Amendment No. 2 to Form 10-K

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of Regulation S-K (Section 209.405 of this chapter) is not contained herein, and will not be contained to the best of registrant’s knowledge, in any definitive proxy or information statement incorporated by reference in Part II of this Form 10-K/A or any amendment to this Form 10-K/A. ¨

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

The approximate aggregate market value of the registrant’s common stock held by non-affiliates as of September 30, 2003 (the last business day of the registrant’s most recently completed second fiscal quarter) was $134.1 million based on the closing price for the common stock on the NASDAQ National Market on such date.

For purposes of this disclosure, common stock held by persons who hold more than 5% of the outstanding voting shares and common stock held by executive officers and directors of the Registrant have been excluded in that such persons may be deemed to be “affiliates” as that term is defined under the rules and regulations promulgated under the Securities Act of 1933. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of May 31, 2004, the number of shares of the Registrant’s common stock outstanding was 21,319,828.

Portions of the Registrant’s Proxy Statement in connection with its August 12, 2004, Annual Meeting of Shareholders are incorporated by reference into Part III to the extent stated in Part III

THIS FORM 10-K/A AMENDMENT NO. 2 IS BEING FILED FOR THE PURPOSE OF AMENDING ITEMS 6, 7, AND 8 OF PART II AND ITEM 15 OF PART IV OF FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2004, FILED ON JUNE 14, 2004, AS AMENDED BY FORM 10-K/A AMENDMENT NO. 1 FILED ON SEPTEMBER 2, 2004. AS PREVIOUSLY ANNOUNCED ON JANUARY 20, 2005, AND REPORTED IN A FORM 8-K DATED JANUARY 18, 2005, WHICH WAS FILED ON JANUARY 21, 2005, THE COMPANY HAS IDENTIFIED CERTAIN COSTS FROM VENDORS THAT HAD BEEN RECOGNIZED IN THE INCORRECT QUARTER AND THE COMPANY IS ADJUSTING ITS FINANCIAL RESULTS FOR CERTAIN QUARTERS TO CORRECT THESE TIMING INACCURACIES. IN ADDITION, THE COMPANY HAS CORRECTED THE BREAKDOWN OF INVENTORY AT MARCH 31, 2004 INTO FINISHED GOODS, WORK IN PROCESS, AND RAW MATERIALS WHICH BREAKDOWN HAD PREVIOUSLY BEEN DISCLOSED IN FOOTNOTE 5 TO THE FINANCIAL STATEMENTS CONTAINED IN PART I, ITEM 1 OF THE COMPANY’S QUARTERLY REPORTS ON FORM 10-Q FOR THE QUARTERS ENDED SEPTEMBER 30, 2004, AND DECEMBER 31, 2004. ALSO, THE COMPANY HAS RECLASSIFIED THE AMORTIZATION OF DEBT ISSUANCE COSTS OF $235,000 TO INTEREST EXPENSE FROM INTEREST INCOME AND OTHER. FINALLY, THE COMPANY HAS REVISED FOOTNOTE DISCLOSURE FOR THE NUMBER OF ANTIDILUTIVE OPTIONS AND WARRANTS OUTSTANDING. OTHER THAN TO REFLECT THESE ADJUSTMENTS, THE COMPANY HAS MADE NO FURTHER CHANGES TO THE PREVIOUSLY FILED FORM 10-K; THUS, THIS FORM 10-K/A DOES NOT REFLECT ANY OTHER SUBSEQUENT INFORMATION OR EVENTS SINCE THE FILING OF THE ORIGINAL FORM 10-K.

The selected financial data set forth below should be read in connection with our financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K/A. Historical results are not necessarily indicative of future results.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts and are based on current expectations, estimates, and projections about our industry; our beliefs and assumptions; and our goals and objectives. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” and variations of these words and similar expressions are intended to identify forward-looking statements. Examples of the kinds of forward-looking statements in this report include statements regarding the following: (1) our belief that we will continue to optimize our operations in the future as our business changes, (2) our expectation as to future levels of research and development expenses and selling, general and administrative expenses, (3) our view that we may in the future reverse some or all of the valuation allowance associated with our deferred tax asset if we continue to be profitable; (4) our anticipation that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs over the next 12 months; (5) our plan to solicit shareholder approval to amend our articles of incorporation to increase the number of our authorized common shares by 25 million; and (6) our expectation that “Other Income or Expense” will result in income rather than expense during fiscal 2005. These statements are only predictions, are not guarantees of future performance, and are subject to risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include, but are not limited to, our acceptance by major worldwide electronic system manufacturers, our ability to increase our market penetration, future growth of the markets for our products, that design wins and bookings will translate into orders, that increased product demand combined with moderate price erosion will cause our revenues to increase, that our third party vendors will be able to make products without yield issues to satisfy product demand, whether our shareholders will approve our proposed amendment to our articles of incorporation and whether we will have large unanticipated cash requirements, as well as other risk factors detailed in this report, especially under the caption “Risk Factors” under Item 1, Business. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

In this discussion, “CAMD,” “we,” “us” and “our” refer to California Micro Devices Corporation. All trademarks appearing in this discussion are the property of their respective owners. This discussion should be read in conjunction with the other financial information and financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” and elsewhere in this report.

We design and sell application specific analog semiconductor products primarily for high volume applications in the mobile, computing and consumer electronics markets. We are a leading supplier of application specific integrated passive (ASIP^™) devices that provide electromagnetic interference filtering, electrostatic discharge protection and termination for high speed signals. We also offer a growing portfolio of active analog devices including power management and interface devices. Our ASIP devices, built using our proprietary silicon process technology, provide the function of multiple passive components in a single chip solution for densely populated, high performance electronic systems. Our ASIP devices are significantly smaller, offer increased performance and reliability, and cost our customers less, taking into account all of the costs of implementation, than traditional solutions based on discrete passive components. Some of our ASIP devices also integrate active analog elements to provide additional functionality. With our active analog device portfolio, we seek opportunities to design standard products that are differentiated from competitive alternatives by being optimized for specific applications. We also selectively design second source active analog devices that provide us entry to new applications, complement other products in our portfolio or enhance existing customer relationships. Our active analog device solutions use industry standard CMOS manufacturing processes for cost effectiveness.

During the past three years, we have streamlined our operations and become fabless for the semiconductor products that we supply to our customers in our core markets, using independent providers of wafer fabrication services. This decision to use independent foundries led us to close our fabrication facility in Milpitas, California and consolidate our thin film manufacturing activities in Tempe, Arizona. In connection with these actions, we reduced our workforce and wrote down the value of equipment, recording restructuring charges of approximately $4.2 million in the year ended March 31, 2002. We took an additional charge of $1.0 million in cost of sales in the year ended March 31, 2004 relating to several adjustments made during the year to further reduce our internal manufacturing infrastructure, which included workforce reductions and equipment sales and write-downs.

During the past several years, we have also focused our marketing and sales on strategic customers in our three core markets. As a part of this process, we have reduced the number of our actively marketed products from approximately 5,000 to approximately 500 while at the same time increasing our unit shipments from less than 25 million in the quarter ended March 31, 2001 to more than 110 million in the quarter ended March 31, 2004. As a result of our decision to limit the number of products we actively market, we sent end of life notices to our customers and wrote down associated inventories. In compliance with our inventory valuation policy, we have also written down inventories when our quantity on hand for a particular part is in excess of forecasted demand. In fiscal 2004, our inventory reserve provisions were $0.4 million for end of life inventories and $1.3 million for excess inventories, for a total of $1.7 million. In fiscal 2003, our inventory reserve provisions were $0.7 million for end of life inventories and $0.4 million for excess inventories, for a total of $1.1 million. In fiscal 2002, our inventory reserve provision was $4.1 million for end of life inventories.

To the extent we subsequently sell some of this end of life or excess inventory, our gross margin benefits by revenue without any associated cost of sales. During the past three fiscal years, we sold inventory that had previously been written down, as follows: in fiscal 2004, $1.8 million; in fiscal 2003, $1.7 million, and in fiscal 2002, $1.4 million.

End customers for our semiconductor products are original equipment manufacturers including Dell, Hewlett-Packard, Kyocera Wireless, LG Electronics, Motorola, Philips, Samsung, Sony and TriGem. We sell to some of these end customers through original design manufacturers, including Appeal, Arima, BenQ, Compal, Pantech and Quanta, and contract electronics manufacturers, including Celestica, Foxconn and Solectron. We use a direct sales force, manufacturers’ representatives and a network of distributors to sell our semiconductor products.

We also manufacture a limited number of thin film products in our Tempe, Arizona fabrication facility, which we sell primarily to Guidant for use in implantable defibrillators and pacemakers.

We operate in one operating segment and most of our assets are located in the United States. Our assets located outside the United States are comprised primarily of inventory or equipment used in manufacturing our products.

Net sales for fiscal 2004 were $59.6 million, an increase of $17.4 million or 41% from $42.2 of net sales in fiscal 2003. As shown above in the table of revenue by market, the largest component of this increase was in the mobile market followed by higher sales in the medical and computing and consumer electronics markets.

Our growth in mobile sales is primarily the result of increasing our penetration of the mobile phone market and secondarily a result of market growth. During fiscal 2004, we announced that we had design wins at and are shipping products to Samsung Electronics in addition to Motorola and LG Electronics, who are among the top tier of handset manufacturers. In addition to these top tier manufacturers, we also sell our products to a large number of other handset manufacturers.

The growth in the medical business is primarily the result of improved pricing, and secondarily, additional demand from our primary medical products customer, Guidant.

The growth in computing and consumer electronics is primarily the result of increased volume shipments to manufacturers of personal computers, digital displays and set top boxes.

Our sales from other products, which include lighting, communications, legacy and mature products, declined during fiscal 2004 versus fiscal 2003. We had expected a decrease in sales of our communications, legacy and mature products as we had previously provided our customers for many of these products with end of life purchase opportunities. We substantially completed shipment of end of life product orders during fiscal 2004 and therefore expect to recognize substantially lower sales of these products in the future. In addition, price increases for our lighting products and other factors resulted in a significant reduction in orders for these products and we no longer expect these products to be a significant contributor to our sales in the future.

Units shipped during fiscal 2004 increased to approximately 337 million units from approximately 191 million units for fiscal 2003. Our increased net sales resulted primarily from larger unit sales, due in part from increased sales of current products and in part from sales of newly introduced products, and to a lesser extent, from price increases effective July 1, 2003, on our medical products. Our average unit price decreased by approximately 17% during fiscal 2004 versus fiscal 2003. This decrease was predominately the result of faster growth in our lower priced products, which offset our medical product price increases.

Net sales for fiscal 2003 were $42.2 million compared to net sales for fiscal 2002 of $29.9 million, an increase of $12.3 million, or 41%. The largest component of this increase was in the mobile market followed by higher sales in the computing and consumer electronics and medical markets. Net sales in the mobile market, computing and consumer electronics and medical markets increased to $10.6 million, $15.3 million and $4.9 million in fiscal 2003 from approximately $1.6 million, $13.0 million, and $3.5 million respectively in fiscal 2002. Sales in the lighting market increased slightly to $2.6 million in fiscal 2003 from $2.2 million in fiscal 2002 while net sales in our communications, legacy and mature products in total decreased to $8.9 million in fiscal 2003 from $9.7 million in fiscal 2002. We had expected a decrease in our communications, legacy and mature products as we have notified our customers that we will no longer support many of these products. The customers for the affected products have been provided with end of life purchase opportunities. Units shipped during fiscal 2003 increased to approximately 191 million units from 87 million in fiscal 2002. Our increased revenue resulted primarily from larger unit sales, which resulted in part from increased sales of current products and in part from sales of newly introduced products. Our average unit price dropped by approximately 33% during fiscal 2003 versus fiscal 2002 which was predominately the result of faster growth in our lower price products and to a lesser extent to price decreases.

