 |   |       |        | 23,375 |   |   |       | 23,625 |   |   |        | 23,685 |  

|                                       |         |                                          |         |        |   |       |        |        |  |   |        |        |  |   |        |        |  
|-------------------------------------- | ------- | ---------------------------------------- | ------- | ------ | - | ----- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | -
|                                       |         |                                         
|                                       |         | 2001                                    
|                                       |         |                                         
|                                       |         | First                                    |         | Second |   | Third |        | Fourth
|                                       |         |                                          |         |        |   |       |        |       
|                                       |         |                                         
|                                       |         | (In thousands, except per share amounts)
|Net sales                              |         | $                                        | 24,035  |        |   | $     | 19,119 |        |  | $ | 15,167 |        |  | $ | 11,752 |       
|Cost of sales                          |         |                                          | 21,519  |        |   |       | 10,089 |        |  |   | 7,642  |        |  |   | 5,850  |       
|Research and development               |         |                                          | 3,894   |        |   |       | 3,767  |        |  |   | 3,184  |        |  |   | 2,768  |       
|Selling, general and administrative    |         |                                          | 5,967   |        |   |       | 4,899  |        |  |   | 4,087  |        |  |   | 3,282  |       
|Restructuring charge                   |         |                                          | 3,205   |        |   |       |       |        |  |   |       |        |  |   |       |       
|Net income (loss)                      |         |                                          | (10,233 | )      |   |       | 631    |        |  |   | 432    |        |  |   | (299   | )     
|Net income (loss) per share:           |         |                                          |         |        |   |       |        |        |  |   |        |        |  |   |        |       
|                                       | Basic   |                                          |         | (0.48  | ) |       |        | 0.03   |  |   |        | 0.02   |  |   |        | (0.01  | )
|                                       | Diluted |                                          |         | (0.48  | ) |       |        | 0.03   |  |   |        | 0.02   |  |   |        | (0.01  | )
|Shares used in per share calculations: |         |                                          |         |        |   |       |        |        |  |   |        |        |  |   |        |       
|                                       | Basic   |                                          |         | 21,487 |   |       |        | 21,645 |  |   |        | 21,905 |  |   |        | 22,173 |  
|                                       | Diluted |                                          |         | 21,487 |   |       |        | 23,673 |  |   |        | 24,542 |  |   |        | 22,173 |  

50



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements with
    Accountants On Accounting and Financial Disclosure

None




PART III

Certain information required by Part III is
omitted from this Report in that the Registrant will file a
definitive proxy statement pursuant to Regulation 14A (the
Proxy Statement) not later than 120 days after
the end of the fiscal year covered by this Report, and certain
information included therein is incorporated herein by reference.






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Certain information concerning our directors and
executive officers required by this Item is incorporated by
reference to the information contained in the sections captioned
Election of Directors and Section 16(a)
Beneficial Ownership Reporting Compliance in our Proxy
Statement.

The information concerning our executive officers
required by this Item is included in Part I hereof under
the caption Executive Officers of the Registrant.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item is
incorporated by reference to the information contained in the
section captioned Executive Compensation in our
Proxy Statement.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The information required by this Item is
incorporated by reference to the information contained in the
section captioned Security Ownership of Certain Beneficial
Owners and Management in our Proxy Statement. Equity
Compensation Plan Information is included in Part II,
Item 5 of this Annual Report.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this Item is
incorporated by reference to the information contained in the
section captioned Election of Directors in our Proxy
Statement.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures



| |                                                         
| | --------------------------------------------------------
| | (a) Evaluation of Disclosure Controls
    and Procedures

Our chief executive officer and our chief
financial officer, after evaluating our disclosure
controls and procedures (as defined in Securities Exchange
Act of 1934 (the Exchange Act)
Rules 13a  14(c) and 15-d-14(c)) as of a date
(the Evaluation Date) within 90 days before the
filing date of this Annual Report on Form 10-K have
concluded that as of the Evaluation Date, our disclosure
controls and procedures are effective to ensure that information
we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and
Exchange Commission rules and forms.



| |                                     
| | ------------------------------------
| | (b) Changes in Internal
    Controls

