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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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(Mark One)



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



For the Quarter ended December 27, 2003



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to
.



Commission File Number: 0-19299



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Integrated Circuit Systems, Inc.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Pennsylvania                                                   |  | 23-2000174                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



2435 Boulevard of
the Generals

Norristown, Pennsylvania 19403

(Address of principal executive offices)



(610) 630-5300

(Registrants telephone number including area code)



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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 whether the registrant
is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



Yes x No ̈



As of February 6, 2004, there were 72,292,819 shares of Common Stock; $0.01 par value, outstanding.



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INTEGRATED CIRCUIT SYSTEMS, INC.



INDEX



|         |  |                                                                                                                              |  |            
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | -----------
|         |  |                                                                                                                              |  | Page Number
|         |  |                                                                                                                             
|PART I.  |  | FINANCIAL INFORMATION                                                                                                        |  |            
|         |  |                                                                                                                             
|Item 1.  |  | Consolidated Financial Statements:                                                                                           |  |            
|         |  |                                                                                                                             
|         |  | Consolidated Balance Sheets (Unaudited): December 27, 2003 and June 28, 2003                                                 |  | 3          
|         |  |                                                                                                                             
|         |  | Consolidated Statements of Operations (Unaudited): Three Months and Six Months Ended December 27, 2003 and December 28, 2002 |  | 4          
|         |  |                                                                                                                             
|         |  | Consolidated Statements of Cash Flows (Unaudited): Six Months Ended December 27, 2003 and December 28, 2002                  |  | 5          
|         |  |                                                                                                                             
|         |  | Notes to Consolidated Financial Statements                                                                                   |  | 6          
|         |  |                                                                                                                             
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                        |  | 11         
|         |  |                                                                                                                             
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                   |  | 16         
|         |  |                                                                                                                             
|Item 4.  |  | Controls and Procedures                                                                                                      |  | 17         
|         |  |                                                                                                                             
|PART II. |  | OTHER INFORMATION                                                                                                            |  |            
|         |  |                                                                                                                             
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                          |  | 17         
|         |  |                                                                                                                             
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                             |  | 17         



2



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PART I. FINANCIAL INFORMATION



|Item 1. | Consolidated Financial Statements
|------- | ---------------------------------



INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

(Unaudited)



|                                                                                                                                                      |  |              |         |   |              |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                      |  | Dec. 27,2003 |         |   | June 28,2003 |  
|ASSETS                                                                                                                                                |  |              |         |   |              |   |         |  
|Current Assets:                                                                                                                                       |  |              |         |   |              |   |         |  
|Cash and cash equivalents                                                                                                                             |  | $            | 43,981  |   |              | $ | 118,038 |  
|Marketable securities                                                                                                                                 |  |              | 93,735  |   |              |   | 5,000   |  
|Accounts receivable, net                                                                                                                              |  |              | 38,480  |   |              |   | 31,501  |  
|Inventory, net                                                                                                                                        |  |              | 16,277  |   |              |   | 15,822  |  
|Deferred income taxes                                                                                                                                 |  |              | 6,406   |   |              |   | 6,713   |  
|Prepaid income taxes                                                                                                                                  |  |              | 14,962  |   |              |   | 12,212  |  
|Prepaid assets                                                                                                                                        |  |              | 3,565   |   |              |   | 4,842   |  
|Other current assets                                                                                                                                  |  |              | 2,617   |   |              |   | 6,309   |  
|                                                                                                                                                      |  |              |         |   |              |   |         |  
|Total current assets                                                                                                                                  |  |              | 220,023 |   |              |   | 200,437 |  
|                                                                                                                                                      |  |              |         |   |              |   |         |  
|Property and equipment, net                                                                                                                           |  |              | 17,112  |   |              |   | 15,749  |  
|Long term investments                                                                                                                                 |  |              | 36,000  |   |              |   | 32,000  |  
|Intangibles                                                                                                                                           |  |              | 29,033  |   |              |   | 30,245  |  
|Goodwill                                                                                                                                              |  |              | 36,573  |   |              |   | 36,573  |  
|Other assets                                                                                                                                          |  |              | 12      |   |              |   | 144     |  
|                                                                                                                                                      |  |              |         |   |              |   |         |  
|Total assets                                                                                                                                          |  | $            | 338,753 |   |              | $ | 315,148 |  
|                                                                                                                                                      |  |              |         |   |              |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                  |  |              |         |   |              |   |         |  
|Current Liabilities:                                                                                                                                  |  |              |         |   |              |   |         |  
|Current portion of long-term obligation                                                                                                               |  | $            | 90      |   |              | $ | 10,059  |  
|Accounts payable                                                                                                                                      |  |              | 19,706  |   |              |   | 10,836  |  
|Accrued salaries and bonus                                                                                                                            |  |              | 2,457   |   |              |   | 2,302   |  
|Accrued expenses and other current liabilities                                                                                                        |  |              | 5,423   |   |              |   | 8,553   |  
|                                                                                                                                                      |  |              |         |   |              |   |         |  
|Total current liabilities                                                                                                                             |  |              | 27,676  |   |              |   | 31,750  |  
|                                                                                                                                                      |  |              |         |   |              |   |         |  
|Deferred tax and other liabilities                                                                                                                    |  |              | 12,810  |   |              |   | 12,575  |  
|                                                                                                                                                      |  |              |         |   |              |   |         |  
|Total liabilities                                                                                                                                     |  |              | 40,486  |   |              |   | 44,325  |  
|                                                                                                                                                      |  |              |         |   |              |   |         |  
|Commitments and contingencies Shareholders equity:                                                                                                   |  |              |         |   |              |   |         |  
|Preferred Stock, authorized 5,000; none issued                                                                                                        |  |              |        |   |              |   |        |  
|Common stock, $0.01 par, authorized 300,000; Issued and outstanding 72,223 and 71,284 shares, as of December 27, 2003 and June 28, 2003,
respectively |  |              | 722     |   |              |   | 713     |  
|Additional paid in capital                                                                                                                            |  |              | 273,755 |   |              |   | 258,422 |  
|Retained earnings                                                                                                                                     |  |              | 64,558  |   |              |   | 28,625  |  
|Deferred compensation                                                                                                                                 |  |              | (243    | ) |              |   | (731    | )
|Other comprehensive income                                                                                                                            |  |              | 10      |   |              |   | 6       |  
|Treasury stock, at cost, 1,925 and 1,120 shares, as of December 27, 2003 and June 28, 2003, respectively                                              |  |              | (40,535 | ) |              |   | (16,212 | )
|                                                                                                                                                      |  |              |         |   |              |   |         |  
|Total shareholders equity                                                                                                                            |  |              | 298,267 |   |              |   | 270,823 |  
|                                                                                                                                                      |  |              |         |   |              |   |         |  
|Total liabilities and shareholders equity                                                                                                            |  | $            | 338,753 |   |              | $ | 315,148 |  
|                                                                                                                                                      |  |              |         |   |              |   |         |  



See accompanying notes
to consolidated financial statements.



