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FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2002
OR

For the transition period from                              to                             .

Commission File No. 0-12695

INTEGRATED DEVICE TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)

Registrant's Telephone Number, Including Area Code: (408) 727-6116

NONE

Former name, former address and former fiscal year (if changed since last report)

        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 ý    No o

        The number of outstanding shares of the registrant's Common Stock, $.001 par value, as of July 23, 2002, was approximately 103,322,400.

PART I    FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)

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

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INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS)

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

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INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)

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

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INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1—Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements of Integrated Device Technology, Inc. (IDT or the Company) contain all normal adjustments which are, in the opinion of management, necessary to present fairly the interim financial information included therein.

        These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended March 31, 2002. The results of operations for the three-month period ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year. Certain prior-period amounts have been reclassified to conform to the current presentation.

Note 2—Loss Per Share

        Loss per share has been computed using weighted-average common shares outstanding in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share."

        Net loss per share for the three month periods ended June 30, 2002 and July 1, 2001 is based only on weighted average shares outstanding. Incremental shares related to the assumed exercise of stock options for the three months ended June 30, 2002 and July 1, 2001 of 3.0 million and 4.0 million, respectively, have been excluded, as their effect would be antidilutive. Total stock options outstanding, including antidilutive options, were 18.6 million and 15.3 million at June 30, 2002 and July 1, 2001, respectively.

Note 3—Recent Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations related to the retirement of tangible long-lived assets and associated asset retirement costs. Adoption of SFAS No. 143 is required during IDT's fiscal 2004. The Company does not expect adoption to have a material impact on its financial position or results of operations.

        On April 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption did not have a significant effect on the Company's financial position and results of operations.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard replaces EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

Note 4—Cash Equivalents and Investments

        Cash equivalents are highly liquid investments with original maturities of three months or less at the time of purchase. All of the Company's investments are classified as available for sale at June 30, 2002 and March 31, 2002. Available-for-sale investments are classified as short-term investments, as these investments generally consist of highly marketable securities that are intended to be available to

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meet current cash requirements. Investment securities classified as available-for-sale are reported at market value, and net unrealized gains or losses are recorded in accumulated comprehensive income, a separate component of stockholders' equity, until realized. Realized gains and losses on non-equity investments are computed based upon specific identification and are included in interest income and other, net. Management evaluates investments on a regular basis to determine if an other-than-temporary impairment has occurred. See Note 14 regarding restricted investments.

Note 5—Inventories, Net

        Inventories (net of reserves of $77.2 million and $84.3 million at June 30, 2002 and March 31, 2002, respectively) are summarized as follows:

Note 6—Business Combination

        On April 18, 2001, the Company acquired Newave Semiconductor Corp. (Newave), a privately held designer and marketer of integrated circuits for the telecommunications market. The Company paid approximately $73.2 million in cash and issued options to purchase approximately 0.47 million shares of IDT stock in exchange for outstanding employee options to acquire Newave stock.

        The Newave combination was accounted for as a purchase. The total purchase price for Newave was $75.5 million, which was comprised of the following:

        Deferred Stock Compensation.    The intrinsic value of the options assumed as part of the Newave transaction and not vested as of the closing date was recorded as deferred compensation to be amortized over the respective vesting periods of the options. A total of $0.5 million and $1.1 million of stock-based compensation expense was recorded in the first quarters of fiscal 2003 and 2002, respectively.

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        The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed based on independent appraisals and management estimates as follows:

        Acquired In-Process Research and Development.    The Company recorded a $16.0 million charge to in-process research and development during the first quarter of fiscal 2002. The amount was determined by identifying research projects which had not yet proven to be technically feasible and did not have alternative future uses. Estimated future expenses were deducted and economic rents charged for the use of other assets. Based on this analysis, a present value calculation of estimated after-tax cash flows attributable to the projects was computed using a discount rate of 30%. Present values were adjusted by factors representing the percentage of completion for each project, which ranged from 24% to 85%.

        Goodwill and Other Intangible Assets.    See Note 7.    

Note 7—Goodwill and Other Intangible Assets

        The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on April 1, 2002 and, in accordance with the standard, ceased to amortize goodwill as of the beginning of fiscal 2003. Goodwill is reviewed annually for impairment (or more frequently if indicators of impairment arise). The Company will complete the transitional impairment assessment required under SFAS No. 142 by the end of fiscal 2003.