Our review of our internal controls was made
within the context of the relevant professional auditing
standards defining internal controls,
reportable conditions, and material
weaknesses. Internal controls are processes
designed to provide reasonable assurance that our transactions
are properly authorized, our assets are safeguarded against
unauthorized or improper use, and our transactions are properly
recorded and reported, all to permit the preparation of our
condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States.
Significant deficiencies are referred to as
reportable conditions, or control issues that could
have a significant adverse effect on our ability to properly

51



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##### Table of Contents



authorize transactions, safeguard our assets, or
record, process, summarize or report financial data in the
condensed consolidated financial statements. A material
weakness is a particularly serious reportable condition
where the internal control does not reduce to a relatively low
level the risk that misstatements caused by error or fraud may
occur in amounts that would be material in relation to the
condensed consolidated financial statements and not be detected
within a timely period by employees in the normal course of
performing their assigned functions. As part of our internal
controls procedures, we also address other, less significant
control matters that we or our auditors identify, and we
determine what revision or improvement to make, if any, in
accordance with our on-going procedures.


Subsequent to the Evaluation Date, there were no
significant changes in our internal controls or in other factors
that could significantly affect our internal controls, including
any corrective actions with regard to significant deficiencies
and material weaknesses.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a)  The following documents are
filed as a part of this report:

(1) Financial Statements

|                                                                                                                          |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                          |  | Page
|                                                                                                                          |  |     
|Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                                          |  |      | 27 | 
|Consolidated Statements of Operations for each of
    the three years in the period ended December 31, 2002               |  |      | 28 | 
|Consolidated Statements of Shareholders
    Equity for each of the three years in the period ended
    December 31, 2002 |  |      | 29 | 
|Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2002               |  |      | 30 | 
|Notes to Consolidated Financial Statements                                                                                |  |      | 31 | 
|Report of Independent Accountants                                                                                         |  |      | 49 | 

(2) Financial Statement
Schedules



| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All schedules have been omitted since the
    required information is not applicable, not significant or
    because the information required is included in the consolidated
    financial statements or notes thereto.



| |              
| | -------------
| | (3) Exhibits.



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | The exhibits listed in the accompanying Index to
    Exhibits are filed or incorporated by reference as part of this
    Annual Report.

(b) Reports on Form 8-K



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | No reports on Form 8-K were filed with the
    Securities and Exchange Commission during the quarter ended
    December 31, 2002.

52



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Annual Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of
Milpitas, State of California, on the 26th day of March
2003.



| |           
| | ----------
| | XICOR, INC
| | Registrant



| |    |                  
| | -- | -----------------
| | By | /s/ LOUIS DINARDO

| |                                          
| | -----------------------------------------
| |                                          
| | Louis DiNardo                            
| | President and Chief Executive
    Officer
| | (Principal Executive Officer)            

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Louis DiNardo and Geraldine N. Hench, and each of them, jointly
and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and
all amendments to this Report on Form 10-K and to file the
same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated:

|                                           |  |                                                                                                                                               |  |                |  | 
|------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                           |  |                                                                                                                                               |  |               
|Signature                                  |  | Title                                                                                                                                         |  | Date          
|                                           |  |                                                                                                                                               |  |               
|                                          
|/s/ J. DANIEL MCCRANIE(J. Daniel McCranie) |  | Chairman of the Board                                                                                                                         |  | March 26, 2003
|                                          
|/s/ LOUIS DINARDO(Louis DiNardo)           |  | President and Chief Executive Officer (Principal
    Executive Officer)                                                                       |  | March 26, 2003
|                                          
|/s/ JULIUS BLANK(Julius Blank)             |  | Director                                                                                                                                      |  | March 26, 2003
|                                          
|/s/ ANDREW W. ELDER(Andrew W. Elder)       |  | Director                                                                                                                                      |  | March 26, 2003
|                                          
|/s/ JOHN R. HARRINGTON(John R. Harrington) |  | Director                                                                                                                                      |  | March 26, 2003
|                                          
|/s/ EMMANUEL HERNANDEZ(Emmanuel Hernandez) |  | Director                                                                                                                                      |  | March 26, 2003
|                                          
|/s/ GEOFFREY WINKLER(Geoffrey Winkler)     |  | Director                                                                                                                                      |  | March 26, 2003
|                                          
|/s/ GERALDINE N. HENCH(Geraldine N. Hench) |  | Vice President, Finance and Administration and
    Chief Financial Officer (Principal Financial Officer and
    Principal Accounting Officer) |  | March 26, 2003