The table below shows our sales, cost of sales, gross margin and expenses, both in dollars and as a percentage of net sales, for fiscal 2004, 2003 and 2002:

Over the past three years we have been implementing a strategy to satisfy the production requirements for products in our core markets from external foundries. Our requirements for complementary metal oxide semiconductor (CMOS) products or our proprietary process requirements can be run on standard manufacturing lines at our external foundries. During the third quarter of fiscal 2004, we completed the final internal CMOS wafer fabrication and converted our Tempe manufacturing operations to a dedicated thin film facility. Our thin film products are primarily medical products plus a portion of our mature products, which are shown in the “Other products” category in the net sales discussion. During the year, we subcontracted our chip scale packaging requirements and eliminated our internal capability. We were able to reduce our Tempe-related internal manufacturing overhead costs by approximately $2.0 million during fiscal 2004 primarily as a result of reducing headcount earlier in the year and further reducing headcount and converting the facility to thin film production only, during the third and fourth quarters of fiscal 2004. During the fourth quarter of fiscal 2004, we substantially completed the realignment of our internal manufacturing operations, which we began several years ago. As an ongoing requirement of our business, we expect to continuously optimize our operations in the future. Included in cost of sales for fiscal 2004 was approximately $1.0 million of charges associated with changes to our internal manufacturing cost structure during the year.

The increase in cost of sales for fiscal 2004 versus fiscal 2003 was primarily due to the greater volume of products sold, which accounted for an increase of approximately $7.5 million. The increase was partially offset by a decrease of approximately $3.0 million due to cost reductions including the realignment of and reduction in spending at our Tempe wafer fabrication facility.

In fiscal 2004, our inventory reserve provisions were $0.4 million for end of life inventories and $1.3 million for excess inventories, for a total of $1.7 million. In fiscal 2003, our inventory reserve provisions were $0.7 million for end of life inventories and $0.4 million for excess inventories, for a total of $1.1 million.

However, we benefited from the sale of previously reserved inventory due primarily to the large number of products for which we have discontinued future support by placing them in an ‘end of life’ category. These products have been primarily sold through our distributors to an erratic and unpredictable demand by end customers. As a result, we have experienced the sale of some products that were previously reserved and the requirement to further write-down certain other products for which orders did not occur as we had expected. The benefit related to sales of previously reserved inventory was approximately $1.8 million and $1.7 million for fiscal 2004 and fiscal 2003, respectively.

Cost of sales decreased by $4.1 million in fiscal 2003 compared to fiscal 2002 while the level of net sales increased by $12.3 million. Cost of sales was impacted by three elements: the charges related to our “end of life” (EOL) or obsolete program, benefits of selling previously reserved material, and the costs of producing the products. During fiscal 2002, we initiated a plan to focus our business on high volume products and in markets where we believe we can achieve a leadership position. We concluded that it was not economical to continue the manufacturing of many of our smaller and older product lines. As part of this process, we designated many of these products as EOL or obsolete during fiscal 2002. The last phase of EOL or obsolete product designation for that program, occurred in the fourth quarter of fiscal 2003. Based on our forecast of future demand and historical sales rates, and recognizing that minimal sales and marketing resources would be applied both internally and by our distributors for products so designated, much of the existing internal inventory for these legacy products was deemed to be excess or obsolete and accordingly was reserved, as well as the cost related to the inventory held by certain of our distributors. During fiscal 2002, we incurred charges of $5.2 million related to reserving discontinued inventory on hand and at distributors. During fiscal 2003, we incurred charges of $0.7 million related to reserving EOL and obsolete inventory. During fiscal 2003 and 2002 cost of sales included a benefit associated with the sale of fully reserved inventory for which reserves of approximately $1.7 million and $1.4 million had been established in prior periods. Cost of sales, excluding the impact of our end of life and obsolete product reserves and the benefits of selling previously reserved material, was $35.1 million in fiscal 2003 compared to $34.4 million in fiscal 2002 for an increase of $0.7 million. The small increase in cost of sales, excluding these items, relative to the increase in net sales of $12.3 million is the result of streamlining our internal manufacturing operations and our strategy of outsourcing the wafer fabrication for the products we manufacture for our core markets.

Gross Margin. Gross margin is comprised of net sales less costs of sales. The gross margin dollar increase and gross margin percentage increase in fiscal 2004 versus fiscal 2003 was primarily the result of increased sales volumes, a significant price increase for our medical products and a reduction in manufacturing spending. The gross margin dollar and percentage increase in fiscal 2003 compared to fiscal 2002 was in part the result of increased revenue, consolidating our internal manufacturing operations, our wafer fabrication subcontracting strategy and the reduction in inventory charges related to our “end of life” (EOL) or obsolete program as described above in cost of sales.

Research and Development. Research and development expenses consist primarily of compensation and related costs for employees, prototypes, masks and other expenses for the development of new products and process technology. The increases in

research and development expenses for fiscal 2004 versus 2003 were primarily due increased employee costs related to our bonus plan and an increase in prototype material expenses. The decline in research and development expenses for fiscal 2003 versus 2002 was primarily due to lower employee compensation costs. Research and development expenses as a percentage of net sales decreased during fiscal 2004 due to our increased sales. In the future we expect to incur increased research and development expenses as sales increase and research and development to represent 8% to 9% of sales; however, if our sales were to decline in future periods, research and development could represent more than 9% of sales.

Selling, General and Administrative. Selling, general and administrative expenses consist primarily of compensation and related costs for employees, sales commissions, marketing and promotional expenses, and legal and other professional fees. The increases in selling, general, and administrative expenses for fiscal 2004 versus fiscal 2003 were primarily due to increases in marketing and finance staffing and increased expense for our bonus plan. Selling, general and administrative expenses as a percentage of net sales decreased during the fiscal year due to our increased sales. These expenses are expected to increase in dollar terms in the future as sales increase, but at a slower rate than the growth in sales. As a result, we expect a gradual reduction in selling, general and administrative expenses as a percentage of sales in the future; however, if our sales were to decline in future periods, these expenses could increase as a percentage of sales. The decrease in fiscal 2003 over fiscal 2002 was primarily the result of lower compensation related expenses. Even though our revenue increased substantially in fiscal 2003, thereby increasing our sales commissions, we were able to reduce our overall selling, general, and administrative expenses by 13% in fiscal 2003.

Restructuring Charges. During fiscal 2003, we completed a restructuring program that we initiated during fiscal 2002. The cost to implement the program was slightly less than originally projected and as a result we recognized a benefit related to the reversal of the remaining liability of $193,000 during fiscal 2003. During fiscal 2002, we recorded restructuring and asset impairment charges of $4.2 million related to our decision to outsource a significant portion of our wafer manufacturing. In connection with this decision, we consolidated all of our internal wafer fabrication activities into our Tempe, Arizona facility. During fiscal 2004, we subcontracted our chip scale packaging requirements and eliminated our internal capability. The $4.2 million of restructuring charges in fiscal 2002 consisted of expenses related to a workforce reduction, write-down of certain manufacturing equipment and lease termination costs.

Other Income and Expense. Other income and expense, which is comprised primarily of interest expense and interest income, was a net expense of $1.1 million in fiscal 2004, $1.1 million in fiscal 2003 and $836,000 in fiscal 2002. Included in fiscal 2004 was a charge of $219,000 related to unamortized issuance costs associated with our Industrial Revenue Bonds that we expensed when we prepaid these bonds in March, 2004. For fiscal 2005, as the result of our paying off most of our remaining debt in May 2004 and having more cash, we expect a net income rather than net expense.

Income Taxes. In fiscal 2004, 2003 and 2002 there was no provision for income taxes due to tax losses incurred during each of these periods. In fiscal 2004, despite our having earned net income on a financial accounting basis, we incurred a loss on a tax accounting basis primarily due to our having scrapped inventory during the fiscal year. We have provided a valuation allowance against the total deferred tax assets due to the uncertainties surrounding our ability to generate sufficient taxable income in future periods to realize the tax benefits of the carry forwards. See Note 11 of Notes to Financial Statements. If we continue to be profitable in future periods, we may reverse a portion or all of our valuation allowance. We will continue to evaluate our ability to realize the deferred tax asset.

Net Income (Loss). For the reasons explained above, we realized a net income of approximately $3.6 million for fiscal 2004, compared to a net loss of approximately $6.5 million for fiscal 2003.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and all known facts and circumstances that we believe are relevant. Actual results may differ materially from our estimates. Our significant accounting policies are described in Note 2 of Notes to Financial Statements. The significant accounting policies that we believe are critical, either because they relate to financial line items that are key indicators of our financial performance (e.g., revenue) or because their application requires significant management judgment, are described in the following paragraphs.

Our revenue recognition policy is described in Note 2 of Notes to Financial Statements. We recognize revenue when persuasive evidence of an arrangement exists, delivery or customer acceptance, where applicable, has occurred, the fee is fixed and determinable, and collection is reasonably assured.

Revenue from product sales to end user customers, or to distributors that do not receive price concessions and do not have return rights, is recognized upon title transfer and shipment, assuming all other revenue recognition criteria are met. Reserves for sales returns and allowances from end user customers are estimated primarily based on historical experience and are provided for at the time of shipment.

Revenue from product shipments to distributors with agreements allowing for either price concessions or for product returns is recognized at the time the distributor sells the product to OEMs or other end users at which time the sales price becomes fixed. Revenue is not recognized upon initial shipment to the distributors since, due to various forms of price concessions, the sales price is not substantially fixed or determinable at that time. Additionally, these distributors have contractual rights to return products, up to a specified amount for a given period of time. Pursuant to our agreements with our distributors, custom, older or end-of-life products are sold with no right of return and are not eligible for price concessions. In these cases, revenue is recognized upon shipment to the distributor assuming all other revenue recognition criteria are met.

At the time of shipment to distributors, we defer our gross selling price of the product shipped and the related cost of the product shipped, and we reflect such net amounts on our balance sheet as a current liability entitled deferred margin on shipments to distributors. Thus, deferred margin on shipments to distributors represents the margin on the products we ship to distributors, or the difference between our revenue and cost of the product for inventory held by the distributors at the end of the accounting period.

Determining whether collection is reasonably assured is the factor in our revenue recognition policy that involves significant judgement and estimates. In making this determination, we assess the probability of collection based on a number of factors, including past transaction history and/or the creditworthiness of the customer. If we determine that collection of a receivable is not probable, we defer recognition of revenue until the collection becomes probable, which is generally upon receipt of cash.