        In connection with the adoption of SFAS No. 142, the balance of the in-place workforce intangible, which no longer met the definition of an identifiable intangible asset, was reclassified to goodwill as of April 1, 2002. The amount reclassified was $0.3 million.

        Goodwill and identified intangible assets relate to the Company's acquisition of Newave Semiconductor Corp. in April 2001 (see Note 6) and are allocable in their entirety to the Company's

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Communications and High Performance Logic segment. Balances as of June 30, 2002 and March 31, 2002 are summarized as follows:

        Amortization expense for goodwill and identified intangibles is summarized below:

        The amounts allocated to existing technology are being amortized over an estimated useful life of seven years. Other identified intangibles are being amortized over estimated useful lives of two to seven years. Estimated future amortization expense is $2.8 million for the remaining nine months of fiscal 2003. For fiscal 2004 through 2008, estimated future amortization expense is $3.4 million per year.

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        A reconciliation of the Company's net loss and net loss per share, as reported, to pro forma amounts exclusive of goodwill amortization is as follows:

Note 8—Other Assets

        Included in other assets is an interest-bearing financial instrument in the amount of $30.0 million, which under certain circumstances is either repayable, potentially including a premium, or convertible into preferred shares of a private, technology company. Prior to repayment or conversion, the financial instrument bears interest at a rate of 2.9% per annum.

Note 9—Debt

        In the first quarter of fiscal 2002, the Company repaid the mortgage related to its Salinas, Calif. wafer manufacturing facility. The Company paid approximately $5.7 million, including a 5% prepayment premium, to repay the debt.

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Note 10—Restructuring and Asset Impairment

        During fiscal 2002, the Company recorded approximately $26.0 million in asset impairment and restructuring charges as a result of poor business conditions in the semiconductor industry. Included in these charges were $2.5 million in expenses related to restructuring actions, consisting mainly of reductions in force, which were recorded in the first quarter of fiscal 2002.

        Also in fiscal 2002, the Company announced plans to consolidate its wafer manufacturing operations. Production at the Salinas, Calif. manufacturing facility was phased out during the first quarter of fiscal 2003 and successfully transferred to the Company's Hillsboro, Ore. facility. Approximately 180 Salinas-based positions were eliminated during the first quarter of fiscal 2003 and an additional 80 personnel currently engaged in shutdown and disposal activities are expected to be terminated during the remainder of fiscal 2003.

        Reserve balances related to these actions and charges are summarized in the table below:

        Assets held for sale in the amount of $5.4 million, representing the estimated net realizable value of the Salinas manufacturing assets, are included in prepayments and other current assets as of June 30, 2002. The Company plans to reassess the carrying value of these assets on a quarterly basis until they are sold or otherwise disposed of. Because of fluctuating market conditions for older wafer fabrication facilities and equipment, adjustments in future periods may be necessary.

Note 11—Comprehensive Loss

        The components of comprehensive loss were as follows:

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        The components of accumulated other comprehensive loss were as follows:

Note 12—Derivative Instruments

        As a result of its significant international operations, sales and purchase transactions, the Company is subject to risks associated with fluctuating currency exchange rates. The Company uses derivative financial instruments, principally currency forward contracts, to attempt to minimize the impact of currency exchange rate movements on its operating results and on the cost of capital equipment purchases. The Company does not enter into derivative financial instruments for speculative or trading purposes. The Company's major foreign currency exchange exposures and related hedging programs are described below.

        Forecasted transactions.    The Company uses currency forward contracts to hedge exposures related to forecasted sales denominated in Japanese yen. These contracts are designated as cash flow hedges when the transactions are forecasted and in general closely match the underlying forecasted transactions in duration. The contracts are carried on the balance sheet at fair value and the effective portion of the contracts' gains and losses is recorded as other comprehensive income until the forecasted transaction occurs.

        If the underlying forecasted transactions do not occur, or it becomes probable that they will not occur, the gain or loss on the related cash flow hedge is recognized immediately, in other income. For the first three months of fiscal 2003 and 2002, the Company did not record any gains or losses related to forecasted transactions that did not occur or became improbable.

        The Company measures the effectiveness of hedges of forecasted transactions on at least a quarterly basis by comparing the fair values of the designated currency forward contracts with the fair values of the forecasted transactions. No ineffectiveness was recognized in earnings during the first three months of fiscal 2003 and 2002.

        Firm commitments.    The Company uses currency forward contracts to hedge certain foreign currency purchase commitments, primarily in Japanese yen and the euro. These contracts are designated as fair value hedges, and changes in the fair value of the contracts are offset against changes in the fair value of the commitment being hedged, through earnings. Net gains and losses included in earnings during the first three months of fiscal 2003 and 2002 were not material.