3



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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands)

(Unaudited)



|                                              |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|--------------------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                              |  | Three Months Ended |        |   | Six Months Ended |  
|                                              |  | Dec. 27, 2003      |        |   | Dec. 28, 2002    |   |        | Dec. 27, 2003 |  |   | Dec. 28, 2002 |  
|Revenue:                                      |  | $                  | 69,565 |   |                  | $ | 62,026 |               |  | $ | 134,850       |   |  | $ | 119,815 |  
|Cost and expenses:                            |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Cost of sales                                 |  |                    | 28,107 |   |                  |   | 25,701 |               |  |   | 54,543        |   |  |   | 49,022  |  
|Research and development                      |  |                    | 10,014 |   |                  |   | 8,803  |               |  |   | 19,322        |   |  |   | 17,021  |  
|Selling, general and administrative           |  |                    | 9,638  |   |                  |   | 9,291  |               |  |   | 19,428        |   |  |   | 19,542  |  
|                                              |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Operating income                              |  |                    | 21,806 |   |                  |   | 18,231 |               |  |   | 41,557        |   |  |   | 34,230  |  
|Interest and other income                     |  |                    | 461    |   |                  |   | 995    |               |  |   | 1,342         |   |  |   | 1,588   |  
|Interest expense                              |  |                    | (82    | ) |                  |   | (430   | )             |  |   | (218          | ) |  |   | (917    | )
|                                              |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Income before income taxes                    |  |                    | 22,185 |   |                  |   | 18,796 |               |  |   | 42,681        |   |  |   | 34,901  |  
|Income taxes                                  |  |                    | 3,533  |   |                  |   | 2,871  |               |  |   | 6,748         |   |  |   | 5,263   |  
|                                              |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Net income                                    |  | $                  | 18,652 |   |                  | $ | 15,925 |               |  | $ | 35,933        |   |  | $ | 29,638  |  
|                                              |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Basic income per share:                       |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Net income                                    |  | $                  | 0.26   |   |                  | $ | 0.24   |               |  | $ | 0.51          |   |  | $ | 0.44    |  
|Diluted income per share:                     |  |                    |        |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Net income                                    |  | $                  | 0.26   |   |                  | $ | 0.23   |               |  | $ | 0.49          |   |  | $ | 0.42    |  
|Weighted average shares outstanding  basic   |  |                    | 70,422 |   |                  |   | 67,711 |               |  |   | 70,437        |   |  |   | 67,186  |  
|Weighted average shares outstanding  diluted |  |                    | 72,882 |   |                  |   | 70,313 |               |  |   | 73,087        |   |  |   | 69,859  |  



See accompanying notes
to consolidated financial statements.



4



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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                  |  |                  |          |   |               |   |         |  
|--------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------- | - | ------- | -
|                                                                                  |  | Six Months Ended |         
|                                                                                  |  | Dec. 27, 2003    |          |   | Dec. 28, 2002 |  
|Cash flows from operating activities:                                             |  |                  |          |   |               |   |         |  
|Net income                                                                        |  | $                | 35,933   |   |               | $ | 29,638  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                  |          |   |               |   |         |  
|Depreciation and amortization                                                     |  |                  | 4,833    |   |               |   | 4,570   |  
|(Gain) loss on sale of assets                                                     |  |                  | (558     | ) |               |   | (494    | )
|Tax benefit of stock options                                                      |  |                  | 8,258    |   |               |   | 6,464   |  
|Deferred income taxes                                                             |  |                  | 596      |   |               |   | (2,535  | )
|Changes in assets and liabilities:                                                |  |                  |          |   |               |   |         |  
|Accounts receivable                                                               |  |                  | (6,979   | ) |               |   | (109    | )
|Inventory                                                                         |  |                  | (454     | ) |               |   | 3,072   |  
|Other assets, net                                                                 |  |                  | 772      |   |               |   | (297    | )
|Accounts payable, accrued expenses and other current liabilities                  |  |                  | 6,602    |   |               |   | (2,532  | )
|Restructuring costs                                                               |  |                  | (657     | ) |               |   | (915    | )
|Accrued interest expense                                                          |  |                  | (51      | ) |               |   | 328     |  
|Income taxes                                                                      |  |                  | (2,750   | ) |               |   | 686     |  
|                                                                                  |  |                  |          |   |               |   |         |  
|Net cash provided by operating activities                                         |  |                  | 45,545   |   |               |   | 37,876  |  
|                                                                                  |  |                  |          |   |               |   |         |  
|Cash flows from investing activities:                                             |  |                  |          |   |               |   |         |  
|Purchases of marketable securities                                                |  |                  | (124,550 | ) |               |   | (26,000 | )
|Sales/Maturities of marketable securities                                         |  |                  | 32,374   |   |               |   | 25,609  |  
|Capital expenditures                                                              |  |                  | (4,458   | ) |               |   | (1,928  | )
|Other                                                                             |  |                  | 39       |   |               |   | 2,373   |  
|                                                                                  |  |                  |          |   |               |   |         |  
|Net cash provided by (used in) investing activities                               |  |                  | (96,595  | ) |               |   | 54      |  
|                                                                                  |  |                  |          |   |               |   |         |  
|Cash flows from financing activities:                                             |  |                  |          |   |               |   |         |  
|Exercise of stock options                                                         |  |                  | 10,847   |   |               |   | 2,662   |  
|Shares purchased through stock purchase plan                                      |  |                  | 438      |   |               |   | 399     |  
|Purchase of treasury stock                                                        |  |                  | (24,323  | ) |               |   | (2,529  | )
|Repayments of long-term debt                                                      |  |                  | (9,969   | ) |               |   | (15,229 | )
|                                                                                  |  |                  |          |   |               |   |         |  
|Net cash used in financing activities                                             |  |                  | (23,007  | ) |               |   | (14,697 | )
|                                                                                  |  |                  |          |   |               |   |         |  
|Net (decrease) increase in cash and cash equivalents                              |  |                  | (74,057  | ) |               |   | 23,233  |  
|Cash and cash equivalents:                                                        |  |                  |          |   |               |   |         |  
|Beginning of period                                                               |  | $                | 118,038  |   |               | $ | 74,255  |  
|                                                                                  |  |                  |          |   |               |   |         |  
|End of period                                                                     |  | $                | 43,981   |   |               | $ | 97,488  |  
|                                                                                  |  |                  |          |   |               |   |         |  



See accompanying notes
to consolidated financial statements.