Our inventory and related reserves policy is described in Note 2 of Notes to Financial Statements. Forecasting customer demand is the factor in our inventory and related reserves policy that involves significant judgments and estimates. In our inventory determination, we establish a reserve for estimated excess and obsolete inventory based on a comparison of quantity and cost of inventory on hand to management’s forecast of customer demand for the next twelve months. In forecasting customer demand, we make estimates as to, among other things, the timing of sales, the mix of products sold to customers, the timing of design wins and related volume purchases by new and existing customers, and the timing of existing customers’ transition to new products. Because a significant portion of our sales are through distributors and many parts may have small sales volume, the customer demand forecast process does not include all parts. Therefore, historical trends may also be used in estimating the excess and obsolete inventory reserves. We review our reserve for excess and obsolete inventory on a quarterly basis considering all known facts and circumstances and adjust our forecast of customer demand accordingly. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of. In fiscal 2004, we wrote down inventory by $1.7 million to reflect our estimates of excess and obsolete inventories. Also in fiscal 2004, we recognized a benefit of approximately $1.8 million relating to the sale of inventory that had been reserved in prior periods. To the extent that our forecast of customer demand materially differs from actual demand, our estimates used in determining cost of sales and gross margin could be positively or negatively impacted.

Long-lived assets held and used by us are reviewed for impairment whenever events indicate that their carrying value may not be recoverable. An impairment loss is recognized if the sum of the expected undiscounted cash flows from the use of the asset is less than the carrying value of the asset. The amount of impairment loss will be measured as the difference between the carrying value of the assets and their estimated fair value.

In fiscal 2002, we determined that the carrying value of certain of our owned manufacturing equipment was no longer recoverable based on estimates of future cash flows. Our estimate of the future cash flows generated from this equipment decreased significantly in 2003 due to our plan to outsource a significant portion of our wafer fabrication activities to independent foundries. As a result, we recognized an impairment charge of approximately $3.4 million in the second quarter of fiscal 2003. Estimates of future cash flows used to test the asset for recoverability were based on current operating projections extended to the useful life of the asset group. We have estimated the fair value of the equipment based on market prices for purchases of similar equipment. If the estimate of the cash flows were to increase by 10% the assets would still not be recoverable. There were no events or changes during fiscal 2004 that gave rise to the impairment of long-lived assets.

We are a party to lawsuits, claims, investigations, and proceedings, including commercial and employment matters, which are being handled and defended in the ordinary course of business. We review the current status of any pending or threatened proceedings with our outside counsel on a regular basis and, considering all the other known relevant facts and circumstances, we recognize any loss that we consider probable and estimable as of the balance sheet date. For these purposes, we consider settlement offers we may make to be indicative of such a loss under certain circumstances.

During fiscal years 2002, 2003, and 2004, we had two pending cases in which significant damages were sought but it was difficult to determine the probability of loss and to estimate the resulting damages. As a result, no accrual was made until we made settlement offers, at which time the amount we offered was accrued. When these cases were settled during the first quarter of fiscal 2005, the settlement had no income statement impact as the settlement amount had been fully accrued during prior periods.

We have historically financed our operations through a combination of debt and equity financing and cash generated from operations.

Total cash and cash equivalents as of March 31, 2004, were $20.3 million, as compared to $4.5 million at March 31, 2003 which did not include our restricted cash balance of $880,000.

Accounts receivable increased to $6.1 million at March 31, 2004 compared to $5.3 million a year earlier, primarily as a result of increased sales. Receivables days sales outstanding were 35 days at March 31, 2004 as compared to 48 days at March 31, 2003.

Inventories increased to $6.5 million at March 31, 2004 from $3.6 million at March 31, 2003 as a result of higher manufacturing activity levels necessary to support increased demand for our products.

Accounts payable and accrued liabilities totaled $9.3 million at March 31, 2004 compared to $5.8 million at March 31, 2003. The $3.4 million increase was the result of a $1.9 million bonus accrual along with a $1.5 million increase in payables primarily related to the higher volume of contract manufacturing purchases associated with an increase in demand for our products.

Operating activities provided $6.7 million of cash in fiscal 2004 compared to usage of $7.9 million in fiscal 2003, due primarily to a swing to net income from a net loss and an increase in accounts payable and other current liabilities, offset by an increase in inventories. In fiscal 2003 the most significant usage of cash was our net loss before non-cash charges of $3.1 million; a decrease in accounts payable and other current liabilities and an increase in inventories together used $5.1 million of cash. These uses of cash were partially offset by a decrease in other long-term assets, which provided approximately $800,000 of cash.

Investing activities provided $1.1 million of cash during fiscal 2004 which was the result of a reduction in restricted cash of $880,000 and proceeds from the sale of fixed assets of $561,000, offset by capital expenditures of $297,000. During fiscal 2003, we used cash of $1.5 million for investing which was principally the result of an increase in capital expenditures of $1.8 million offset by the sale of short term investments of $300,000.

Net cash provided by financing activities of $8.0 million in fiscal 2004 was the result of net proceeds from our private placement of common stock of $5.2 million, proceeds from a new term loan from Silicon Valley Bank of $4.2 million, proceeds from the issuance of common stock related to employee stock option and employee stock purchase plans of $3.2 million and proceeds from the exercise of common stock warrants of $2.3 million, offset by repayment of long-term debt related to the Industrial Revenue Bonds of $6.8 million. Net cash provided by financing activities in fiscal 2003 of $6.9 million was primarily the result of proceeds from the sale of our common stock of $6.4 million, proceeds from the issuance of common stock related to employee stock option and employee stock purchase plans of $1.8 million and $4.8 million from long term borrowings offset by repayments of long term borrowings of $4.3 million.

In June 2002, we entered into a Loan and Security Agreement (“Agreement”) with Silicon Valley Bank that allowed us to borrow up to a total of $5.0 million under an equipment line of credit and a revolving line of credit. On July 30, 2003, we entered into an agreement to modify the existing Loan and Security Agreement. The modification extended the term of the agreement for one additional year to July 31, 2004 and, subject to compliance with various covenants, allowed us to borrow an additional $250,000 under the equipment line of credit and an additional $180,000 under the working capital line of credit, still subject to a combined cap of $5.0 million. In January 2004, we entered into an Amended and Restated Loan and Security Agreement (“Agreement”) with Silicon Valley Bank that allows us to borrow up to a total of $11.6 million, which includes a $5.5 million term loan, an equipment line of credit and a revolving line of credit. The term loan was to be used for general working capital purposes or to pay off indebtedness owing under the Industrial Revenue Bonds related to our Tempe facility, as described in Note 9 of Notes to Financial Statements. We used the term loan to pay off our Industrial Revenue Bonds as discussed in the next paragraph. The equipment line of credit has a maximum of $2.1 million and is based on the amount of eligible equipment. The revolving line of credit has a maximum of $4.0 million and is based on accounts receivable. As of March 31, 2004, $5.3 million was outstanding under the term loan; $1.6 million was outstanding on the equipment line of credit; and there were no borrowings outstanding on the revolving line of credit. On May 4, 2004 we repaid this debt.

We exercised our call option to repay the Industrial Revenue Bonds on March 1, 2004, using $5.5 million which we borrowed from Silicon Valley Bank under a five-year term loan pursuant to an Amended and Restated Loan and Security Agreement.

The following table summarizes our contractual obligations as of March 31, 2004.

As of May 31, 2004, we had cash and cash equivalents of $30.8 million, and debt and capital lease obligations of $279,000. This resulted in part from our follow-on public offering that closed in early May in which we raised net proceeds of $17.9 million which we used to pay down our term bank debt and bank equipment financing. We had incurred this term debt during the fourth quarter of fiscal 2004 partly in order to pay off early the Industrial Revenue Bonds associated with our Tempe facility. We still have in place a $4 million working capital credit line which we have not drawn down.

In the future, it is possible that our liquidity could be impacted in order to resolve the environmental issue arising out of the closure of our Milpitas wafer fabrication facility. At present, we do not have a reasonable basis to assess the likelihood of potential future costs as to the environmental issues discussed in Note 16 of Notes to Financial Statements. We will be better positioned to evaluate whether we are reasonably likely to incur additional expenses to remediate the subject property once we obtain additional core samples and evaluate the risks associated with any contamination they may show.

At March 31, 2004 we had separate pending litigation with two former employees, Tarsaim Batra and Chan Desaigoudar, as described in Note 15 of Notes to Financial Statements. We resolved both matters in the first quarter of fiscal 2005 for amounts that had previously been accrued. The payments during the first quarter of fiscal 2005 will have a minimal effect on our liquidity. See Note 19 of Notes to Financial Statements.

Operating and capital requirements depend on many factors, including the levels at which we maintain revenue, margins, inventory, accounts receivable and operating expenses. We may wish to purchase additional production equipment to support a portion of the increases in capacity at our foundry and assembly test partners which may require additional equipment financing that we may not be able to obtain on terms we consider reasonable or may require us to use more of our cash resources than we currently have planned. While we currently anticipate that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for the next twelve months, we may wish to raise additional equity capital, private or public, to provide us with cash reserves and to fund future growth such as to support the increased levels of receivables and inventory associated with any continued growth in revenue, or to make strategic technology or product line acquisitions. In these regards, we have an effective S-3 shelf registration statement covering 2.7 million shares; however, we have only a few hundred thousand authorized but unissued shares that are not reserved for issuance upon the exercise of currently outstanding options. We plan to solicit shareholder approval at our August 2004 annual shareholder meeting to increase our authorized common share capital by 25 million shares, although there can be no assurance that the shareholders will approve this increase.

We do not have any off balance sheet arrangements that have, or are reasonably likely to have, a current or future effect upon our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors, other than operating leases and purchase obligations shown above.

Although we cannot accurately determine the precise effect of inflation on our operations, we do not believe inflation has had a material effect on net sales or income.

We have audited the accompanying balance sheet of California Micro Devices Corporation as of March 31, 2004, and the related statements of operations, shareholders’ equity, and cash flows for the year ended March 31, 2004. Our audit also included the financial statement schedule listed in the Index at Item 8. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of California Micro Devices Corporation as of March 31, 2004, and the results of its operations and its cash flows for the year ended March 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We have audited the accompanying balance sheet of California Micro Devices Corporation as of March 31, 2003, and the related statements of operations, shareholders’ equity, and cash flows for each of the two years ended March 31, 2003 and 2002. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of California Micro Devices Corporation at March 31, 2003, and the results of its operations and its cash flows for each of the two years ended March 31, 2003 and 2002, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We design and sell application specific analog semiconductor products primarily for high volume applications in the mobile, computing and consumer electronics markets. We are a leading supplier of application specific integrated passive (ASIP^{^™}) devices that provide electromagnetic interference filtering, electrostatic discharge protection and termination for high speed signals. We also offer a growing portfolio of active analog devices including power management and interface devices. Our ASIP devices, built using our proprietary silicon manufacturing process technology, provide the function of multiple passive components in a single chip solution for densely populated, high performance electronic systems. Our ASIP devices are significantly smaller, offer increased performance and reliability, and cost our customers less, taking into account all of the costs of implementation, than traditional solutions based on discrete passive components. Some of our ASIP devices also integrate active analog elements to provide additional functionality. With our active analog device portfolio, we seek opportunities to design standard products that are differentiated from competitive alternatives by being optimized for specific applications. We also selectively design second source active analog devices that provide us entry to new applications, complement other products in our portfolio or enhance existing customer relationships. Our active analog device solutions use industry standard CMOS manufacturing processes for cost effectiveness.