        For firm commitment hedges, the Company excludes the time value of currency forward contracts from effectiveness testing, as permitted under SFAS No. 133. For the first three months of fiscal 2003 and the first three months of fiscal 2002, the time value of these contracts was recorded as other income and was not significant.

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        Balance sheet.    The Company also utilizes currency forward contracts to hedge currency exchange rate fluctuations related to certain foreign currency assets and liabilities. Gains and losses on these undesignated derivatives offset gains and losses on the assets and liabilities being hedged and the net amount is included in earnings. An immaterial amount of net gains and losses were included in earnings during the first three months of fiscal 2003 and 2002.

        Equity investments.    The Company's policies allow for the use of derivative financial instruments to hedge the fair values of investments in publicly traded equity securities. As of June 30, 2002, the Company had not entered into this type of hedge.

Note 13—Industry Segments

        The Company operates in two segments: (1) Communications and High-Performance Logic and (2) SRAMs and Other. The Communications and High-Performance Logic segment includes FIFOs and multi-ports, communications applications-specific standard products (ASSPs) and high-performance logic and clock management devices. The SRAMs and Other segment consists mainly of high-speed SRAMs. IDT evaluates the performance of its segments on the basis of operating results which exclude acquisition-related costs; special items, such as asset impairments and restructuring charges; interest expense; interest income and other; and taxes.

        The tables below provide information about these segments for the three-month periods ended June 30, 2002 and July 1, 2001:

Revenues by segment

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Profit (loss) by segment

Note 14—Subsequent Event

        The Company's wafer fabrication facility in Hillsboro, Ore., is subject to a synthetic, $64 million Tax Ownership Operating Lease which expires in May 2005. Monthly rent payments under the lease vary based on the London Interbank Offering Rate (LIBOR). Under the terms of the transaction, the Company earns interest income, also based on LIBOR, on its 79% purchase interest in the rental stream. The Company is required to maintain a deposit of $50.6 million with the lessor. The Company can, at its option, acquire the leased assets or, at the end of the lease, arrange for them to be acquired by others.

        On July 16, 2002, the Company formally notified the lessor of its intent to terminate the synthetic lease and exercise its option to purchase approximately $64 million in fixed assets.  In anticipation of the lease termination, which is expected to be completed in September 2002, the $50.6 million deposit has been reclassified from long-term other assets to short-term restricted investments as of June 30, 2002.

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

        All references are to our fiscal quarters ended June 30, 2002 (Q1 2003), March 31, 2002 (Q4 2002) and July 1, 2001 (Q1 2002), unless otherwise indicated. Quarterly financial results may not be indicative of the financial results of future periods.

        This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve a number of risks and uncertainties. These include, but are not limited to: operating results; new product introductions and sales; competitive conditions; capital expenditures and resources; manufacturing capacity utilization; customer demand and inventory levels; intellectual property issues; and the risk factors set forth in the section "Factors Affecting Future Results." As a result of these risks and uncertainties, actual results could differ from those anticipated in the forward-looking statements.

        Forward-looking statements, which are generally identified by words such as "anticipate," "expect," "plan," and similar terms, include statements related to revenues and gross profit, research and development activities, selling, general, and administrative expenses, interest expense, interest income and other, taxes, capital spending and financing transactions, as well as statements regarding successful development and market acceptance of new products, industry and overall economic conditions and demand, and capacity utilization.

RESULTS OF OPERATIONS

        Revenues (Q1 2003 compared to Q1 2002).    Our revenues for Q1 2003 were $91.8 million, a decrease of $24.1 million or 21% compared to Q1 2002. In Q1 2003, revenues for our Communications and High Performance Logic segment, which includes FIFOs and multi-ports, communications applications- specific standard products (ASSPs), and high-performance logic and clock management devices, declined by $18.7 million or 19% compared to Q1 2002. Revenues for the SRAMs and Other segment in Q1 2003 declined by $5.4 million or 29% compared to Q1 2002. Unit volumes shipped increased in both segments, but were offset by declines in average selling price (ASP) per unit. For products that we sell where multiple sources exist, such as in our SRAMs and Other segment, the ASP decline significantly exceeded what one would expect to experience in normalized industry conditions.