5



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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)



(1) INTERIM ACCOUNTING POLICY



The accompanying financial statements have not been audited. In the opinion of our
management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly our financial position at December 27, 2003 and results of operations and cash flows
for the interim periods presented. Certain items have been reclassified to conform to current period presentation.



Certain footnote information has been condensed or omitted from these financial statements. Therefore, these financial statements should be read in conjunction with the
consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended June 28, 2003. Results of operations for the six months ended December 27, 2003 are not necessarily indicative of results to be
expected for the full year.



Per SECs Release No. 33-8040,
Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We state these
accounting policies in Managements Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the consolidated financial statements contained in our Annual Report on Form 10-K for our fiscal year ended June
28, 2003. There were no significant changes to our critical accounting polices during the six months ended December 27, 2003.



Stock Options



We apply the intrinsic-value-based method prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for employee stock options. Our policy is to grant stock options at the
fair market value of the underlying stock at the date of grant. Accordingly, compensation expense is generally recognized only when options are granted with a discounted exercise price. Any resulting compensation expense is recognized ratably over
the associated service period, which is generally the option vesting term.



6



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We have determined pro forma net earnings and earnings per share information as if the fair value method described in
SFAS No. 123, Accounting for Stock Based Compensation, had been applied to employee stock-based compensation. The pro forma effect on net earnings and net earnings per share is as follows for the three-month and six-month periods ending
December 27, 2003 and December 28, 2002 (in thousands, except net income per share):



|                                                                                                                                        |  |                    |        |                  |   |               |  |               |        |  |   |       
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- | - | ------------- |  | ------------- | ------ |  | - | ------
|                                                                                                                                        |  | Three Months Ended |        | Six-Months Ended
|                                                                                                                                        |  | Dec. 27, 2003      |        | Dec. 28, 2002    |   | Dec. 27, 2003 |  | Dec. 28, 2002
|Net income, as reported                                                                                                                 |  | $                  | 18,652 |                  | $ | 15,925        |  | $             | 35,933 |  | $ | 29,638
|Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects                            |  |                    | 244    |                  |   | 244           |  |               | 488    |  |   | 1,294 
|Less: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax
effects |  |                    | 4,415  |                  |   | 3,284         |  |               | 8,830  |  |   | 6,568 
|                                                                                                                                        |  |                    |        |                  |   |               |  |               |        |  |   |       
|Net income, pro forma                                                                                                                   |  | $                  | 14,481 |                  | $ | 12,885        |  | $             | 27,591 |  | $ | 24,364
|Basic earnings per share:                                                                                                               |  |                    |        |                  |   |               |  |               |        |  |   |       
|As reported                                                                                                                             |  | $                  | 0.26   |                  | $ | 0.24          |  | $             | 0.51   |  | $ | 0.44  
|Pro forma                                                                                                                               |  | $                  | 0.21   |                  | $ | 0.19          |  | $             | 0.39   |  | $ | 0.36  
|Diluted earnings per share:                                                                                                             |  |                    |        |                  |   |               |  |               |        |  |   |       
|As reported                                                                                                                             |  | $                  | 0.26   |                  | $ | 0.23          |  | $             | 0.49   |  | $ | 0.42  
|Pro forma                                                                                                                               |  | $                  | 0.20   |                  | $ | 0.18          |  | $             | 0.38   |  | $ | 0.35  



SFAS No. 123 requires the use of
option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting
restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the options expected life and the price volatility of the underlying stock. Because the companys
employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing
models do not necessarily provide a reliable single measure of the fair value of employee stock options.



New Accounting Pronouncements



In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities an Interpretation of ARB No. 51. FIN 46 addresses consolidation by business enterprises of variable interest entities. The FASB then issued FIN
46(R), Consolidation of Variable Interest Entities an Interpretation of ARB No. 51, which replaced FIN 46. Application of FIN 46(R) 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. As of December 27, 2003 we had no investments in variable interest entities.



7



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(2) INVENTORY



Inventory is valued at the lower of cost or market. Cost is determined by the first in, first out (FIFO) method. The components of inventories are as follows (in
thousands):



|                           |  |              |        |   |              |   |        |  
|-------------------------- |  | ------------ | ------ | - | ------------ | - | ------ | -
|                           |  | Dec. 27,2003 |        |   | June 28,2003 |  
|Raw Materials              |  | $            | 6,686  |   |              | $ | 6,972  |  
|Work-in-process            |  |              | 9,396  |   |              |   | 8,761  |  
|Finished parts             |  |              | 8,593  |   |              |   | 8,579  |  
|Less: Obsolescence reserve |  |              | (8,398 | ) |              |   | (8,490 | )
|                           |  |              |        |   |              |   |        |  
|                           |  | $            | 16,277 |   |              | $ | 15,822 |  
|                           |  |              |        |   |              |   |        |  



(3) DEBT



In connection with the acquisition of Micro Networks Corporation in Fiscal 2002, we entered
into a revolving credit and term loan facility dated December 31, 2001, which will terminate December 31, 2004. The facility enables us to draw down $45.0 million under the term loan and $10.0 million under the revolving credit facility. At our
option, the interest rates under the term loan will be either (1) an annual base rate, which is the higher of (i) a rate of interest announced from time to time by the lenders administrative agent as the base rate (Base Rate) or
(ii) the sum of the federal funds rate plus 0.5% per annum or (2) London Interbank Offer Rate (LIBOR) plus 1.75%. At our option, the interest rates under the Revolving Credit Loan, will be either (1) the Base Rate or (2) the LIBOR Rate
plus a pre-formulated margin. During the first three months of fiscal year 2004, we paid down $4.2 million of the term loan. During the second quarter of fiscal 2004, we made the final payment of $5.8 million on our term loan. There is no
outstanding amount on the revolving credit as of December 27, 2003.



