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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 September 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
November 7, 2003, there were 72,140,548 shares of Common Stock; $0.01 par value, outstanding.



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INTEGRATED CIRCUIT SYSTEMS, INC.



IN
DEX



|         |  |                                                                                       |  | PageNumber
|-------- |  | ------------------------------------------------------------------------------------- |  | ----------
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  |           
|Item 1.  |  | Consolidated Financial Statements:                                                    |  |           
|         |  |                                                                                      
|         |  | Consolidated Balance Sheets (Unaudited):                                              |  |           
|         |  | September 27, 2003 and June 28, 2003                                                  |  | 3         
|         |  |                                                                                      
|         |  | Consolidated Statements of Operations (Unaudited):                                    |  |           
|         |  | Three Months Ended September 27, 2003 and September 28, 2002                          |  | 4         
|         |  |                                                                                      
|         |  | Consolidated Statements of Cash Flows (Unaudited):                                    |  |           
|         |  | Three Months Ended September 27, 2003 and September 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                            |  | 15        
|         |  |                                                                                      
|Item 4.  |  | Controls and Procedures                                                               |  | 15        
|         |  |                                                                                      
|PART II. |  | OTHER INFORMATION                                                                     |  |           
|         |  |                                                                                      
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                      |  | 16        

|
|

|
|



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)



|                                                                                                                                                      |  | Sept. 27, 2003 |         |   | June 28, 2003 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ------------- | -
|ASSETS                                                                                                                                                |  |                |         |   |               |  
|Current Assets:                                                                                                                                       |  |                |         |   |               |  
|Cash and cash equivalents                                                                                                                             |  | $              | 132,380 |   |               | $
|Marketable securities                                                                                                                                 |  |                | 14,943  |   |               |  
|Accounts receivable, net                                                                                                                              |  |                | 33,829  |   |               |  
|Inventory, net                                                                                                                                        |  |                | 16,439  |   |               |  
|Deferred income taxes                                                                                                                                 |  |                | 6,224   |   |               |  
|Prepaid income taxes                                                                                                                                  |  |                | 15,636  |   |               |  
|Prepaid assets                                                                                                                                        |  |                | 4,312   |   |               |  
|Other current assets                                                                                                                                  |  |                | 2,263   |   |               |  
|                                                                                                                                                      |  |                |         |   |               |  
|Total current assets                                                                                                                                  |  |                | 226,026 |   |               |  
|                                                                                                                                                      |  |                |         |   |               |  
|Property and equipment, net                                                                                                                           |  |                | 16,405  |   |               |  
|Long term investments                                                                                                                                 |  |                | 31,073  |   |               |  
|Intangibles                                                                                                                                           |  |                | 29,639  |   |               |  
|Goodwill                                                                                                                                              |  |                | 36,573  |   |               |  
|Other assets                                                                                                                                          |  |                | 78      |   |               |  
|                                                                                                                                                      |  |                |         |   |               |  
|Total assets                                                                                                                                          |  | $              | 339,794 |   |               | $
|                                                                                                                                                      |  |                |         |   |               |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                  |  |                |         |   |               |  
|Current Liabilities:                                                                                                                                  |  |                |         |   |               |  
|Current portion of long-term obligations                                                                                                              |  | $              | 5,854   |   |               | $
|Accounts payable                                                                                                                                      |  |                | 19,365  |   |               |  
|Accrued salaries and bonus                                                                                                                            |  |                | 1,518   |   |               |  
|Accrued expenses and other current liabilities                                                                                                        |  |                | 7,535   |   |               |  
|                                                                                                                                                      |  |                |         |   |               |  
|Total current liabilities                                                                                                                             |  |                | 34,272  |   |               |  
|                                                                                                                                                      |  |                |         |   |               |  
|Deferred tax and other liabilities                                                                                                                    |  |                | 12,950  |   |               |  
|                                                                                                                                                      |  |                |         |   |               |  
|Total liabilities                                                                                                                                     |  |                | 47,222  |   |               |  
|                                                                                                                                                      |  |                |         |   |               |  
|Shareholders equity:                                                                                                                                 |  |                |         |   |               |  
|Preferred Stock, authorized 5,000; none issued                                                                                                        |  |                |        |   |               |  
|Common stock, $0.01 par, authorized 300,000; Issued and outstanding 71,905 and 71,284 shares as of September 27, 2003 and June 28,
2003, respectively |  |                | 719     |   |               |  
|Additional paid in capital                                                                                                                            |  |                | 268,837 |   |               |  
|Retained earnings                                                                                                                                     |  |                | 45,906  |   |               |  
|Deferred compensation                                                                                                                                 |  |                | (487    | ) |               |  
|Other comprehensive income                                                                                                                            |  |                | 6       |   |               |  
|Treasury stock, at cost, 1,320 and 1,120 shares as of September 27, 2003 and June 28, 2003, respectively                                              |  |                | (22,409 | ) |               |  
|Total shareholders equity                                                                                                                            |  |                | 292,572 |   |               |  
|                                                                                                                                                      |  |                |         |   |               |  
|Total liabilities and shareholders equity                                                                                                            |  | $              | 339,794 |   |               | $
|                                                                                                                                                      |  |                |         |   |               |  