Within the past three years, we have streamlined our operations and become fabless for our semiconductor products, using independent providers of wafer fabrication services. We have focused our marketing and sales on strategic customers in our three core markets. As a part of this process, we have reduced the number of our actively marketed products from approximately 5,000 to approximately 500 while at the same time increasing our unit volume shipments from less than 25 million units in the quarter ended March 31, 2001 to more than 110 million units in the quarter ended March 31, 2004.

End customers for our semiconductor products are original equipment manufacturers including Dell Inc., Hewlett-Packard Company, Kyocera Wireless Corp., LG Electronics, Motorola, Inc., Royal Philips Electronics N.V., Samsung Electronics Co., Ltd., Sony Corporation and TriGem Computer Inc. We sell to some of these end customers through original design manufacturers, including Appeal, Arima Computer Corporation, BenQ Corporation, Compal Electronics, Inc., Pantech Co., Ltd. and Quanta Computer, Inc., and contract electronics manufacturers, including Celestica Inc., Foxconn (Hon Hai Precision Industry Co., Ltd.) and Solectron Corporation. We use a direct sales force, manufacturers’ representatives and a network of distributors to sell our semiconductor products. We also manufacture a limited number of thin film products in our Tempe, Arizona fabrication facility, which we sell primarily to Guidant Corporation for use in implantable defibrillators and pacemakers.

In the accompanying financial statements, fiscal 2004, 2003, and 2002 refer to the twelve months ended March 31, 2004, 2003, and 2002, respectively. Certain prior year amounts in the financial statements and notes thereto have been reclassified to conform to the fiscal 2004 presentation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates are based on historical experience, input from sources outside of the company, and other relevant facts and circumstances. Actual results could differ from those estimates.

We consider all highly liquid debt instruments with a maturity date of three months or less at the date of purchase to be cash equivalents. Cash equivalents generally consist of commercial paper and money market funds.

We invest our excess cash in high quality financial instruments. All of our marketable investments are classified as available-for-sale and we view our available-for-sale portfolio as available for use in current operations.

Available-for-sale securities are stated at fair market value, with unrealized gains and losses, net of tax, reported as a component of shareholders’ equity. The cost of securities sold is based upon the specific identification method. Realized gains and losses and declines in value judged to be other than temporary, if incurred, are included in interest income and other (net).

Inventories are stated at the lower of cost, determined on a first-in first-out basis, or market.

Reserves are provided for excess and obsolete inventory, which are estimated based on a comparison of the quantity and cost of inventory on hand to management’s forecast of customer demand. Customer demand is dependent on many factors and requires us to use significant judgment in our forecasting process. We must also make assumptions regarding the rate at which new products will be accepted in the marketplace and at which customers will transition from older products to newer products. Because a significant portion of our sales are through distributors and many parts may have small sales volume, the customer demand forecast process is not inclusive of all parts. Therefore, historical trends may also be used in estimating the excess and obsolete inventory reserves. Generally, inventories in excess of twelve months demand are reserved and the related charge is recorded to cost of sales. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of, even if in subsequent periods we forecast demand for this product.

Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the shorter of the estimated useful lives of the assets, or the remaining lease term. Estimated useful lives of assets are as follows:

Long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. An impairment loss is recognized if the sum of the expected future undiscounted cash flows from the use of the asset over its remaining useful economic life is less than the carrying value of the asset. The amount of impairment loss will be measured as the difference between the carrying value of the assets and their estimated fair values. See Note 7 for additional information regarding asset impairments.

We recognize revenue when persuasive evidence of an arrangement exists, delivery or customer acceptance, where applicable, has occurred, the fee is fixed or determinable, and collection is reasonably assured.

Revenue from product sales to end user customers, or to distributors that do not receive price concessions and do not have return rights, is recognized upon shipment and title transfer, if we believe collection is reasonably assured and all other revenue recognition criteria are met. We assess the probability of collection based on a number of factors, including past transaction history and/or the creditworthiness of the customer. If we determine that collection of a receivable is not probable, we defer recognition of revenue until the collection becomes probable, which is generally upon receipt of cash. Reserves for sales returns and allowances from end user customers are estimated based on historical experience and are provided for at the time of shipment. At the end of each reporting period, the sufficiency of the reserve for sales returns and allowances is also assessed based on a comparison to authorized returns for which a credit memo has not been issued.

Revenue from product sales to distributors with agreements allowing for either price concessions or for product returns is recognized at the time the distributor sells the product to original equipment manufacturers or other end users at which time the sales price becomes fixed. Revenue is not recognized upon initial shipment to the distributor since, due to various forms of price concessions, the sales price is not substantially fixed or determinable at that time. Additionally, these distributors have contractual rights to return products, up to a specified amount for a given period of time. Pursuant to our agreements with our distributors, custom, older or end-of-life products are sold with no right of return and are not eligible for price concessions. In these cases, revenue is recognized upon shipment to the distributor, assuming all other revenue recognition criteria are met.

At the time of shipment to distributors, we defer our gross selling price of the product shipped and the related cost of the product shipped and reflect such net amounts on our balance sheet as a current liability entitled “deferred margin on shipments to distributors”. Thus, deferred margin on shipments to distributors represents the margin on the products we ship to distributors, or the difference between our revenue and cost of the product for inventory held by the distributors at the end of the accounting period.

We provide a one-year warranty that our products will be free from defects in material and workmanship and will substantially conform in all material respects to our most recently published applicable specifications. We have experienced minimal warranty claims in the past, and the accrual for such obligations is treated as part of our sales returns and allowance reserve.

We expense all research and development and advertising costs as incurred. Advertising expense was immaterial for fiscal years 2004, 2003 and 2002.

We expense all shipping costs related to shipments to customers as incurred. Shipping costs are recognized in cost of goods sold.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company provides an allowance for specific customer accounts where collection is doubtful and also provides a general allowance for other accounts based on historical collection and write-off experience.

Basic earnings per common share are computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per common share incorporate the incremental shares issuable upon the assumed exercise of stock options and other dilutive securities. The following table sets forth the computation of basic and diluted net income (loss) per share:

Options to purchase 1,410,492 shares of common stock in fiscal 2004, 2,842,911 shares of common stock in fiscal 2003 and 2,790,000 shares of common stock in fiscal 2002 were not included in the diluted earnings per share computation, as the effect of including such shares would be antidilutive. Warrants to purchase 241,834 shares of common stock in fiscal 2004, 271,459 shares of common stock in fiscal 2003 and 59,250 shares of common stock in fiscal 2002 were not included in the diluted earnings per share computation, as the effect of including such shares would be antidilutive.

As allowed under Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock Based Compensation,” along with the adopted disclosures of SFAS No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123”, we account for our employee stock plans in accordance with the provisions of Accounting Principles Board’s Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees” and have adopted the disclosure only provisions of SFAS 123. Stock-based awards to non-employees are accounted for in accordance with SFAS 123 and EITF 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” Fair value for these awards is calculated using the Black-Scholes option-pricing model, which requires that we estimate the volatility of our stock, an appropriate risk-free interest rate, estimated time until exercise of the option, and our dividend yield. The Black-Scholes model was developed for use in estimating the fair value of traded options that do not have specific vesting schedules and are ordinarily transferable. The calculation of fair value is highly sensitive to the expected life of the stock-based award and the volatility of our stock, both of which we estimate based primarily on historical experience. As a result, the pro forma disclosures are not necessarily indicative of pro forma effects on reported financial results for future years.

We generally recognize no compensation expense with respect to employee stock grants, as the exercise price is at or above the market price as of the date of grant. Had we recognized compensation for the grant date fair value of employee stock grants in accordance with SFAS 123, our net income (loss) and net income (loss) per share would have been revised to the pro forma amounts below. For pro forma purposes, the estimated fair value of our stock-based grants is amortized over the options’ vesting period for stock options granted under our stock option plans, and the purchase period for stock purchases under our stock purchase plan.

The fair value of our stock-based grants was estimated assuming no expected dividends and the following weighted-average assumptions:

The weighted-average fair value of stock options granted in fiscal 2004, 2003 and 2002 was $2.44, $3.69, and $4.57 per share, respectively. The weighted-average fair value of the option element of the 1995 Employee Stock Purchase Plan stock granted in fiscal 2004, 2003 and 2002 was $1.58, $1.43 and $2.27 per share, respectively. The option element in the 1995 Employee Stock Purchase Plan is related to the 15% discount that is provided to employees. See Note 14.

Accumulated other comprehensive income presented in the accompanying balance sheets consists of the accumulated net unrealized gains on available-for-sale securities. Accumulated other comprehensive income was $0 at March 31, 2004 and March 31, 2003, as we did not hold any available-for-sale securities at either date.

Income taxes have been provided using the liability method in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 109, “Accounting for Income Taxes” (“SFAS 109”). In accordance with SFAS 109, a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. We provide a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.

In June 2001, the FASB issued Statement No. 143, “Accounting for Asset Retirement Obligations”, which establishes accounting standards for recognition and measurement of a liability for the costs of asset retirement obligations. Under Statement 143, the future costs of retiring a tangible long-lived asset will be recorded as a liability at their present value when the retirement obligation arises and will be amortized to expense over the life of the asset. Statement 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Our adoption of Statement 143 on April 1, 2003 had no effect our financial position, results of operations or cash flows.

In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. Statement 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. Statement 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that are frequently used in connection with share repurchase programs. Statement 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments as of July 1, 2003. Our adoption of Statement 150 on June 1, 2003 had no effect on our financial position, results of operations or cash flows.

In December 2003, the SEC published Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”. This SAB updates portions of the SEC staff’s interpretive guidance provided in SAB 101. SAB 104 deletes interpretive material no longer necessary, and conforms the interpretive material retained, because of pronouncements issued by the FASB’s EITF on various revenue recognition topics. Our adoption of the interpretive guidance in SAB 104 on October 1, 2003 had no effect on our financial position, results of operations or cash flows.

In December 2003, the FASB issued FIN 46R, “Consolidation of Variable Interest Entities”. FIN 46R requires us to consolidate a variable interest entity if we are subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. Application of this Interpretation is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities (other than small business issuers) for all other types of entities is required in financial statements for periods ending after March 15, 2004. We currently have no contractual relationships or other business relationships with variable interest entities and do not have any such plans, and therefore our adoption of the interpretive guidance in FIN 46R had no effect on our financial position, results of operations or cash flows.

The following is a summary of cash, cash equivalents and marketable securities at March 31, 2004 and March 31, 2003, respectively:

Our cash balance was $0 at March 31, 2004 because the rate of interest we earn on money market funds exceeds the rate of interest we earn on our cash funds, and we are able to immediately draw upon our money market funds to pay our vendors and our employees.

Our financial instruments that expose us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and trade accounts receivable.

We primarily use one financial institution for our banking activities and maintain available cash in our short term money markets funds. Our balances exceed those insured by the Federal Deposit Insurance Corporation.

A significant portion of our sales are to customers whose activities are related to computer and computer peripherals, wireless communications and medical devices, including many who are located in foreign countries. We generally extend credit to these customers and, therefore, the aforementioned industries and economic influences of customers’ geographic locations affect collection of

accounts receivable. However, we monitor extensions of credit and require collateral, such as letters of credit, whenever deemed necessary. We maintain a reserve for potentially uncollectible accounts receivable based on our assessment of collectibility and historical experience.