Certain of
our loan agreements require the maintenance of specified financial ratios, including a fixed charge coverage ratio, a funded debt to EBITDA ratio and a minimum tangible net worth, and impose financial limitations. At December 27, 2003 we were in
compliance with the covenants.



(4) RESTRUCTURING COST



On January 4, 2002, we acquired MNC, net of cash, for $74.9 million. We believe that by
acquiring MNC we now have access to technology that will broaden our offering of silicon timing products to strengthen our position within strategic markets such as servers, storage systems and communications. The purchase price includes $5.6
million in purchase accounting liabilities. Of the total amount recorded, $1.2 million represents costs associated with closing office and production facilities and employee relocation costs, $2.0 million represents severance and other personnel
costs, and $2.4 million represents the net book value of property and equipment identified for disposal, net of estimated sales proceeds. We expect to complete the restructuring by the end of fiscal year 2004. As of December 27, 2003, we have
expended approximately $0.8 million and $2.0 million of this reserve relating to facility closing costs, severance and personnel costs, respectively. Approximately $29,000 of the remaining amount relates to severance and other personnel costs, which
will be paid in fiscal year 2004, and the remaining relates to facility closing costs. During the second quarter of fiscal 2004 we utilized $0.1 million of the reserve for both severance and facility closing costs. This reserve is included in
Accrued expense and other current liabilities in the Balance Sheet. The results of MNC have been included in the consolidated financial statements since the acquisition date. The roll forward of the restructuring reserve is as follows
(in thousands):



|                             |  |   |       |  
|---------------------------- |  | - | ----- | -
|Balance at June 28, 2003     |  | $ | 1,144 |  
|Utilized:                    |  |   |       |  
|Severance                    |  |   | (400  | )
|Facility closing costs       |  |   | (257  | )
|                             |  |   |       |  
|Balance at December 27, 2003 |  | $ | 487   |  
|                             |  |   |       |  



8



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(5) CAPITAL STOCK



In September 2001, we announced a repurchase program, which authorized the purchase, from time to time, of 2.0 million shares of our common stock on the market. In
October 2002, we announced that our board of directors approved an increase in the number of shares to be repurchased under this repurchase program to 3.0 million. As of December 27, 2003, we had repurchased 1.9 million shares for $40.5 million.



As of December 27, 2003, additional paid in capital increased $15.3 million
from the June 28, 2003 balance as the result of the exercise of stock options, the tax benefit relating to the exercises of non-qualified stock options and the purchase of our stock by employees in our stock purchase plan.



(6) INDUSTRY AND SEGMENT INFORMATION



Factors used in determining the reportable business segments include the nature of operating
activities, existence of separate senior management teams, and the type of information presented to the Companys chief operating decision maker to evaluate all results of operations.



We operate and track our results in one reportable business segment. We design, develop,
manufacture and market silicon timing devices. The nature of our products and production processes as well as distribution methods is consistent among all of our products.



(7) NET INCOME PER SHARE



Basic net income per share is based on the weighted-average number of common shares outstanding excluding contingently issuable or returnable shares that contingently
convert into common stock upon certain events. Diluted net income per share is based on the weighted average number of common shares outstanding and diluted potential common shares outstanding.



The following table set forth the computation of net income (numerator) and shares
(denominator) for earnings per share:



|                                                                      |  |                    |        |                  |   |               |  |               |        |  |   |       
|--------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- | - | ------------- |  | ------------- | ------ |  | - | ------
|                                                                      |  | Three-Months Ended |        | Six-Months Ended
|                                                                      |  | Dec. 27, 2003      |        | Dec. 28, 2002    |   | Dec. 27, 2003 |  | Dec. 28, 2002
|Numerator (in thousands):                                             |  |                    |        |                  |   |               |  |               |        |  |   |       
|Net income                                                            |  | $                  | 18,652 |                  | $ | 15,925        |  | $             | 35,933 |  | $ | 29,638
|                                                                      |  |                    |        |                  |   |               |  |               |        |  |   |       
|Denominator (in thousands):                                           |  |                    |        |                  |   |               |  |               |        |  |   |       
|Weighted average shares outstanding used for basic income per share   |  |                    | 70,422 |                  |   | 67,711        |  |               | 70,437 |  |   | 67,186
|Common stock equivalents                                              |  |                    | 2,460  |                  |   | 2,602         |  |               | 2,650  |  |   | 2,673 
|                                                                      |  |                    |        |                  |   |               |  |               |        |  |   |       
|Weighted average shares outstanding used for diluted income per share |  |                    | 72,882 |                  |   | 70,313        |  |               | 73,087 |  |   | 69,859
|                                                                      |  |                    |        |                  |   |               |  |               |        |  |   |       



9



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(8) COMPREHENSIVE INCOME



Total comprehensive income represents net income plus the results of certain equity changes not reflected in the condensed consolidated statements of operations. The
components of accumulated other comprehensive income are shown below.



|                             |  |                    |        |                  |   |               |  |               |        |  |   |       
|---------------------------- |  | ------------------ | ------ | ---------------- | - | ------------- |  | ------------- | ------ |  | - | ------
|                             |  | Three Months Ended |        | Six Months Ended
|                             |  | Dec. 27, 2003      |        | Dec. 28, 2002    |   | Dec. 27, 2003 |  | Dec. 28, 2002
|Net income                   |  | $                  | 18,652 |                  | $ | 15,925        |  | $             | 35,933 |  | $ | 29,638
|                             |  |                    |        |                  |   |               |  |               |        |  |   |       
|Other comprehensive income:  |  |                    |        |                  |   |               |  |               |        |  |   |       
|Foreign currency translation |  |                    | 4      |                  |   |              |  |               | 4      |  |   |      
|                             |  |                    |        |                  |   |               |  |               |        |  |   |       
|Total comprehensive income   |  | $                  | 18,656 |                  | $ | 15,925        |  | $             | 35,937 |  | $ | 29,638
|                             |  |                    |        |                  |   |               |  |               |        |  |   |       



(9) INCOME TAX



Our effective income tax rate was 15.8% for the first six months of fiscal year 2004 as
compared to 15.1% in the prior year period. The effective tax rate for fiscal years 2004 and 2003 reflects the tax-exempt status of our Singapore operation, which has been given pioneer status, or exemption of taxes on non-passive income, for five
years as stated in our agreement with the Economic Development Board of Singapore. The five-year period ends December 31, 2007. We do not currently calculate deferred taxes on our investment in our Singapore operations, as all undistributed earnings
are permanently reinvested back into the Singapore facility. If we were to record deferred taxes on our investment, the amount would be a liability of approximately $59.3 million as of December 27, 2003.