53



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##### Table of Contents



CERTIFICATIONS

I, Louis DiNardo, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Xicor, Inc.;                                                                                                                                                                                                                                                                             
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |     |                  
| | --- | -----------------
| | By: | /s/ LOUIS DINARDO

| |                                          
| | -----------------------------------------
| |                                          
| | Louis DiNardo                            
| | President and Chief Executive
    Officer

Date: March 26, 2003

54



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##### Table of Contents



I, Geraldine N. Hench, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Xicor, Inc.;                                                                                                                                                                                                                                                                             
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |     |                       
| | --- | ----------------------
| | By: | /s/ GERALDINE N. HENCH

| |                                               
| | ----------------------------------------------
| |                                               
| | Geraldine N. Hench                            
| | Vice President, Finance and
    Administration
| | and Chief Financial Officer                   

Date: March 26, 2003

55



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##### Table of Contents



XICOR, INC.

INDEX TO EXHIBITS

Item 14(a)3.


|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 2.1  |             |  | Agreement and Plan of Merger, dated as of
    April 16, 2002, by and among Xicor, Inc., Valley
    Acquisition Corp., Analog Integration Partners LLC, Issie
    Rabinovitch as the member representative and all of the holders
    of membership interests of Analog Integration Partners LLC,
    filed as Exhibit 2.1 with Form 8-K on April 30,
    2002, is hereby incorporated by reference.
|        | 2.2  |             |  | Registration Rights Agreement, dated as of
    April 16, 2002, by and among Xicor, Inc. and Issie
    Rabinovitch as the member representative, filed as
    Exhibit 2.2 with Form 8-K on April 30, 2002, is
    hereby incorporated by reference.                                                                                                                                                 
|        | 3.1  |             |  | Amended and Restated Articles of Incorporation
    dated June 13, 2002 filed as Exhibit 3.1 with
    Form 10-Q for the quarter ended June 30, 2002, is
    hereby incorporated by reference.                                                                                                                                                                                                       
|        | 3.2  |             |  | By-laws, as amended to date, filed as
    Exhibit 3.2 with Form 10-K for the year ended
    December 31, 1987, is hereby incorporated by reference.                                                                                                                                                                                                                                                
|        | 3.2A |             |  | Certificate of Amendment of By-Laws effective as
    of January 28, 1998 filed as Exhibit 3.2A with
    Form 10-K for the year ended December 31, 1998, is
    hereby incorporated by reference.                                                                                                                                                                                                   
|        | 3.2B |             |  | Certificate of Amendment of By-Laws effective as
    of June 4, 1999 filed as Exhibit 3.2B with
    Form 10-K for the year ended December 31, 1999, is
    hereby incorporated by reference.                                                                                                                                                                                                       
|        | 3.2C |             |  | Certificate of Amendment of By-Laws effective as
    of May 30, 2000 filed as Exhibit 3.2C with
    Form 10-K for the year ended December 31, 2000, is
    hereby incorporated by reference.                                                                                                                                                                                                       
|        | 3.3  |             |  | Certificate of Determination of Rights,
    Preferences and Privileges of Series A Participating
    Preferred Stock of Xicor, Inc. filed as Exhibit 3.3 with
    Form 8-A on October 19, 2001, is hereby incorporated
    by reference.                                                                                                                                                           
|        | 4.1  |             |  | Form of 5.5% Convertible Subordinated Note dated
    November 19, 2001 filed as Exhibit 4.1 with
    Form 8-K on November 20, 2001, is hereby incorporated
    by reference.                                                                                                                                                                                                                       
|        | 4.2  |             |  | Form of Warrants to Purchase Common Stock dated
    November 19, 2001 filed as Exhibit 4.2 with
    Form 8-K on November 20, 2001, is hereby incorporated
    by reference.                                                                                                                                                                                                                        
|        | 4.3  |             |  | Registration Rights Agreement dated
    November 16, 2001, filed as Exhibit 4.3 with
    Form 8-K on November 20, 2001, is hereby incorporated
    by reference.                                                                                                                                                                                                                                   
|        | 4.5  |             |  | Preferred Stock Rights Agreement, dated as of
    October 9, 2001, between Xicor, Inc. and the American Stock
    Transfer & Trust Company filed as Exhibit 4.5 with
    Form 8-A on October 19, 2001, is hereby incorporated
    by reference.                                                                                                                                                    
|        | 10.1 |             |  | Xicor, Inc. 1990 Incentive and Non-incentive
    Stock Option Plan (As Amended and Restated March 16, 2001)
    filed as Exhibit 4.2 with Form S-8 Registration
    Statement Number 333-81370 on January 25, 2002, is
    hereby incorporated by reference.                                                                                                                                       
|        | 10.2 |             |  | Building lease between WB Murphy Ranch LLC and
    Xicor, Inc. dated October 8, 2002 filed as
    Exhibit 10.2 with Form 10-Q for the quarterly period
    ended September 29, 2002 is hereby incorporated by
    reference.                                                                                                                                                                       
|        | 10.6 |             |  | Form of Indemnification Agreement entered into
    between Xicor, Inc. and each of its Officers and Directors filed
    as Exhibit 10.6A with Form 10-Q for the quarterly
    period ended June 30, 1996, is hereby incorporated by
    reference.                                                                                                                                                 
|        | 10.7 |             |  | Lingsen-Xicor Dedicated Production Agreement
    dated September 21, 1988 as amended on March 11, 1989,
    April 14, 1989 and September 8, 1989 filed as
    Exhibit 10.8 with Form 10-K for the year ended
    December 31, 1989, is hereby incorporated by reference.                                                                                                                           
|        | 10.8 |             |  | Xicor, Inc. 2002 Stock Option Plan, with form of
    Stock Option Agreement, filed as Exhibit 4.2 with
    form S-8 Registration Statement Number 333-102673 on
    January 23, 2003, is hereby incorporated by reference.                                                                                                                                                                         