We market our products into high-technology industries, such as mobile electronics, computing, consumer electronics, medical and other markets that are characterized by rapid technological change, intense competitive pressure, and volatile demand patterns. Most of the systems into which our products are designed have short life cycles. As a result, we require a significant number of new design wins on an ongoing basis to maintain and grow revenue.

Generally, our sales are not subject to long-term contracts but rather to short-term releases of customers’ purchase orders, most of which are cancelable on relatively short notice. The timing of these releases for production as well as custom design work is in the control of the customer. Because of the short life cycles involved with our customers’ products, the order pattern from individual customers can be erratic with significant accumulation and de-accumulation of inventory during phases of the life cycle.

In fiscal 2004, two customers that are manufacturers represented a combined 33% of our revenue, and one customer that is a distributor represented 14% of our revenue. In fiscal 2003, two customers that are manufacturers represented a combined 29% of our revenue, and one customer that is a distributor represented 12% of our revenue. Loss of any of these customers could have a substantial negative effect on our revenues and results of operations.

Our manufacturing processes are complex, and require production in a highly controlled, clean environment suitable for fine tolerances. Normal manufacturing risks include errors in fabrication processes, defects in raw materials, process changes, as well as other factors that can affect yields.

Beginning in fiscal 2002, we implemented a strategy to outsource the wafer fabrication of a substantial portion of our products to ASMC, an outside foundry, located in China and in fiscal 2004 we established a relationship and have begun to receive production material from Sanyo Electric Co. Ltd. in Japan. As a result of this strategy, we are subject to certain risks including reduced control over delivery schedules, quality assurance, manufacturing yields and production costs, lack of guaranteed production capacity or product supply and lack of availability of, or delayed access to, key process technologies. We also use independent subcontractors, primarily in Thailand, Malaysia and Taiwan, for assembly, packaging and testing of most of our product. The common industry practice of using independent subcontractors to manufacture, test, package and assemble products is subject to risks resulting from unfavorable economic conditions, political strife, prolonged work stoppages, natural or man-made disasters, or power shortages in these countries, or other factors, and may adversely affect the ability of our independent subcontractors to manufacture, test, package and assemble our products.

Cash and cash equivalents at March 31, 2004 were $20.3 million. During the first quarter of fiscal 2005, subsequent to the end of the fiscal year, we settled our pending litigation with Batra and Desaigoudar for amounts previously accrued, which will not materially impact our liquidity. In the future, it is possible that our liquidity could be impacted by the environmental issues arising out of the closure of our Milpitas wafer fabrication facility. We currently anticipate that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for the next twelve months. However, we may need to raise additional funds through public or private equity or debt financing in order to expand our operations to the level we desire. The funds may not be available to us, or if available, we may not be able to obtain them on terms favorable to us.

During fiscal 2003, we completed the restructuring program approved by the Board of Directors in the second quarter of 2002, in which we streamlined our manufacturing operations and now focus our business on products and markets in which we have, or believe we can achieve, a leadership position while leveraging our core technology strengths. Key parts of this strategy include the plan to outsource a significant portion of our wafer manufacturing to an independent foundry and to discontinue certain older products.

In connection with outsourcing a significant portion of our wafer manufacturing, we have consolidated all of our internal wafer fabrication activities and chip scale packaging activities into our Tempe, Arizona facility with selected high-value backend manufacturing activities continuing at our Milpitas, California headquarters. In connection with these actions, we recorded restructuring and asset impairment charges of $4.2 million in the year ended March 31, 2002, which was reflected in operating expenses as Restructuring Charges. The restructuring program included workforce reduction and lease termination costs. At the end of the third quarter of fiscal 2003, we determined that our original estimate of restructuring costs exceeded the actual amount required to complete the plan. Therefore, we reversed the remaining restructuring liability of approximately $193,000 as a benefit to operations. There was no restructuring liability remaining at March 31, 2003 or 2004.

A roll forward of the restructuring and asset impairment charges is as follows (in thousands):

In connection with the restructuring program, we reduced our headcount by approximately 65 employees, primarily in the manufacturing functions and primarily located at our Milpitas, California facility. The workforce reduction resulted in a $438,000 charge in fiscal year 2002 relating to severance and fringe benefits of which $106,000 was reversed in fiscal 2003. All employees affected by the workforce reduction were informed of the plan in enough detail so that they could determine their type and amount of benefit. Approximately 15 employees had been terminated as of March 31, 2002, with their severance and benefits paid in April 2002, and the majority of the remaining employees were terminated by the end of the second quarter of fiscal 2003.

With the outsourcing of a significant portion of our wafer fabrication activities, the number and volume of products generated from the equipment located at our Tempe facility have been significantly reduced. As a result of these circumstances in fiscal 2002, we performed an analysis to determine if the manufacturing equipment at our Tempe, Arizona facility was impaired. Based on the analysis performed, which was based on our estimates of future undiscounted cash flows, we determined that these assets were impaired and wrote-down the recorded value of the assets to their estimated fair value, resulting in a charge of $3.4 million in fiscal 2002. Fair value was estimated as the amount for which the assets could be purchased in an arms-length transaction.

The restructuring plan called for us to relocate from our Milpitas facility once all internal wafer fabrication activities had been consolidated into our Tempe, Arizona facility. As required by the lease for the Milpitas facility, we were obligated to restore the Milpitas facility to its pre-lease condition. Accordingly, we recorded $251,000 in estimated renovation costs related to the Milpitas facility in fiscal 2002. Of the total restructuring liability pertaining to facilities, $87,000 was reversed in fiscal 2003.

Cash expenditures relating to the workforce reduction were paid in fiscal 2003. As of March 31, 2003, the restructuring program was complete and no liability remained.

On September 29, 2003, the Board of Directors approved a plan to align our internal manufacturing operations to current business requirements. The plan provided for the termination of 61 employees for which severance costs of approximately $343,000 were recorded and then $62,000 were later reversed based on updated information, for a net charge of $281,000. As part of the infrastructure alignment plan, we also identified surplus capital equipment, with a total estimated loss on either sale or abandonment of approximately $534,000. The losses exceeded our estimate by approximately $149,000 due to our inability to sell some capital equipment items that we had expected to sell at prices originally projected. The estimated loss on sale or abandonment was calculated as the difference between the estimated proceeds on the sale of the assets and the net book value of the assets.

During fiscal 2004, we recorded the following charges in relation to the infrastructure alignment plan (amounts in thousands):

We have evaluated the estimated fair value of our financial instruments. The amounts reported as cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term maturities. Historically, the fair values of short-term investments are estimated based on quoted market prices.

The carrying and estimated fair values of our long-term debt are follows (in thousands):

The fair value of our long-term debt obligations is based on the estimated market rate of interest for similar debt instruments with the same remaining maturities.

Our Industrial Revenue Bonds were collateralized by a lien on all of our land and buildings in Tempe, Arizona, and certain equipment acquired with the proceeds of the bonds, and required certain minimum annual sinking fund payments ranging from $185,000 in fiscal 2004 to $780,000 in fiscal 2018. At March 31, 2003, restricted cash of $880,000, was held in sinking fund trust accounts, of which $800,000 was to be used for principal and interest payments in the event of default by the Company, and the balance was used for semi-annual interest and principal payments. The bonds were paid off on March 1, 2004.

In June 2002, we entered into a Loan and Security Agreement (“Agreement”) with Silicon Valley Bank that allowed us to borrow up to a total of $5.0 million under an equipment line of credit and a revolving line of credit. The amount available under the Agreement is based on the amount of eligible equipment and accounts receivable. Under the Agreement, which includes a subjective acceleration clause related to liquidity, we are subject to certain financial covenants and restrictions and were required to maintain a compensating balance of $2.75 million with the bank in order to maintain our borrowing capability. The financial covenants relate to a required monthly minimum quick ratio and quarterly tangible net worth. Borrowings under the equipment line and the revolving line bear interest at an annual rate of prime plus 3.0% and prime plus 0.75%, respectively. As of March 31, 2004 and 2003, the equipment line of credit rate was 7.25%. Principal, in equal installments, and interest are due monthly for the term of 36 months for all borrowings made under the equipment line. Borrowings under the revolving credit line have a term of 12 months, with principal due at maturity and interest due in monthly installments. Borrowings under both lines are collateralized by substantially all of our assets. During the twelve-months ending March 31, 2003, we had borrowed $3.5 million under the equipment line and $1.3 million under the revolving line of credit, of which $1.5 million was used to pay off other capital equipment financing facilities in full in the first quarter of fiscal 2003. As of March 31, 2003, the $1.3 million borrowed on the revolving line of credit had been paid in full. We were in not compliance with the tangible net worth ratio under our Agreement as of March 31, 2003. The Bank subsequently provided a waiver to the March 31, 2003 covenants, modified the future covenants and extended the term of the agreement to July 31, 2004. On June 26, 2003, the bank agreed to further modify the loan agreement such that if we fail in the future to comply with either of the financial covenants defined in the agreement, as amended, the credit facilities would convert to an asset based lending facility. Presently, our Borrowing Base is sufficient to support all outstanding obligations, and therefore we have continued to classify as long term on our balance sheet, all obligations scheduled to be repaid beyond twelve months. In January 2004, we entered into an Amended and Restated Loan and Security Agreement, which increased our credit facility to include a term loan that we used to refinance our Industrial Revenue Bonds. On May 4, 2004, we used $6.6 million of the $17.9 million net proceeds from our recent public offering to repay our debt with Silicon Valley Bank.

In March 2001, we entered into a equipment Financing Agreement (“Agreement”) with Epic Funding Corporation which allows us to finance $975,000 of equipment over a term of 4 years with interest at 9.6% payable in 48 installments of approximately $25,000 per month. The total outstanding obligation as of March 31, 2004 was approximately $280,000.

During fiscal 2003, we entered into new capital leases to finance some equipment purchases. The total outstanding capital lease obligations were $48,000 at March 31, 2004, due in monthly installments with interest rates ranging from 10.4% to 12.6%. Fixed assets purchased under capital leases and the associated accumulated depreciation were not material as of March 31, 2004 and 2003.

Future maturities of long-term debt and capital lease obligations at March 31, 2004 are as follows (in thousands):

We lease certain manufacturing facilities and sales offices under operating leases expiring from fiscal 2004 to fiscal 2007. Future minimum lease payments under non-cancelable operating lease agreements having an initial term in excess of one year at March 31, 2004 are as follows (fiscal years ending March 31, with amounts in thousands):

Rent expense was approximately $535,000, $719,000 and $485,000 in fiscal 2004, 2003 and 2002, respectively. There was no sublease income in fiscal 2004, 2003 or 2002.

As of March 31, 2004 we had approximately $1.3 million in non-cancelable purchase contract commitments.