(10) LEGAL PROCEEDINGS



From time to time, various inquiries, potential claims and charges and litigation are made, asserted or commenced by or against us,
principally arising from or related to contractual relations and possible patent infringement. We believe that any of these claims currently pending, individually and in the aggregate, have been adequately reserved and will not have any material
adverse effect on our consolidated financial position or results of operations.



(11) CUSTOMERS



In fiscal year 2001, we entered into an
Investment and Stock Trade Agreement (the Agreement) with Maxtek Technology Co. Ltd. (Maxtek), a distributor in Taiwan. We invested in approximately 10% of Maxtek, or 4.0 million shares, at $4.0 million. The Agreement states
that if Maxtek fails to successfully complete a public offering by December 5, 2005, we, at our sole option, have the right to demand immediate repurchase of all 4.0 million shares, at the original purchase price plus accrued annual interest
(commercial rate set by the Central Bank of China) during the said period.



From December 2002 through August 2003 we sold 3.0 million shares or 75% of our ownership of Maxtek for a total gain of $0.9 million during this period. During the first quarter of fiscal 2004, Maxtek declared a stock dividend. As a result
of this dividend, our ownership is 1.3 million shares or approximately 2.5% of Maxtek.



Maxtek, our distributor for our PC business in Taiwan, represented approximately 22% of our sales for the first six months of fiscal year 2004, and 20% in the prior year period. Additionally, sales to Lacewood International Corp, formerly
known as Maxtech Corporation Limited, an entity that is commonly controlled by the owners of Maxtek representing business in Hong Kong and China, were approximately 17% of our sales for the first six months of fiscal year 2004, and 20% in the
prior year period.



10



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



Forward-Looking Statements



Except for the historical statements and discussions contained herein, statements contained
in this Report on Form 10-Q constitute 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, such as when we describe what we believe, expect or
anticipate will occur, and other similar statements. You must remember that our expectations may not be correct. While we believe these expectations and projections are reasonable, such forward-looking statements are inherently subject to risks,
uncertainties and assumptions about us, including, among other things:



| |  | Our dependence on continuous introduction of new products based on the latest technology
| | - | ----------------------------------------------------------------------------------------



| |  | The intensely competitive semiconductor and personal computer component industries
| | - | ----------------------------------------------------------------------------------



| |  | Our dependence on the personal computer industry and third-party silicon wafer fabricators and assemblers of semiconductors
| | - | ---------------------------------------------------------------------------------------------------------------------------



| |  | Risks associated with international business activities and acquisitions and integration of acquired companies or product lines
| | - | -------------------------------------------------------------------------------------------------------------------------------



| |  | Our dependence on proprietary information and technology and on key personnel
| | - | -----------------------------------------------------------------------------



| |  | Our product liability exposure and the potential unavailability of insurance
| | - | ----------------------------------------------------------------------------



| |  | General economic conditions, including economic conditions related to the semiconductor and personal computer industries
| | - | ------------------------------------------------------------------------------------------------------------------------



We do not guarantee that the transactions and events described in this Form 10-Q will happen
as described or that they will happen at all. You should read this Form 10-Q completely and with the understanding that actual future results may be materially different from what we expect. We disclaim any intention or obligation to update these
forward-looking statements, even though our situation will change in the future.



Results of Operations



The following table sets forth,
for the periods indicated, the percentage relationship to revenue of certain cost, expense and income items. The table and the subsequent discussion should be read in conjunction with the financial statements and the notes thereto:



|                                    |  |                    |   |  |                  |   |  |              |   |  |              |  
|----------------------------------- |  | ------------------ | - |  | ---------------- | - |  | ------------ | - |  | ------------ | -
|                                    |  | Three-Months Ended |   |  | Six-Months Ended |  
|                                    |  | Dec. 27,2003       |   |  | Dec. 28,2002     |   |  | Dec. 27,2003 |   |  | Dec. 28,2002 |  
|Revenues                            |  | 100.0              | % |  | 100.0            | % |  | 100.0        | % |  | 100.0        | %
|Gross margin                        |  | 59.6               |   |  | 58.6             |   |  | 59.6         |   |  | 59.1         |  
|Research and development            |  | 14.4               |   |  | 14.2             |   |  | 14.4         |   |  | 14.2         |  
|Selling, general and administrative |  | 13.9               |   |  | 15.0             |   |  | 14.4         |   |  | 16.3         |  
|                                    |  |                    |   |  |                  |   |  |              |   |  |              |  
|Operating income                    |  | 31.3               |   |  | 29.4             |   |  | 30.8         |   |  | 28.6         |  
|                                    |  |                    |   |  |                  |   |  |              |   |  |              |  
|Interest and other income           |  | 0.7                |   |  | 1.6              |   |  | 1.0          |   |  | 1.3          |  
|Interest expense                    |  | (0.1               | ) |  | (0.7             | ) |  | (0.2         | ) |  | (0.8         | )
|                                    |  |                    |   |  |                  |   |  |              |   |  |              |  
|Income before income taxes          |  | 31.9               |   |  | 30.3             |   |  | 31.6         |   |  | 29.1         |  
|Income taxes                        |  | 5.1                |   |  | 4.6              |   |  | 5.0          |   |  | 4.4          |  
|                                    |  |                    |   |  |                  |   |  |              |   |  |              |  
|Net income                          |  | 26.8               | % |  | 25.7             | % |  | 26.6         | % |  | 24.7         | %
|                                    |  |                    |   |  |                  |   |  |              |   |  |              |  



11



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SECOND QUARTER FISCAL YEAR 2004 AS COMPARED TO SECOND QUARTER FISCAL YEAR 2003



Revenue. Revenue was $69.6 million for the second quarter ended December 27, 2003, an
increase of $7.5 million from the prior year quarter. The increase is attributable to the ramp up for Double Data Rate (DDR) registered memory modules and increased demand in notebooks and communications products. Our average selling
price for our products declined 10.1%, while the volume increased 24.8%.



Foreign revenue, which includes shipments of products to foreign companies as well as offshore subsidiaries of US multinational companies, was 78.0% of total revenue for the second quarter of fiscal year 2004 as compared to 74.5% of total
revenue in the prior year quarter. Our sales are denominated in U.S. dollars, which minimizes foreign currency risk.