56



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##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                                                                                                   
|------- | ------ | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.9   |             |  | Xicor, Inc. 2000 Director Option Plan (as Amended
    and Restated March 16, 2001) with form of Stock Option
    Agreement filed as Exhibit 4.3 with Form S-8
    Registration Statement Number 333-81370 on January 25,
    2002, is hereby incorporated by reference.           
|        | 10.10* |             |  | Xicor-Yamaha Semiconductor Manufacturing Foundry
    Agreement dated February 6, 1997 filed as
    Exhibit 10.10 with Form 10-K for the year ended
    December 31, 1998, is hereby incorporated by reference.                                                                    
|        | 10.11  |             |  | Xicor, Inc. 1998 Employee Stock Purchase Plan
    filed as Exhibit 10.11 with Form 10-K for the year
    ended December 31, 1998, is hereby incorporated by
    reference.                                                                                                        
|        | 10.12  |             |  | Xicor, Inc. 1998 Nonstatutory Stock Option Plan
    (as Amended and Restated March 28, 2002) with form of Stock
    Option Agreement filed as Exhibit 4.1 with Form S-8
    Registration Statement Number 333-102673 on January 23,
    2003, is hereby incorporated by reference.
|        | 10.13* |             |  | Foundry Agreement by and between Xicor, Inc. and
    Zentrum Mikroelektronic Dresden GmbH dated April 8, 1999
    filed as Exhibit 10.13 with Form 10-K for the year
    ended December 31, 1999, is hereby incorporated by
    reference.                                        
|        | 10.17  |             |  | Security Purchase Agreement dated
    November 16, 2001 filed as Exhibit 10.1 with Form 8-K
    on November 20, 2001, is hereby incorporated by reference.                                                                                                                        
|        | 21.    |             |  | List of Subsidiaries.                                                                                                                                                                                                                                                             
|        | 23.    |             |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                            
|        | 24.    |             |  | Powers of Attorney (included on the signature
    pages hereof).                                                                                                                                                                                                                  
|        | 99.1   |             |  | Certification of Chief Executive Officer and
    Chief Financial Officer.                                                                                                                                                                                                         



---



|  |                                                                                    
|- | -----------------------------------------------------------------------------------
|* | Confidential treatment has been granted as to
    certain portions of this Exhibit.

57