        Global economic conditions have a direct impact on demand in our customers' markets and broadly weaker economic conditions across multiple industries and geographies affected capital spending trends, to which our customers are sensitive. The trend towards weaker global economic conditions and reduced customer demand worsened during much of fiscal 2002 in all of our sales channels (distributors; contract equipment manufacturers or CEMs; and direct customers, which consist primarily of original equipment manufacturers, or OEMs). Our customers also reacted to changes in end market conditions by taking steps to reduce their finished goods, work-in-process and component inventories. This industry-wide trend decreased demand for our more proprietary products, and led to the declines in ASPs described above for multiple-sourced products, and was the primary reason for the decline in revenues from Q1 2002 to Q1 2003.

        Revenues (Q1 2003 compared to Q4 2002).    Consistent with what we observed to be stabilizing or improving economic and market conditions in early calendar 2002, the levels of unit demand and revenues for our products have improved in recent quarters. In Q1 2003, our revenues grew by 6% over Q4 2002, following an 8% sequential revenue increase from Q3 2002 to Q4 2002. The growth in Q1 2003 was led by products in our Communications and High Performance Logic segment, which grew by $6.6 million or 9% from Q4 2002. Revenues in the SRAMs and Other segment declined by $1.4 million or 10% from Q4 2002. Units shipped grew slightly for each segment compared with Q4 2002.

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        While business conditions have stabilized somewhat, customers continue to delay placing committed purchase orders and to demand that products be delivered on very short lead times, resulting in low levels of backlog. This current lack of order visibility, together with continuing uncertain conditions in the economies, markets, and customers that we serve, make it difficult to predict the rate of future growth in our revenue.

        Gross profit (Q1 2003 compared to Q1 2002).    Gross profit for Q1 2003 was $34.8 million, a decrease of $6.9 million compared to Q1 2002. The decline in gross profit is due primarily to the lower level of revenues in Q1 2003, and hence lower utilization of our fixed manufacturing infrastructure. Gross profit in Q1 2003 was also lower due to higher non-recurring charges, such as retention bonuses related to closing our Salinas manufacturing facility (as described below under Restructuring charges, asset impairment and other). These factors were partially offset by reduced manufacturing spending in Q1 2003, including lower labor costs as a result of two manufacturing headcount reductions that we implemented in Q1 2002 and Q3 2002. Gross profit in Q1 2002 was also affected by $2.3 million in restructuring charges related to these actions. Our gross margin for Q1 2003 was 37.9% compared to 36.0% for Q1 2002.

        Gross profit (Q1 2003 compared to Q4 2002).    Our gross profit increased by $8.2 million in Q1 2003 compared to Q4 2002. The improvement relates primarily to better manufacturing utilization in Q1 2003, as revenues grew but manufacturing spending remained essentially flat; and to lower non-recurring charges in Q1 2003, as $4.0 million in Q4 2002 restructuring charges (primarily severance related to closing the Salinas facility) did not repeat. Reserves related to shipments of SRAM products that had been carried at the lower of cost or market were reversed during the period. This was more than offset by the adverse impact during Q1 2003 of under-absorbed manufacturing spending, as our facilities continued to operate at low utilization levels. Our gross margin percentage for Q4 2002 was 30.7%.

        For the remainder of fiscal 2003, we expect that while the closure of our Salinas manufacturing facility will have a positive impact on gross margin percentage in Q2 2003, further significant improvement in quarterly gross margin percentage will remain primarily dependent on whether business conditions continue to improve and support sequential revenue growth.

        Restructuring charges, asset impairment and other.    We recorded $26.0 million in asset impairment and restructuring charges during fiscal 2002, primarily because of poor business conditions in the semiconductor industry. Of this amount, $24.7 million was recorded as cost of goods sold; the remainder, as operating expenses. In the first and third quarters of fiscal 2002, we recorded $4.6 million in expenses related to restructuring actions, consisting mainly of worldwide reductions in force in our manufacturing and administrative organizations. Such expenses in the first quarter of fiscal 2002 were recorded as cost of goods sold ($2.3 million) and operating expenses ($0.2 million).

        During fiscal 2002, we performed impairment reviews of our manufacturing facilities. Principally because of the age and limited capability of the facility to produce technologically competitive products going forward, we determined that future undiscounted cash flows related to our older wafer fabrication facility located in Salinas would not be sufficient to recover the carrying values of the assets in that facility. We accordingly wrote down the assets to their fair values on the basis of appraisals and management estimates, resulting in a charge of $17.4 million in the third quarter of fiscal 2002.