Gross Margin.Gross margin represents net revenue less cost of sales. Cost of sales was $28.1 million for the quarter ended December 27, 2003, an increase of $2.4
million from the prior year quarter because of higher revenues and favorable product mix. Cost of sales as a percentage of total revenue was 40.4% for the second quarter of fiscal year 2004 as compared to 41.4% in the prior year quarter. Cost of
sales includes: the cost of purchasing the finished silicon wafers manufactured by independent foundries, costs associated with assembly, packaging, testing, quality assurance, product yields and the cost of personnel and equipment associated with
manufacturing support.



Research and Development Expense.Research and
development (R&D) expense was $10.0 million for the second quarter of fiscal year 2004, an increase of $1.2 million from the prior year quarter. This increase is due to the continued investment in technical expertise in engineering.
As a percentage of revenue, R&D increased to 14.4% in the second quarter of fiscal year 2004 as compared to 14.2% in the prior year period.



R&D costs consist primarily of the salaries and related expenses of engineering employees engaged in research, design and development activities, costs related to
design tools, supplies and services and facilities expenses. The level of research and development expenditures as a percentage of net revenues will vary from period to period, depending, in part, on the level of net revenues and, in part, on our
success in recruiting the technical personnel needed for our new product introductions and process development. We continuously attempt to control expense levels in all areas including research and development. However, we continue to make
substantial investments in research and development to enhance our product offerings, which in turn are critical to our future growth.



Selling, General, Administrative and Other.Selling, general, administrative and other expense (SG&A) was $9.6 million for the second quarter of
fiscal year 2004, an increase of $0.3 million from the prior year quarter. As a percentage of total revenue, SG&A expenses decreased to 13.9% in the second quarter of fiscal year 2004 as compared to 15.0% in the prior year quarter. The
percentage decrease is attributable to the increase in revenue from the prior year period. SG&A expenses consist mainly of salaries and related expenses, sales commissions, professional and legal fees, facilities expenses, depreciation and
amortization of intangibles.



Operating Income.In dollar terms,
operating income was $21.8 million in the second quarter of fiscal year 2004 compared to $18.2 million in the second quarter of fiscal year 2003. Expressed as a percentage of revenue, operating income was 31.3% and 29.4% in the first quarter of
fiscal year 2004 and the prior year quarter, respectively.



Interest
Expense.Interest expense was $0.1 million in the second quarter of fiscal year 2004 and $0.4 million in the second quarter of fiscal year 2003. This decrease is due to lower debt balances.



Interest and Other Income.Interest and other income was $0.5 million for the quarter
ended December 27, 2003 and $1.0 million in the prior year quarter as interest rates have declined over the past year.



12



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Income Tax Expense.Our effective income tax rate was 15.9% for the second quarter of fiscal year 2004 as compared
to 15.3% in the prior year period. The effective tax rate for fiscal years 2004 and 2003 reflects the tax-exempt status of our Singapore operation, which has been given pioneer status, or exemption of taxes on non-passive income, for five years as
stated in our agreement with the Economic Development Board of Singapore. The five-year period ends December 31, 2007. The increase in overall tax rate was directly attributable to increased income in our USA locations relative to our total
operations. We do not currently calculate deferred taxes on our investment in our Singapore operations, as all undistributed earnings are permanently reinvested back into the Singapore facility. If we were to record deferred taxes on our investment,
the amount would be a $59.3 million liability as of December 27, 2003.



SIX
MONTHS ENDED DECEMBER 27, 2003 AS COMPARED TO SIX MONTHS ENDED DECEMBER 28, 2002



Revenue. Revenue was $134.9 million for the first half of fiscal year 2004, an increase of $15.0 million from the corresponding prior year period. The increase is attributable to the ramp up for Double Data Rate (DDR)
registered memory modules and increased demand in notebooks and communications products. Our average selling price for our products declined 12.5%, while the volume increased 28.7%.



Foreign revenue, which includes shipments of products to foreign companies as well as offshore subsidiaries of US multinational companies,
was 76.4% of total revenue for the first six months of fiscal year 2004 as compared to 75.5% of total revenue in the prior year period. Our sales are denominated in U.S. dollars, which minimizes foreign currency risk.



Gross Margin.Gross margin represents net revenue less cost of sales. Cost of sales
was $54.5 million for the first half of fiscal year 2004, an increase of $5.5 million from the prior year period because of higher revenues and favorable product mix. Cost of sales as a percentage of total revenue was 40.4% for the first half of
fiscal year 2004 as compared to 40.9% in the prior year period. Cost of sales includes: the cost of purchasing the finished silicon wafers manufactured by independent foundries, costs associated with assembly, packaging, testing, quality assurance,
product yields and the cost of personnel and equipment associated with manufacturing support.



Research and Development Expense.Research and development (R&D) expense was $19.3 million for the first half of fiscal year 2004, an increase of $2.3 million from the prior year period. This
increase is due to the continued investment in technical expertise in engineering. As a percentage of revenue, R&D increased to 14.4% in the first half of fiscal year 2004 as compared to 14.2% in the prior year period.



R&D costs consist primarily of the salaries and related expenses of engineering employees
engaged in research, design and development activities, costs related to design tools, supplies and services and facilities expenses. The level of research and development expenditures as a percentage of net revenues will vary from period to period,
depending, in part, on the level of net revenues and, in part, on our success in recruiting the technical personnel needed for our new product introductions and process development. We continuously attempt to control expense levels in all areas
including research and development. However, we continue to make substantial investments in research and development to enhance our product offerings, which in turn are critical to our future growth.



Selling, General, Administrative and Other.Selling, general, administrative and other
expense (SG&A) was $19.4 million for the first half of fiscal year 2004, a decrease of $0.1 million from the prior year period. As a percentage of total revenue, SG&A expenses decreased to 14.4% in the first half of fiscal year
2004 as compared to 16.3% in the prior year period. The percentage decrease is attributable to the increase in revenue from the prior year period. SG&A expenses consist mainly of salaries and related expenses, sales commissions, professional and
legal fees, facilities expenses and amortization of intangibles.



Operating
Income.In dollar terms, operating income was $41.6 million in the first half of fiscal year 2004 compared to $34.2 million in the prior year period. Expressed as a percentage of revenue, operating income was 30.8% and 28.6% for the first six
months of fiscal year 2004 and the prior year period, respectively.