The provision for income taxes differs from the amount computed by applying the U.S. statutory rate of 34% to the income (loss) before income taxes for the years ended March 31, 2002, March 31, 2003 and March 31, 2004. The principal reasons for this difference are as follows:

Deferred income taxes reflect the tax effects of net operating loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows (amounts in thousands):

Statement of Financial Accounting Standard No. 109 (“SFAS 109”) provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based on the weight of available evidence, we have provided a valuation allowance against net deferred tax assets. We will continue to evaluate our ability to realize the deferred tax asset on a quarterly basis. The valuation allowance decreased by $2,526,000 during the year ended March 31, 2004, increased by $1,868,000 during the year ended March 31, 2003 and increased by $11,584,000 during the year ended March 31, 2002. Approximately $3,560,000 of the valuation allowance for deferred tax assets relates to benefits of stock option deductions which, when recognized, will be directly allocated to common stock.

As of March 31, 2004, we had net operating loss carryforwards for federal and state income tax purposes of approximately $67,600,000 and $15,600,000 respectively, which expire in the years 2009 through 2024 and federal and state research and development credits of approximately $200,000 and $350,000, respectively. The federal research and development tax credits expire in 2008, while the state research and development tax credits carry forward indefinitely.

Utilization of the net operating loss may be subject to substantial annual limitation due to the ownership change provisions of the Internal Revenue Code and similar state provisions. The annual limitation could result in the expiration of the net operating loss before utilization.

Interest income reflects the amounts earned from investments in cash equivalents and short term securities.

On May 3, 2004, we closed our public offering of 1,300,000 shares of common stock. See Note 19 of Notes to Financial Statements.

In July 2003, we entered into a stock and warrant purchase agreement pursuant to which we (1) sold 2,444,244 shares of common stock at $2.25 per share with net proceeds of $5.2 million and (2) granted 733,273 five-year warrants to purchase shares of common stock with an exercise price of $3.00 per share. At our option, the warrant holders, excluding our two placement agents, were obligated to exercise their warrants during the 30 days following notice from us (a “Triggering Notice”) that the closing price of our stock had equaled or exceeded $5.00 for 20 consecutive trading days. To the extent the warrants were not exercised during this 30-day notice period, we could have, but were not obligated to, terminate the warrants upon a follow-on notice to the warrant holders. The warrants are immediately exercisable and expire five years from the date of issuance. The fair value of these warrants, estimated using the Black-Scholes model with the following assumptions—volatility of .97, expected life of 5 years, risk free interest rate of 3.38%, no dividend yield—was approximately $1.6 million, or $2.20 per share, and was recorded as common stock on the balance sheet. In July 2003, we also granted an aggregate of 73,326 warrants to our two placement agents related to the stock and warrant financing. These warrants contain similar terms to the warrants granted to our investors except that such warrants are for a three-year term and cannot be exercised until nine months after their date of grant. The warrants are immediately exercisable and expire three years from the date of issuance. The fair value of these warrants, estimated using the Black-Scholes model with the following assumptions—volatility of .97, expected life of 3 years, risk free interest rate of 2.33%, no dividend yield—was approximately $132,000, or $1.81 per share, and was recorded as common stock on the balance sheet. As required under the stock and warrant purchase agreements, and our engagement letter with the placement agents, we registered the shares we sold and the shares underlying the warrants we granted for resale to the public under the Federal Securities Act of 1933, as amended, pursuant to a registration statement declared effective on September 25, 2003. During October 2003, we gave the investors the Triggering Notice as described above. During October and November 2003, these investors exercised their 733,273 warrants resulting in total proceeds of approximately $2.2 million.

In November 2002, in a private placement, we entered into stock and warrant purchase agreements pursuant to which we (1) sold 1,519,000 shares of no par value common stock at $3.40 per share and (2) granted 424,417 warrants to purchase shares of common stock with an exercise price of $4.36 per share, raising net cash proceeds of $4.6 million. The warrants are immediately exercisable and expire three years from the date of issuance. The fair value of these warrants, estimated using the Black-Scholes model with the following assumptions—volatility of .573, expected life of 3 years, risk free interest rate of 2.32%, no dividend yield—was approximately $577,000, or $1.36 per share, and was recorded as common stock on the balance sheet. The issuance of these shares and these warrants did not require shareholder approval. During fiscal 2004 investors in the November 2002 private placement exercised an aggregate of 28,609 warrants resulting in total proceeds of approximately $125,000.

In December 2001, in a private placement, we sold 2,000,000 shares of our no par value common stock at $4.11 per share, yielding gross cash proceeds of $8.2 million. Cash offering expenses of approximately $609,000 were offset against the proceeds for net cash proceeds of $7.6 million. In addition to cash expenses, we issued the placement agent warrants to purchase up to 59,250 shares of our common stock at an exercise price of $4.11 per share. The warrants are immediately exercisable and expire five years from the date of issuance. The fair value of these warrants, estimated using the Black-Scholes model with the following assumptions—volatility of .95, expected life of 5 years, risk free interest rate of 5.83%, no dividend yield—was approximately $187,000, or $3.16 per share, and was recorded as common stock on the balance sheet. The issuance of these shares and this warrant did not require shareholder approval.

We have 10,000,000 shares of preferred stock authorized, of which 400,000 is designated Series A Participating Preferred Stock. The Board of Directors has the authority to issue the Preferred Stock and to fix the rights, privileges, preferences and restrictions related to the Preferred Stock. No shares of preferred stock were outstanding at March 31, 2004 and 2003.

In September 2001, our Board of Directors adopted a shareholder rights plan, pursuant to which one preferred stock purchase right (a “Right”) was distributed for each share of common stock held as of October 12, 2001. Each Right, when exercisable, will entitle the holder to purchase from us one one-thousandth of a share of our Series A Participating Preferred Stock at a price of $50.00 (the “Purchase Price”).

The Rights entitle the holder to receive, upon exercise, shares of common stock (and in certain circumstances, a combination of securities or other assets) having a value of twice the Purchase Price if a person or group acquires beneficial ownership of 15% or more of our outstanding common stock, subject to certain exceptions for existing shareholders. Additionally, if we are involved in a business combination or sale of 50% or more of our assets or earning power, each Right will entitle the holder to receive, upon exercise, shares of common stock of the acquiring entity having a value of twice the Purchase Price. Our Board of Directors has the right to cause each Right to be exchanged for common stock or substitute consideration.

We have the right to redeem the Rights at a price of $0.001 per Right in certain circumstances. The Rights expire on September 24, 2011.

We maintain a 401(k) Savings Plan covering substantially all of our employees. Under the plan and through December 31, 2002, eligible employees contributed to the plan with the Company matching at a rate of 50% of the participants’ contributions not in excess of 6% of compensation. Participants’ contributions are fully vested at all times. The Company’s contributions vest incrementally over a two-year period. During fiscal 2004, 2003, and 2002, we expensed $130,000, $207,000 and $295,000, respectively, relating to our contributions under the plan. As of January 1, 2003, we discontinued our policy regarding future matching of the participant’s contributions. As of October 1, 2003, we reinstated our policy regarding future matching of the participants’ contributions at a rate of 50%, not in excess of 6% of compensation.

In April 1997, we implemented a nonqualified deferred compensation plan for the benefit of eligible employees. As of January 1, 2003 the Nonqualified Deferred Compensation plan was terminated and as of March 31, 2003 all monies in the trust assets were refunded back to the participants. This plan was designed to permit certain discretionary employer contributions in excess of the tax limits applicable to the 401(k) plan and to permit employee deferrals in excess of certain tax limits. Company assets that were earmarked to pay benefits under the plan were held by a rabbi trust. The diversified assets held by the rabbi trust were classified as trading securities and were recorded at fair market value with changes recorded to other income and expense. The assets were classified within other long-term assets on the balance sheet. Changes in the liability related to the rabbi trust account were recorded as adjustments to compensation expense. In fiscal 2003, we recorded a benefit to compensation expense of $90,000 due to the decrease in the market value of the trust assets, with the same amount being recorded as a loss in other (income) expense. In fiscal 2002, we recognized compensation expense of $25,000 as a result of an increase in the market value of the trust assets, with the same amount being recorded as securities gains included in interest income. We did not make any contributions under the plan in fiscal 2003 or 2002. The balances held by the rabbi trust were classified as long-term liabilities. As of January 1, 2003 the Nonqualified Deferred Compensation plan was terminated, and as of March 31, 2003 all monies in the trust were refunded to the participants. As a result, the balance in this account was zero at March 31, 2004 and March 31, 2003.

The 1995 Employee Stock Option Plan (“1995 Plan”) is administered by the compensation committee consisting of not less than two qualified directors. The 1995 Non-Employee Directors Plan (the “Directors Plan”) is administered by not less than three members of the Board of Directors and the amount of shares granted to the directors on an annual basis are fixed in amount, as approved by the shareholders.

Under our 1995 Plan, options may be granted to employees and consultants at prices not less than 85% of the fair market value of our common stock on the date of grant for shares issued under a non-qualified stock option agreement. Options may also be issued to key employees at prices not less than 100% of the fair market value of our common stock on the date of grant for shares issued under an incentive stock option agreement. In fiscal 2004, the number of shares authorized for issuance under the 1995 Plan was increased by 630,000 shares bringing the total authorized shares under the 1995 Plan to 4,745,000. At March 31, 2004, 387,228 shares remained available for future grant.

The Directors Plan provides for a fixed issuance amount to the directors at prices not less than 100% of the fair market value of the common stock at the time of the grant. In fiscal 2003, the number of shares authorized for issuance under the Directors Plan was increased by 60,000 shares bringing the total authorized shares under the Directors Plan to 450,000. As of March 31, 2004, 87,431 shares remained available for future grant.

Generally, options under the plans become exercisable and vest over varying periods ranging up to four years as specified by the Board of Directors. Option terms do not exceed ten years from the date of the grant and all plans except for the 1981 Employee Incentive Stock Option Plan (the “1981 Plan”) expire within 20 years of date of adoption. No options may be granted during any period of suspension or after termination of any plan. Unexercised options expire upon, or within, three months of termination of employment, depending upon the circumstances surrounding termination.

During fiscal 2004, one of our executives terminated from the Company and returned to the Company 100,000 options that were outside of the 1995 Plan described above (“non-Plan Options”). Also during fiscal 2004, an executive joined the Company and was

granted non-Plan options to purchase 125,000 shares. The weighted average exercise price of the Non-Plan Options granted during fiscal 2004 was $2.90 per share. In fiscal 2002, our Board of Directors granted options to purchase 650,000 shares of our common stock to three executives outside of the 1995 Plan described above (“Non-Plan Options”). All Non-Plan Options were granted at exercise prices equal to the fair market value on the date of grant, have vesting periods of four years and expire in ten years. Our Non-Plan Options did not require the approval of, and were not approved by, our shareholders.

The following is a summary of stock option activity and related information, including Non-Plan Options (in thousands, except per share data):

The following table summarizes information about options outstanding at March 31, 2004:

The 1995 Employee Stock Purchase Plan as amended most recently on August 8, 2003, (the “Purchase Plan”) is available for all full-time employees possessing less than 5% of the Company’s common stock on a fully diluted basis. The Purchase Plan provides for the issuance of up to 1,290,000 shares at 85% of the fair market value of the common stock at certain defined points in the plan offering periods. Purchase of the shares is made through employees’ payroll deductions and may not exceed 15% of their total compensation. The Purchase Plan terminates on August 7, 2013 or earlier at the discretion of our Board of Directors. As of March 31, 2004, 259,980 shares were available for future issuance under the Purchase Plan.