        In the fourth quarter of fiscal 2002, we recorded a charge of $4.0 million in restructuring expenses, primarily related to severance and other termination benefits, in connection with our plan to consolidate our wafer fabrication manufacturing operations. We phased out production at the Salinas facility and completed the transfer of production to our Hillsboro, Ore., facility in Q1 2003.

        In addition to expenses specifically identified as asset impairment and restructuring charges, we have incurred other Salinas-related expenses, mainly for retention bonuses. These expenses totaled

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$3.8 million and $3.2 million in Q1 2003 and Q4 2002, respectively. We expect to incur additional costs of approximately $4-5 million associated with closure of the facility, most of which will be recorded during the remainder of fiscal 2003. We expect to reduce wafer manufacturing costs by approximately $6 to $8 million per quarter as a result of this facility consolidation, beginning in Q2 2003.

        Research and development.    For Q1 2003, research and development (R&D) expenses totaled $30.2 million, a decrease of $1.7 million and $2.8 million compared to Q4 2002 and Q1 2002, respectively.

        The decrease from Q4 2002 was driven primarily by lower allocations of manufacturing costs to R&D activities (including the cessation of R&D activities at the Salinas manufacturing facility), and by lower deferred compensation expenses related to our Newave acquisition. Lower allocations of manufacturing costs to R&D activities and lower product tooling costs (particularly for photomasks) contributed to the $2.8 million decrease from Q1 2002 to Q1 2003.

        We expect R&D spending to be flat or slightly higher in Q2 2003 compared with Q1 2003.

        Selling, general and administrative.    In Q1 2003, selling, general and administrative (SG&A) expenses were $20.4 million, a decrease of $3.5 million compared to Q1 2002 and an increase of $1.7 million compared to Q4 2002.

        The increase from Q4 2002 reflects higher spending on outside professional services, and on severance related to small headcount reductions in certain SG&A departments. These increases were partially offset by lower commission expenses to outside sales representatives under a new commission plan that was implemented in Q1 2003. Q4 2002 also benefitted from annual adjustments to amounts owed to distributors under cooperative advertising programs.

        The $3.5 million decrease from Q1 2002 to Q1 2003 reflects the results of our implementation of controls on discretionary spending across the Company, reductions in force completed in October 2001, and lower revenue-based commissions to outside sales representatives.

        We expect SG&A spending to be flat or increase very slightly in Q2 2003 compared with Q1 2003.

        Acquired in-process research and development.    In connection with our acquisition of Newave, we recorded a $16.0 million charge for acquired in-process research and development (IPR&D) in Q1 2002. The allocation of the purchase price to IPR&D was determined by identifying technologies that had not attained technological feasibility and that did not have future alternative uses.

        Amortization of intangibles.    During fiscal 2002, goodwill related to the Newave transaction was amortized to expenses in accordance with an estimated useful life of seven years using the straight-line method. Goodwill amortization expense was $1.5 million in Q1 2002. Other identified intangibles were amortized over estimated useful lives of two to seven years, also using the straight-line method.

        As a result of our adoption of Statement of Financial Accounting Standards (SFAS) No. 142, we ceased to amortize goodwill effective April 1, 2002. As a result, we expect quarterly amortization expense during fiscal 2003 to be approximately $1.5 million lower than in fiscal 2002. In connection with the adoption of SFAS No. 142, IDT is required to perform a transitional goodwill impairment assessment by the end of fiscal 2003.

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        Interest income and other, net.    Changes in interest income and other, net are summarized as follows:

        Interest income declined by $0.7 million in Q1 2003 compared to Q4 2002 due to lower invested balances and lower average interest rates on our investment portfolio. From Q1 2002 to Q1 2003, interest income declined by 51%, mostly due to lower average interest rates.

        Provision for taxes.    Due mainly to the decreased effects of non-deductible, merger-related costs, the effective tax rate rose from a benefit of 2.2% in Q1 2002 to a benefit of 25.7% in Q1 2003.

Liquidity and Capital Resources

        Our financial condition remains strong. Our cash, cash equivalents and investments, excluding restricted investments and our shares of PMC, were $614.4 million at June 30, 2002, a decrease of $54.5 million compared to March 31, 2002. Long- and short-term debt, excluding operating leases, was only $13.7 million as of June 30, 2002.

        Net cash provided by operating activities was $9.2 million in Q1 2003, compared to a use of $5.0 million in Q1 2002. During Q1 2002, the cash generated through a significant reduction in the level of accounts receivable was offset by uses of cash related to lower accounts payable balances; decreased deferred income on shipments to distributors, due to lower levels of distributor channel inventory; and decreased accrued compensation, due to payouts of profit dependent personnel expenses accrued in fiscal 2001 and paid in fiscal 2002.