13



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Interest Expense.Interest expense was $0.2 million in the first half of fiscal year 2004 and $0.9 million in the
prior year period. This decrease is due to lower debt balances.



Interest and Other Income.Interest and other income was $1.3 million for the first half of fiscal year 2004 and $1.6 million in the prior year period. Included in other income for the first six months of both fiscal 2004 and fiscal
2003 is a gain of $0.3 million as a result of the sale of 25% of our investment in Maxtek Technology Co. Ltd in each period.



Income Tax Expense.Our effective income tax rate was 15.8% for the first half of fiscal year 2004 as compared to 15.1% in the prior year period. The effective tax
rate for fiscal years 2004 and 2003 reflects the tax-exempt status of our Singapore operation, which has been given pioneer status, or exemption of taxes on non-passive income, for five years as stated in our agreement with the Economic Development
Board of Singapore. The five-year period ends December 31, 2007. The increase in overall tax rate was directly attributable to increased income in our USA locations relative to our total operations. We do not currently calculate deferred taxes on
our investment in our Singapore operations, as all undistributed earnings are permanently reinvested back into the Singapore facility. If we were to record deferred taxes on our investment, the amount would be a $59.3 million liability as of
December 27, 2003.



INDUSTRY FACTORS



Our strategy has been to develop new products and introduce them ahead of the competition in
order to have them selected for design into products of leading OEMs. Our newer components, which include advanced motherboard FTG components, data communication components and memory components, are examples of this strategy. However, there can be
no assurance that we will continue to be successful in these efforts or that further competitive pressures would not have a material impact on revenue growth or profitability.



We include customer-released orders in our backlog, which may generally be canceled with 45 days advance notice without significant penalty
to the customers. Accordingly, we believe that our backlog, at any time, should not be used as a measure of future revenues.



The semiconductor and personal computer industry, in which we participate, is generally characterized by rapid technological change, intense competitive pressure, and, as
a result, products price erosion. Our operating results can be impacted significantly by the introduction of new products, new manufacturing technologies, rapid changes in the demand for products, decreases in the average selling price over the life
of a product and our dependence on third-party wafer suppliers. Our operating results are subject to quarterly fluctuations as a result of a number of factors, including competitive pressures on selling prices, availability of wafer supply,
fluctuation in yields, changes in the mix of products sold, the timing and success of new product introductions and the scheduling of orders by customers. We believe that our future quarterly operating results may also fluctuate as a result of
Company-specific factors, including pricing pressures on our more mature FTG components, continuing demand for our Application Specific Standard Products, acceptance of our newly introduced components and market acceptance of our customers
products. Due to the effect of these factors on future operations, past performance may be a limited indicator in assessing potential future performance.



LIQUIDITY AND CAPITAL RESOURCES



At December 27, 2003, our principal sources of liquidity included cash and marketable securities of $137.7 million as compared to the June 28, 2003 balance of $123.0
million. Net cash provided by operating activities was $45.5 million in the first six months of fiscal year 2004, as compared to $37.9 million in the prior year period. This increase is primarily attributable to the increase in our profitability.
Our days sales outstanding increased from 47 days at June 28, 2003 to 50 days at December 27, 2003, while our effort on improving our inventory controls and increased sales volume resulted in inventory turns increasing from 5.4 times as of the
quarter ended June 28, 2003 to 6.9 times in the quarter ending December 27, 2003. Accounts Payable increased from June 28, 2003 to December 27, 2003 as AP days increased.



14



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Purchases for property and equipment were $4.5 million in the first six months of fiscal year 2004 as the company
invested in production capacity versus $1.9 million in the prior year period.



Purchases of marketable securities were $124.6 million in the first six months of fiscal year 2004 compared to $26.0 million in the six months ended December 28, 2002. During this period, we invested more funds in the three to six month
range to earn higher yields on our investments.



In fiscal year 2001, we
entered into an Investment and Stock Trade Agreement (the Agreement) with Maxtek, a distributor in Taiwan. We invested in approximately 10% of Maxtek, or 4.0 million shares, at $4.0 million. The Agreement states that if Maxtek fails to
successfully complete a public offering by December 5, 2005, we, at our sole option, have the right to demand immediate repurchase of all 4.0 million shares, at the original purchase price plus accrued annual interest (commercial rate set by the
Central Bank of China) during the said period.



From December 2002 through
August 2003 we sold 3.0 million shares or 75% of our ownership of Maxtek for a total gain of $0.9 million during this period. During the first quarter of fiscal 2004, Maxtek declared a stock dividend. As a result of this dividend, our ownership is
1.3 million shares or approximately 2.5% of Maxtek.



Maxtek, our distributor
for our PC business in Taiwan, represented approximately 22% of our sales for the first six months of fiscal year 2004, and 20% in the prior year period. Additionally, sales to Lacewood International Corp, formerly known as Maxtech Corporation
Limited, an entity that is commonly controlled by the owners of Maxtek representing business in Hong Kong and China, were approximately 17% of our sales for the first six months of fiscal year 2004, and 20% in the prior year period.



During the first six months of fiscal 2004, we received $10.8 million from the
exercise of stock options.



In September 2001, we announced a stock repurchase
program, which authorized the purchase, from time to time, of 2.0 million shares of our common stock on the market. In October 2002, we announced that our board of directors approved an increase in the number of shares to be repurchased under this
repurchase program to 3.0 million. As of December 27, 2003, we had repurchased 1.9 million shares for $40.5 million.



On January 4, 2002, we acquired MNC, net of cash, for $74.9 million. We believe that by acquiring MNC we now have access to technology that will broaden our offering of
silicon timing products to strengthen our position within strategic markets such as servers, storage systems and communications. The purchase price includes $5.6 million in purchase accounting liabilities. Of the total amount recorded, $1.2 million
represents costs associated with closing office and production facilities and employee relocation costs, $2.0 million represents severance and other personnel costs, and $2.4 million represents the net book value of property and equipment identified
for disposal, net of estimated sales proceeds. We expect to complete the restructuring by the end of fiscal year 2004. As of December 27, 2003, we have expended approximately $0.8 million and $2.0 million of this reserve relating to facility closing
costs and severance, respectively. Approximately $29,000 of the remaining amount relates to severance and other personnel costs, which will be paid in fiscal year 2004, and the remaining relates to facility closing costs. During the second quarter
of fiscal 2004 we utilized $0.1 million of the reserve for both severance and facility closing costs. This reserve is included in Accrued expense and other current liabilities in the Balance Sheet. The results of MNC have been included
in the consolidated financial statements since the acquisition date.