We are a party to lawsuits, claims, investigations and proceedings, including commercial and employment matters, which are being handled and defended in the ordinary course of business. We review the current status of any pending or threatened proceedings with our outside counsel on a regular basis and, considering all the other known relevant facts and circumstances, recognize any loss that we consider probable and estimable as of the balance sheet date. For these purposes, we consider settlement offers we may make to be indicative of such a loss under certain circumstances.

We have two cases pending in the Santa Clara County, State of California Superior Court. Although several years old, both cases have been stayed by courts until fairly recently; as a result, both cases are early in the discovery phase.

The first case involves counterclaims brought on August 3, 1995, by our former CEO, Chan Desaigoudar after we sued him on May 5, 1995, for fraud and breach of fiduciary duty. The counterclaims are for, among other items, wrongful termination and improper termination of his stock options. The second case involves a former employee, Tarsaim L. Batra, who sued the company and three of our former officers, Messrs. Chan Desaigoudar, Steve Henke and Surendra Gupta, on September 13, 1993 and April 19, 1994, in two cases which have been consolidated, likewise for wrongful termination of his employment and for deprivation of his stock options. The U.S. government in the past has prosecuted Messrs. Desaigoudar, Henke and Gupta for criminal securities law violations. Mr. Gupta plead guilty before trial while Messrs. Desaigoudar and Henke were convicted; however, their convictions were overturned and a retrial was imminent when in May 2002, they each entered a guilty plea as to one or more of the counts.

We resolved both matters during the first quarter of fiscal 2005. See Note 19 of Notes to Financial Statements.

We are subject to a variety of federal, state and local regulations in connection with the discharge and storage of certain chemicals during our manufacturing processes and believe that we are in substantial compliance with all such applicable environmental regulations. Industrial waste generated at our facilities is either processed prior to discharge or stored in barrels with double containment methods until removed by an independent contractor. We have obtained all necessary permits for such discharges and storage. We do not anticipate that the cost of environmental compliance will change significantly in the next couple of years from the recent past.

During fiscal 2003, we closed our Milpitas wafer fabrication facility. As part of the closure process, we retained a state licensed environmental contractor familiar with this type of semiconductor manufacturing facility to prepare and implement a site closure plan and a site health and safety plan (HASP) to remove, decontaminate as necessary, and dispose of equipment and materials using approved methods and to work with the appropriate agencies to obtain certifications of closure. Upon inspection of the facility by the County of Santa Clara, one of four soil samples obtained by drilling through the floor in one room detected an elevated level of nickel. The County referred the matter to the State Department of Toxic Substances Control (DTSC) for follow-up. A walk-through of the facility occurred in May 2003 with DTSC, during which the agency indicated that a request for additional samples could follow. On June 26, 2003, we received correspondence from DTSC requesting that we enter into an agreement with them and that we conduct a Preliminary Endangerment Assessment (PEA) under their supervision. We entered into the agreement with DTSC in February 2004 and we are currently working with DTSC to finalize the PEA scope. We have accrued the estimated costs for DTSC and for the environmental consultant to perform the work we have proposed. The extent of additional actions, if any, cannot be determined until the PEA is completed. In addition, our Tempe, Arizona facility is located in an area of known groundwater contamination.

Our operations are classified into one reportable segment. Substantially all of our operations and a significant portion of our long-lived assets reside in the United States although we have sales operations in China, Europe, Japan, Korea and Taiwan. In fiscal 2004, approximately $2.6 million of our net fixed assets and a substantial portion of our inventory resided in Asia.

In fiscal 2004, two original equipment manufacturers and one distributor represented 19%, 14% and 14% respectively of our fiscal 2004 net sales. In fiscal 2003, two original equipment manufacturers and one distributor represented 18%, 11% and 12% respectively of our fiscal 2003 net sales. In fiscal 2002, one distributor and one original equipment manufacturer represented 14% and 11% of net sales, respectively.

Net sales to geographic regions reported below are based on the customers’ ship to locations (amounts in millions):

On May 3, 2004, we closed our public offering of 1,300,000 shares of common stock at a price of $15.00 per share with estimated net proceeds of approximately $17.9 million, after deducting the underwriting discount and estimated offering expenses. We also granted the underwriters the right to purchase up to an additional 195,000 shares of common stock to cover over allotments, if any, at any time on or before May 26, 2004. The over-allotment was not exercised and expired on May 26, 2004.

On May 4, 2004, we used $6.6 million of the $17.9 million net proceeds from our recent public offering to repay our debt with Silicon Valley Bank. In the first quarter of fiscal 2005 we will take a charge of approximately $125,000 associated with the debt repayment, which will be offset by our interest savings on the repaid debt.

During our first quarter of fiscal 2005, we settled the litigation matters described in Note 15 for amounts that will not affect our fiscal 2005 results, as such amounts have previously been accrued.

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

2. See Item 8 for a list of financial statement schedules filed. All other schedules have been omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto.

The exhibits listed below are filed herewith or incorporated by reference as indicated pursuant to Regulation S-K. The exhibit number refers to number indicated pursuant to the Instructions to the Exhibit Table for Regulation S-K.

On January 5, 2004 the company filed a report on Form 8-K, which reported under Item 12 the issuance of a press release relating to updated estimates for its financial results for its fiscal third quarter ended December 31, 2003.

On February 5, 2004 the company filed a report on Form 8-K, which reported under Item 12 the issuance of a press release relating to its financial results for its fiscal third quarter ended December 31, 2003.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized on the 30th day of June, 2005.


CALIFORNIA MICRO DEVICES CORPORATION (Registrant)

By:		/S/ ROBERT V. DICKINSON
		Robert V. Dickinson President, Chief Executive Officer and Director/Principal Executive Officer

By:		/S/ R. GREGORY MILLER
		R. Gregory Miller Vice President and Chief Financial Officer/ Principal Financial and Accounting Officer

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 indicated on the 30th day of June 2005.


California		94-2672609
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

430 North McCarthy Blvd #100, Milpitas, CA		95035-5112
(Address of principal executive offices)		(Zip code)


PART II
Item 6	Selected Financial Data	3
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 8	Financial Statements and Supplementary Data	12

PART IV

Item 15	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	38
	Signatures	41


	Year Ended March 31,
	2004			2003			2002			2001		2000
	(in thousands, except per share data)
Statement of Operations Data:
Net sales	$	59,560		$	42,184		$	29,944		$	57,534	$	43,763
Income (loss) before income taxes	$	3,572	(3)	$	(6,491	)(2)	$	(28,605	)(1)	$	2,588	$	275
Net income (loss)	$	3,572	(3)	$	(6,491	)(2)	$	(28,605	)(1)	$	2,536	$	275
Net income (loss) per share:
Basic	$	0.20		$	(0.44	)	$	(2.33	)	$	0.23	$	0.03
Diluted	$	0.19		$	(0.44	)	$	(2.33	)	$	0.20	$	0.02
Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	20,325		$	4,513		$	7,240		$	6,597	$	6,559
Working capital	$	19,621		$	4,721		$	2,385		$	20,203	$	18,417
Total assets	$	41,127		$	25,405		$	28,237		$	44,269	$	39,086
Long-term obligations	$	4,717		$	8,308		$	7,578		$	9,480	$	8,135
Total shareholders’ equity	$	22,118		$	7,795		$	7,780		$	27,160	$	22,960


	Year Ended March 31,
	2004		2003		2002
Mobile	$	22.3	$	10.6	$	1.6
Computing and Consumer		16.4		15.3		13.0
Medical		11.1		4.9		3.5
Other		9.8		11.4		11.8

Net sales	$	59.6	$	42.2	$	29.9


	Year Ended March 31,
	2004		2003		2002
Customers who each represented 10% or more of our net sales	Guidant Motorola		Guidant Motorola		Guidant
Percentage of our net sales comprised by customers who each represented 10% or more of our net sales	33	%	29	%	11	%
Distributors who each represented 10% or more of our net sales	Epco		Epco		Epco


	12 Months Ended March 31,
	2004				2003					2002
	Amount		% of Sales		Amount			% of Sales		Amount			% of Sales
Net sales	$	59,560	100	%	$	42,184		100	%	$	29,944		100	%
Cost of sales		38,373	64	%		34,051		81	%		38,153		127	%

Gross margin		21,187	36	%		8,133		19	%		(8,209	)	(27	)%

Research and development		4,554	8	%		3,719		9	%		3,884		13	%
Selling, general and administrative		11,984	20	%		10,033		24	%		11,521		38	%
Restructuring charges		—	0	%		(193	)	(0	)%		4,155		14	%
Other expense, net		1,077	2	%		1,065		3	%		836		3	%


			Payments due by period (in thousands)
	Total		1 year		2-3 years		4-5 years		More than 5 years
Long-term debt obligations (1)	$	7,204	$	2,546	$	2,641	$	2,017	$	—
Capital lease obligations		48		22		26		—		—
Operating lease obligations		839		548		291		—		—
Purchase obligations		1,319		1,098		177		44		—

Total	$	9,410	$	4,214	$	3,135	$	2,061	$	—


		Page Number
Financial Statements:

Report of Grant Thornton LLP, Independent Registered Public Accounting Firm		13

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm		14

Balance Sheets as of March 31, 2004 and March 31, 2003		15

Statements of Operations for years ended March 31, 2004, 2003 and 2002		16

Statements of Shareholders’ Equity for years ended March 31, 2004, 2003 and 2002		17

Statements of Cash Flows for years ended March 31, 2004, 2003 and 2002		18

Notes to Financial Statements		19

Financial Statement Schedule:

Schedule II, Valuation and Qualifying Accounts		40


	March 31,
	2004			2003
ASSETS:
Current assets:
Cash and cash equivalents	$	20,325		$	4,513
Accounts receivable, less allowance for doubtful accounts of $76 and $159, respectively		6,134			5,281
Inventories		6,543			3,577
Prepaids and other current assets		911			652

Total current assets		33,913			14,023
Property, plant and equipment, net		6,985			10,087
Restricted cash		—			880
Other long term assets		229			415

Total assets	$	41,127		$	25,405

LIABILITIES & SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	4,705		$	3,195
Accrued liabilities		4,560			2,631
Deferred margin on shipments to distributors		2,459			1,873
Current maturities of long-term debt and capital lease obligations		2,568			1,603

Total current liabilities		14,292			9,302
Long-term debt and capital lease, less current maturities		4,684			8,308
Other long-term liabilities		33			—

Total liabilities		19,009			17,610
Commitments and contingencies
Shareholders’ equity:
Preferred stock—no par value; 10,000,000 shares authorized; none issued and outstanding		—			—
Common stock—no par value; 25,000,000 shares authorized; shares issued and outstanding: 19,788,088 as of March 31, 2004 and 15,881,176 as of March 31, 2003		84,991			74,240
Accumulated deficit		(62,873	)		(66,445	)
Total shareholders’ equity		22,118			7,795

Total liabilities and shareholders’ equity	$	41,127		$	25,405


	Common Stock			Accumulated Deficit			Accumulated Other Comprehensive Income/(Loss)			Total
	Shares	Amount		Accumulated Deficit			Accumulated Other Comprehensive Income/(Loss)			Total
Balance at March 31, 2001	11,460	$	58,509	$	(31,349	)	$	—		$	27,160
Exercise of stock options	262		845		—			—			845
Issuance through employee stock purchase plan of common stock	129		687		—			—			687
Issuance of common stock and warrants in private placement, net of issuance costs	2,000		7,611		—			—			7,611
Stock-based compensation	—		80								80
Components of comprehensive loss:
Net loss	—		—		(28,605	)		—			(28,605	)
Unrealized gain on available-for-sale securities	—		—		—			2			2