        Investing activities provided $3.0 million in Q1 2003. Periodically, we make investments in third-party companies, principally for strategic technology related reasons. In Q1 2003, we invested $30.0 million in an interest bearing financial instrument which in certain circumstances is either repayable or convertible into preferred shares of a privately held technology related company. This investment largely offset net proceeds of $40.6 million from sales and maturities of marketable securities during Q1 2003. We used $171.7 million for investing activities in Q1 2002, including $89.1 million related to net purchases of marketable securities and $74.2 million for the Newave acquisition.

        We used $27.6 million for financing activities in Q1 2003, compared to $20.1 million in Q1 2002. Significant financing activities in Q1 2003 and Q1 2002 included repurchases of common stock ($29.8 million and $19.0 million, respectively).

        We anticipate new capital expenditures of approximately $65-$70 million during fiscal 2003, depending upon business conditions, to be financed primarily through cash generated from operations and existing cash and investments. This estimate includes $7.8 million in capital expenditures during Q1 2003. In addition, we intend to terminate the synthetic lease related to our Hillsboro, Ore., manufacturing site and have notified the lessor of our plans to do so by September 2002. We expect to exercise our option to purchase approximately $64 million in additional fixed assets, with most of the purchase price (approximately $50 million) funded by amounts already pledged to collateralize the lease, and the balance (approximately $14 million) funded by existing cash and investments.

        We believe that existing cash and investment balances, together with cash flows from operations, will be sufficient to meet our working capital and capital expenditure needs through the remainder of fiscal 2003 and 2004. We may investigate other financing alternatives; however, we cannot be certain that additional financing will be available on satisfactory terms.

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FACTORS AFFECTING FUTURE RESULTS

        Our operating results can fluctuate dramatically.    For example, we had net income of $415.2 million and $130.6 million for fiscal 2001 and 2000, respectively, compared to a net loss of $46.2 million for fiscal 2002. Fluctuations in operating results can result from a wide variety of factors, including:

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timing of new product and process technology announcements and introductions from us or our competitors;



•

competitive pricing pressures, particularly in the SRAM market;



•

fluctuations in manufacturing yields;



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changes in the mix of products sold;



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availability and costs of raw materials, and of foundry and other manufacturing services;



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the cyclical nature of the semiconductor industry and industry-wide wafer processing capacity;



•

political and economic conditions in various geographic areas;



•

changes in demand for our products in the markets we serve; and



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costs associated with other events, such as underutilization or expansion of production capacity, intellectual property disputes, or other litigation.

        In addition, many of these factors also impact the recoverability of the cost of manufacturing, tax, goodwill and other intangibles and other assets. As business conditions change, future writedowns or abandonment of these assets may occur. Further, we may be unable to compete successfully in the future against existing or potential competitors, and our operating results could be harmed by increased competition. Our operating results are also impacted by changes in overall economic conditions, both domestically and abroad. Should economic conditions deteriorate, domestically or overseas, our sales and business results could be harmed.

        The cyclicality of the semiconductor industry exacerbates the volatility of our operating results.    The semiconductor industry is highly cyclical. Market conditions characterized by excess supply relative to demand and resultant pricing declines have occurred in the past and may occur in the future. Such pricing declines adversely affect our operating results and force us and our competitors to modify capacity expansion programs. As an example, in prior years, a significant increase in manufacturing capacity allocated to industry standard SRAM components caused significant downward trends in pricing, which adversely affected our gross margins and operating results. We are unable to accurately estimate the amount of worldwide production capacity dedicated to or planned for the industry-standard products, such as SRAM, that we produce. Our operating results can be adversely affected by such factors in the semiconductor industry as: a material increase in industry-wide production capacity; a shift in industry capacity toward products competitive with our products; and reduced demand or other factors that may result in material declines in product pricing.

        Although we are continuing to try to reduce our dependence on revenues derived from the sale of industry-standard products, and while we carefully manage costs, these efforts may not be sufficient to offset the adverse effect the above or other industry related factors can have on our results.