In
connection with the acquisition of Micro Networks Corporation in fiscal 2002, we entered into a revolving credit and term loan facility dated December 31, 2001, which will terminate December 31, 2004. The facility enables us to draw down $45.0
million under the term loan and $10.0 million under the revolving credit facility. At our option, the interest rates under the term loan will be either (1) an annual base rate, which is the higher of (i) a rate of interest announced from



15



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time to time by the lenders administrative agent as the base rate (Base Rate) or (ii) the sum of the federal funds rate plus 0.5% per annum
or (2) London Interbank Offer Rate (LIBOR) plus 1.75%. At our option, the interest rates under the Revolving Credit Loan, will be either (1) the Base Rate or (2) the LIBOR Rate plus a pre-formulated margin. During the first three months
of fiscal year 2004, we paid down $4.2 million of the term loan. During the second quarter of fiscal 2004, we made the final payment of $5.8 million on our term loan. There is no outstanding amount on the revolving credit as of December 27, 2003.



The following summarizes our significant contractual obligations and
commitments as of December 27, 2003 (in thousands):



|                        |  |       |        |                  |   |             |  |             |       |               |   |       |  |   |    
|----------------------- |  | ----- | ------ | ---------------- | - | ----------- |  | ----------- | ----- | ------------- | - | ----- |  | - | ---
|Contractual Obligations |  | Total |        | Less than 1 year |   | 1  3 years |  | 4  5 years |       | After 5 years
|Long-Term Debt          |  | $     | 90     |                  | $ | 90          |  | $           |      |               | $ |      |  | $ |   
|Operating Leases        |  |       | 13,717 |                  |   | 1,418       |  |             | 8,062 |               |   | 3,427 |  |   | 810
|                        |  |       |        |                  |   |             |  |             |       |               |   |       |  |   |    
|Total                   |  | $     | 13,807 |                  | $ | 1,508       |  | $           | 8,062 |               | $ | 3,427 |  | $ | 810
|                        |  |       |        |                  |   |             |  |             |       |               |   |       |  |   |    



Operating leases primarily consist of
leased facilities that we utilize in various locations.



Certain of our loan
agreements require the maintenance of specified financial ratios, including a fixed charge coverage ratio, a funded debt to EBITDA ratio and a minimum tangible net worth, and impose financial limitations. At December 27, 2003, we were in compliance
with the covenants.



We believe that the funds on hand together with funds
expected to be generated from our operations as well as borrowings under our bank revolving credit facility will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months.
Thereafter, we may need to raise additional funds in future periods to fund our operations and potential acquisitions if any. We may also consider conducting future equity or debt financings if we perceive an opportunity to access the capital
markets on a favorable basis, within the next twelve months or thereafter. Any such additional financing, if needed, might not be available on reasonable terms or at all. Failure to raise capital when needed could seriously harm our business and
results of operations. If additional funds were raised through the issuance of equity securities or convertible debt securities, the percentage of ownership of our shareholders would be reduced. Furthermore, such equity securities or convertible
debt securities might have rights, preferences or privileges senior to our common stock.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



Foreign Currency Exposures



Our sales are denominated in U.S. dollars and accordingly, we do not use forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial instruments for trading or
speculative purposes. The effect of an immediate 10% change in exchange rates would not have a material impact on our future operating results or cash flows.



We do not use derivatives for trading or speculative purposes, nor are we party to leverage derivatives.



The company had interest expense of $0.2 million for the first six months of fiscal year 2004. The potential increase in interest expense
for the first six months of fiscal year 2004 from hypothetical 2% adverse change in variable interest rates would be less than $50,000.



16



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|Item 4. | Controls and Procedures
|------- | -----------------------



Evaluation of disclosure controls and procedures. Based on their evaluation of the Companys disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act)) as of December 27, 2003, the Companys president, chief executive officer and chief financial officer (principal executive officer and principal financial
officer) have concluded that the Companys disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and are operating in an effective manner.



Changes in internal controls.There have not been any changes in the Companys internal controls over financial reporting during
the quarter ended December 27, 2003 that materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.



PART II. OTHER INFORMATION



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



At the Companys annual meeting of stockholders held October 29, 2003, the stockholders of the Company elected two directors of the Company.



Mr. Hock E. Tan and Mr. Nam P. Suh were elected to serve as
directors at the meeting. The voting results were 39,213,286 shares in favor and 23,692,380 shares abstained for Mr. Tan and 59,119,322 shares in favor and 3,786,344 shares abstained for Mr. Suh.



|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------



| | (a) | Reports on Form 8-K:
| | --- | --------------------



On October 24, 2003, the Company furnished, under Item 12, a Current Report on Form 8-K announcing financial results for the first quarter ended September
27, 2003. This Current Report is not deemed filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section.



| | (b) | The following is a list of exhibits filed as part of the Form 10-Q:
| | --- | -------------------------------------------------------------------



|     |  |                                                                                                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                        
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                        
|     | 
|32.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Hock E. Tan    
|     | 
|32.2 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Justine F. Lien



17



---

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.



|                        |  |  |  |                                  |  |                    |  |                                                  
|----------------------- |  |  |  | -------------------------------- |  | ------------------ |  | -------------------------------------------------
|                        |  |  |  | INTEGRATED CIRCUIT SYSTEMS, INC.
|                        |  |  | 
|Date: February 10, 2004 |  |  |  | By:                              |  | /s/    HOCK E. TAN
|                        |  |  |  |                                  |  |                    | 
|                        |  |  |  |                                  |  |                    |  | Hock E. Tan President and Chief Executive Officer



|                        |  |  |  |     |  |                        |  |                                                                                                               
|----------------------- |  |  |  | --- |  | ---------------------- |  | --------------------------------------------------------------------------------------------------------------
|                        |  |  | 
|Date: February 10, 2004 |  |  |  | By: |  | /s/    JUSTINE F. LIEN
|                        |  |  |  |     |  |                        | 
|                        |  |  |  |     |  |                        |  | Justine F. Lien Vice President, Finance and Chief Financial Officer (Principal financial & accounting
officer)



18



---

EXHIBIT INDEX



|       |  |                                                                                                                                           
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                               
|       | 
|31.1   |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                        
|       | 
|31.2   |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                        
|       | 
|32.1   |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Hock E. Tan    
|       | 
|32.2   |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Justine F. Lien



19