Comprehensive loss											(28,603	)

Balance at March 31, 2002	13,851	$	67,732	$	(59,954	)	$	2		$	7,780
Exercise of stock options	387		1,358		—			—			1,358
Issuance through employee stock purchase plan of common stock	124		483		—			—			483
Issuance of common stock and warrants in private placement, net of issuance costs	1,519		4,600		—			—			4,600
Stock-based compensation	—		67								67
Components of comprehensive loss:
Net loss	—		—		(6,491	)		—			(6,491	)
Unrealized loss on available-for-sale securities	—		—		—			(2	)		(2	)

Comprehensive loss											(6,493	)

Balance at March 31, 2003	15,881	$	74,240	$	(66,445	)	$	—		$	7,795
Exercise of stock options	540		2,884		—			—			2,884
Issuance through employee stock purchase plan of common stock	116		286		—			—			286
Issuance of common stock and warrants in private placement, net of issuance costs	2,444		5,162		—			—			5,162
Exercise of common stock warrants	762		2,325		—			—			2,325
Stock-based compensation	45		94		—			—			94
Components of comprehensive loss:
Net income	—		—		3,572			—			3,572

Comprehensive income											3,572

Balance at March 31, 2004	19,788	$	84,991	$	(62,873	)	$	—		$	22,118


Building		40 years
Machinery and equipment		3-7 years
Leasehold improvements		Life of the lease
Furniture and fixtures		7 years


	Options						Purchase Plan
	2004		2003		2002		2004		2003		2002
Expected life years	3.48		3.89		3.77		0.41		0.49		0.43
Volatility	0.97		1.02		1.05		0.74		0.51		0.86
Risk-free interest rate	2.64	%	3.02	%	4.21	%	1.51	%	1.82	%	2.91	%
Dividend yield	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%


	Year Ended March 31, 2002								Year Ended March 31, 2003
	Total Charge		Non-cash Charges		Cash Payments		Restructuring Liability at March 31, 2002		Cash Payments			Reversal of Amounts Related to Restructuring			Restructuring Liability at March 31, 2003
Workforce reduction	$	438	$	—	$	—	$	438	$	(332	)	$	(106	)	$	—
Impairment of equipment		3,395		3,395		—		—		—			—			—
Facilities and other		322		—		49		273		(186	)		(87	)		—

Total	$	4,155	$	3,395	$	49	$	711	$	(518	)	$	(193	)	$	—


	Year Ended March 31, 2004
	Total Charge		Non-cash Charges		Cash Payments		Reversal of Amounts Accrued			Liability at March 31, 2004
Workforce reduction	$	343	$	—	$	173	$	(62	)	$	108
Losses on capital equipment related to sales, write-downs and abandonments		534		534		—		—			—

Total	$	877	$	534	$	173	$	(62	)	$	108


	March 31, 2004		March 31, 2003
Industrial revenue bonds at 10.5%, due through March 2018	$	—	$	6,535
Equipment financing facilities due through September 2005		1,608		2,775
Equipment financing agreement due through March 2005		280		534
Term loan due through January 2009		5,316		—
Capital lease agreements		48		67

		7,252		9,911
Less current maturities		2,568		1,603

	$	4,684	$	8,308


	Year Ended March 31,
	2004				2003				2002
	Amount		% of Total		Amount		% of Total		Amount		% of Total
China	$	13.9	23	%	$	9.2	22	%	$	3.9	13	%
Taiwan		11.5	19	%		7.0	16	%		6.4	22	%
Korea		6.1	10	%		1.7	4	%		0.3	1	%
Japan and other		4.0	7	%		7.0	17	%		5.1	17	%

Total Asia Pacific		35.5	59	%		24.9	59	%		15.7	53	%

United States		21.1	36	%		14.1	33	%		12.1	40	%
Brazil and Canada		0.7	1	%		1.1	3	%		—	0	%

Total Americas		21.8	37	%		15.2	36	%		12.1	40	%

Europe		2.3	4	%		2.1	5	%		2.1	7	%

Total net sales	$	59.6	100	%	$	42.2	100	%	$	29.9	100	%


	March 31,
	2004				2003
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Long-term debt obligations	$	7,252	$	7,255	$	9,911	$	9,422


	Principal		Interest		Total
2005	$	2,568	$	443	$	3,011
2006		1,560		278		1,838
2007		1,107		190		1,297
2008		1,100		110		1,210
2009		917		30		947

	$	7,252	$	1,051	$	8,303


2005	$	548
2006		282
2007		9

	$	839


	Shareholder Approved Plans				Non-Shareholder Approved Plan				All Plans
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Balance at March 31, 2001	2,056		$	7.56	—		$	—	2,056		$	7.56
Granted	730			6.87	650			5.86	1,380			6.40
Exercised	(252	)		3.36	—			—	(252	)		3.36
Canceled	(394	)		11.40	—			—	(394	)		11.40

Balance at March 31, 2002	2,140			7.11	650			5.86	2,790			6.82
Granted	761			5.31	—			—	761			5.31
Exercised	(387	)		3.51	—			—	(387	)		3.51
Canceled	(222	)		8.71	—			—	(222	)		8.71

Balance at March 31, 2003	2,292			6.97	650			5.86	2,942			6.73
Granted	968			3.90	125			2.90	1,093			3.79
Exercised	(440	)		5.10	(100	)		6.40	(540	)		5.34
Canceled	(435	)		7.54	(100	)		5.02	(535	)		7.07

Balance at March 31, 2004	2,385		$	5.96	575		$	5.27	2,960		$	5.83


	Options Outstanding				Options Exercisable
Range of Exercises Prices	Number Outstanding (thousands)	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable (thousands)	Weighted Average Exercise Price
$2.75 - $2.88	295	7.90	$	2.78	70	$	2.83
$2.90 - $2.90	409	9.26	$	2.90	—		—
$2.97 - $3.42	335	8.17	$	3.37	70	$	3.18
$3.47 - $5.06	429	8.03	$	4.66	191	$	4.49
$5.09 - $5.88	106	6.99	$	5.35	54	$	5.49
$6.40 - $6.40	350	7.04	$	6.40	209	$	6.40
$6.44 - $6.84	390	7.36	$	6.69	235	$	6.64
$7.00 - $8.05	322	7.83	$	7.60	144	$	7.79
$8.19 - $22.50	283	5.60	$	11.77	221	$	12.78
$22.56 - $22.56	41	6.35	$	22.56	19	$	22.56

$2.75 - $22.56	2,960	7.68	$	5.83	1,213	$	7.05


	For the Three Months Ended
	March 31, 2004		December 31, 2003			September 30, 2003			June 30, 2003			March 31, 2003			December 31, 2002			September 30, 2002			June 30, 2002
	(in thousands, except per share data)
Net sales	$	15,837	$	16,957		$	14,857		$	11,909		$	10,771		$	11,284		$	10,761		$	9,368
Cost of sales	$	9,301	$	9,789	(4)	$	10,065	(3)	$	9,218		$	10,600	(2)	$	7,984		$	9,061		$	6,406

Operating income (loss)	$	2,102	$	2,759	(4)	$	827	(3)	$	(1,039	)	$	(3,263	)(2)	$	118	(1)	$	(1,701	)	$	(580	)
Net income (loss)	$	1,727	$	2,508	(4)	$	619	(3)	$	(1,282	)	$	(3,540	)(2)	$	(164	)	$	(1,966	)	$	(821	)
Net income (loss) per share:
Basic	$	0.09	$	0.13		$	0.04		$	(0.08	)	$	(0.22	)	$	(0.01	)	$	(0.14	)	$	(0.06	)
Diluted	$	0.08	$	0.12		$	0.03		$	(0.08	)	$	(0.22	)	$	(0.01	)	$	(0.14	)	$	(0.06	)


Exhibit Number	Description	Document if Incorporated by Reference
3(i)	Restated Articles of Incorporation, as amended.	Exhibit 4.1 to our Registration Statement on Form S-3 filed on March 17, 2004.

3(ii)	By-laws, as amended.	Exhibit 3(ii) to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 filed on August 14, 2002.

4.1*	1995 Employee Stock Option Plan and 1995 Non-Employee Directors’ Stock Option Plan, both as most recently amended. August 8, 2003 and August 7, 2002, respectively.	Exhibit 4.1 to Registration Statement on Form S-8 filed on September 2, 2003.

4.2*	1995 Employee Stock Purchase Plan, as most recently amended as of August 8, 2003	Exhibit 4.2 to Registration Statement on Form S-8 filed on September 2, 2003.

4.3	Sample Common Stock Certificate of Registrant	Exhibit 4.1 to our Current Report on Form 8-K filed on April 28, 2004.

10.13	Loan Modification Agreement with Silicon Valley Bank dated June 9, 2003	Exhibit 10.11 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 filed on August 14, 2003.

10.14	Loan Modification Agreement with Silicon Valley Bank dated June 26, 2003	Exhibit 10.12 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 filed on August 14, 2003.

10.15	Stock and Warrant Purchase Agreement dated July 28, 2003 between the Company and Investors for July 2003 Private Placement	Exhibit 10.14 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 filed on November 14, 2003.

10.16	Amendment to Placement Agency Agreement dated July 28, 2003 for July 2003 Private Placement	Exhibit 10.15 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 filed on November 14, 2003.

10.17	Amended and Restated Loan and Security Agreement by and between Silicon Valley Bank and California Micro Devices Corporation, dated January 23, 2004	Exhibit 10.17 to our Annual Report on Form 10-K for the year ended March 31, 2004 filed on June 14, 2004.

23.1	Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm**

23.2	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm**

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**


	Allowance for Doubtful Accounts
Year Ended March 31, 2002:
Balance at beginning of fiscal year	$	279
Charged to expenses or other accounts		216
Deductions		(334	)

Balance at end of fiscal year		161

Year Ended March 31, 2003:
Balance at beginning of fiscal year	$	161
Charged to expenses or other accounts		23
Deductions		(25	)

Balance at end of fiscal year	$	159

Year Ended March 31, 2004:
Balance at beginning of fiscal year	$	159
Charged to expenses or other accounts		(61	)
Deductions		(22	)

Balance at end of fiscal year	$	76


/S/ ROBERT V. DICKINSON Robert V. Dickinson		President, Chief Executive Officer and Director (Principal Executive Officer)
/S/ ROBERT V. DICKINSON Robert V. Dickinson

/S/ R. GREGORY MILLER		Vice President Finance & Chief Financial Officer (Principal Financial and Accounting Officer)
R. Gregory Miller

/S/ WADE F. MEYERCORD*		Chairman of the Board
Wade F. Meyercord

/S/ EDWARD C. ROSS*		Director
Edward C. Ross

/S/ JOHN L. SPRAGUE*		Director
John L. Sprague

/s/ DAVID L. WITTROCK*		Director
David L. Wittrock

/s/ DAVID W. SEAR*		Director
David W. Sear