        Demand for our products depends on demand in the communications, and to a lesser extent, computer markets.    The majority of our products are incorporated into customers' systems in enterprise/carrier class network, wireless infrastructure and access network applications. A percentage of our products, including high-performance logic components, serve in customers' computer storage, computer-related, and other applications. Customer applications for our products have historically been characterized by rapid technological change and significant fluctuations in demand. Demand for most of our products, and therefore potential increases in revenue, depends upon growth in the communications market,

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particularly in the data networking and wireless telecommunications infrastructure markets and, to a lesser extent, the computer-related markets. Any slowdown in these communications or computer- related markets could materially adversely affect our operating results. In addition, when all channels of distribution are considered, one customer in the communications market, Cisco Systems, Inc., represents more than 10% of our total revenues.

        Our product manufacturing operations are complex and subject to interruption.    From time to time, we have experienced production difficulties, including reduced manufacturing yields or products that do not meet our or our customers' specifications, that have caused delivery delays and quality problems. While production delivery delays have been infrequent and generally short in duration, we could experience manufacturing problems, capacity constraints and/or product delivery delays in the future as a result of, among other things, complexity of manufacturing processes, changes to our process technologies (including transfers to other facilities and die size reduction efforts), and ramping production and installing new equipment at our facilities.

        Substantially all of our revenues are derived from products manufactured at facilities which are exposed to the risk of natural disasters. We have a wafer fabrication facility in Hillsboro, Ore., and assembly and test facilities in the Philippines and Malaysia. If we were unable to use our facilities, as a result of a natural disaster or otherwise, our operations would be materially adversely affected until we were able to obtain other production capability. We do not carry earthquake insurance on our California facilities or with respect to our business operations, as we do not believe that adequate protection is available at economically justifiable rates.

        We are dependent upon electric power generated by public utilities where we operate our manufacturing facilities. We have periodically experienced electrical power interruptions in the Philippines and California because utilities in these geographies have failed to provide an adequate power infrastructure. We maintain limited backup generating capability, but the amount of electric power that we can generate on our own is insufficient to fully operate these facilities and prolonged power interruptions, particularly at our manufacturing locations, could have a significant adverse impact on our business.

        Historically, we have utilized subcontractors for the majority of our incremental assembly requirements, typically at higher costs than at our own Malaysian and Philippines assembly and test operations. We expect to continue utilizing subcontractors to supplement our own production volume capacity. Due to production lead times and potential subcontractor capacity constraints, any failure on our part to adequately forecast the mix of product demand could adversely affect our operating results.

        Our results are dependent on the success of new products.    New products and process technology associated with the Hillsboro fabrication facility will continue to require significant R&D expenditures. If we are unable to develop new products in a timely manner, and to sell them at gross margins comparable to or better than our current products, our future results of operations could be adversely impacted.

        We are dependent on a limited number of suppliers.    Our manufacturing operations depend upon obtaining adequate raw materials on a timely basis. The number of vendors of certain raw materials, such as silicon wafers, ultra-pure metals and certain chemicals and gases, is very limited. In addition, certain packages used by us require long lead times and are available from only a few suppliers. From time to time, vendors have extended lead times or limited supply to us due to capacity constraints. Our results of operations would be adversely affected if we were unable to obtain adequate supplies of raw materials in a timely manner or if there were significant increases in the costs of raw materials.

        Intellectual property claims could adversely affect our business and operations.    The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights, which have resulted in significant and often protracted and expensive litigation. In recent years, there has been a

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growing trend by companies to resort to litigation to protect their semiconductor technology from unauthorized use by others. We have been involved in patent litigation in the past, which adversely affected our operating results. Although we have obtained patent licenses from certain semiconductor manufacturers, we do not have licenses from a number of semiconductor manufacturers that have broad patent portfolios. Claims alleging infringement of intellectual property rights have been asserted against us and could be asserted against us in the future. These claims could result in our having to discontinue the use of certain processes; cease the manufacture, use and sale of infringing products; incur significant litigation costs and damages; and develop non-infringing technology. We might not be able to obtain such licenses on acceptable terms or to develop non-infringing technology. Further, the failure to renew or renegotiate existing licenses on favorable terms, or the inability to obtain a key license, could adversely affect us.

        International operations add increased volatility to our operating results.    A substantial percentage of our revenues are derived from international sales, as summarized below:

        In addition, our assembly and test facilities in Malaysia and the Philippines incur payroll, facility and other expenses in local currencies. Accordingly, movements in foreign currency exchange rates can impact our cost of goods sold, as well as both pricing and demand for our products. Our offshore manufacturing sites and export sales are also subject to risks associated with foreign operations, including:

•

political instability and acts of war or terrorism, which could disrupt our manufacturing activities;



•

currency controls and fluctuations;



•

changes in local economic conditions; and



•

changes in tax laws, import and export controls, tariffs and freight rates.

        Contract pricing for raw materials used in the fabrication and assembly processes, as well as for subcontract assembly services, can also be impacted by currency exchange rate fluctuations. We also purchase certain semiconductor manufacturing tools, such as photolithography equipment, from overseas vendors. Prices for such tools are typically quoted in foreign currencies and may equate to several million U.S. dollars per unit. Although we seek to mitigate currency risks through the use of hedge instruments, currency exchange rate fluctuations can have a substantial impact on our net U.S.-dollar cost for these tools.

        Global economic and political factors, including terrorism, could harm our business.    Weak economic conditions, terrorist actions, and the effects of ongoing military actions against terrorists could lead to significant business disruptions. If such disruptions result in cancellations of customer orders or a general decrease in corporate spending on information technology, or directly impact our marketing, manufacturing, financial and logistics functions, our results of operations and financial condition could be adversely affected.

        We are subject to a variety of environmental and other regulations related to hazardous materials used in our manufacturing processes.    Any failure by us to control the use or discharge of hazardous materials

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under present or future regulations could subject us to substantial liability or cause our manufacturing operations to be suspended.

        Our common stock has experienced substantial price volatility.    Such volatility may occur in the future, particularly as a result of quarter-to-quarter variations in the actual or anticipated financial results of IDT, other semiconductor companies, or our customers. Announcements by us or by our competitors regarding new product introductions may also lead to volatility. In addition, our stock price can fluctuate due to price and volume fluctuations in the stock market, especially in the technology sector. Stock price volatility may also result from changes in perceptions about the various types of products we manufacture and sell, which employ a variety of semiconductor design technologies and include both proprietary or limited-source products and industry-standard or multiple-source products.

        We are exposed to fluctuations in the market price of our investment in PMC-Sierra, Inc.    We currently hold approximately 338,000 common shares of PMC-Sierra, Inc. (PMC). The PMC stock is highly volatile. The amount of income and cash flow that we ultimately realize from this investment in future periods cannot be determined at this time and may vary materially from the current unrealized amount. We evaluate our investments on a regular basis to determine if an other-than temporary impairment has occurred.

        We may have difficulty integrating acquired companies.    We acquired Newave Semiconductor Corp. (Newave) in fiscal 2002 and may pursue other acquisitions in the future. Failure to successfully integrate acquired companies into our business could adversely affect our results of operations. Integration risks and issues may include, but are not limited to, personnel retention and assimilation, management distraction, technology development, and unexpected costs and liabilities. In addition, we have adopted SFAS No. 142, "Goodwill and Other Intangible Assets," and are required to perform a transitional impairment assessment of Newave-related goodwill during fiscal 2003.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Our interest rate risk relates primarily to our investment portfolio, which consisted of $240.8 million in cash and cash equivalents and $376.6 million in short-term investments as of June 30, 2002. By policy, we limit our exposure to longer-term investments, and a substantial majority of our investment portfolio at the end of fiscal 2002 had maturities of less than two years. As a result of the relatively short duration of our portfolio, a hypothetical 10% move in interest rates would have an insignificant effect on our financial position, results of operations or cash flows. We do not currently use derivative financial instruments in our investment portfolio.

        By policy, we mitigate the credit risk to our investment portfolio through diversification and for, debt securities, adherence to high credit-rating standards.

        We have minimal interest rate risk with respect to debt; our balance sheet at June 30, 2002 includes only $13.7 million in debt. The synthetic lease related to our manufacturing facility in Hillsboro, Ore. has variable, London Interbank Offered Rate (LIBOR)-based payments. However, this lease is collateralized with investment securities that have similar, and thus offsetting, interest rate characteristics.

        We are exposed to foreign currency exchange rate risk as a result of international sales, assets and liabilities of foreign subsidiaries, and capital purchases denominated in foreign currencies. We use derivative financial instruments (primarily forward contracts) to help manage our foreign currency exchange exposures. We do not enter in derivatives for trading purposes. We performed a sensitivity analysis for both fiscal 2002 and the first three months of fiscal 2003 and determined that a 10% change in the value of the U.S. dollar would have an insignificant near-term impact on our financial position, results of operations or cash flows.

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PART II    OTHER INFORMATION

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a)

The following exhibits are filed herewith:

(b)

Reports on Form 8-K:

        No reports were filed on Form 8-K during this quarter.

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SIGNATURES

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

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QuickLinks

PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K