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 |       
|--------------------------------------------- |  | ------------------ | ------
|                                              |  | Sept. 27,2003      |       
|Revenue:                                      |  | $                  | 65,285
|Cost and expenses:                            |  |                    |       
|Cost of sales                                 |  |                    | 26,436
|Research and development                      |  |                    | 9,308 
|Selling, general and administrative           |  |                    | 9,790 
|                                              |  |                    |       
|Operating income                              |  |                    | 19,751
|                                              |  |                    |       
|Interest and other income                     |  |                    | 881   
|Interest expense                              |  |                    | (136  
|                                              |  |                    |       
|Income before income taxes                    |  |                    | 20,496
|Income taxes                                  |  |                    | 3,215 
|                                              |  |                    |       
|Net income                                    |  | $                  | 17,281
|                                              |  |                    |       
|Basic income per share:                       |  |                    |       
|Net income                                    |  | $                  | 0.25  
|Diluted income per share:                     |  |                    |       
|Net income                                    |  | $                  | 0.24  
|Weighted average shares outstanding  basic   |  |                    | 70,453
|Weighted average shares outstanding  diluted |  |                    | 73,279



See accompanying notes
to consolidated financial statements.



4



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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)



|                                                                                  |  | Three Months Ended |        
|--------------------------------------------------------------------------------- |  | ------------------ | -------
|                                                                                  |  | Sept. 27,2003      |        
|Cash flows from operating activities:                                             |  |                    |        
|Net income                                                                        |  | $                  | 17,281 
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                    |        
|Depreciation and amortization                                                     |  |                    | 2,408  
|(Gain) loss on sale of assets                                                     |  |                    | (504   
|Tax benefit of stock options                                                      |  |                    | 5,250  
|Deferred income taxes                                                             |  |                    | 891    
|Changes in assets and liabilities:                                                |  |                    |        
|Accounts receivable                                                               |  |                    | (2,329 
|Inventory                                                                         |  |                    | (617   
|Other assets, net                                                                 |  |                    | 375    
|Accounts payable, accrued expenses and other current liabilities                  |  |                    | 4,933  
|Restructuring costs                                                               |  |                    | (509   
|Accrued interest expense                                                          |  |                    | (23    
|Income taxes                                                                      |  |                    | (3,424 
|                                                                                  |  |                    |        
|Net cash provided by operating activities                                         |  |                    | 23,732 
|                                                                                  |  |                    |        
|                                                                                  |  |                   
|Cash flows from investing activities:                                             |  |                    |        
|Purchases of marketable securities                                                |  |                    | (14,936
|Sales/Maturities of marketable securities                                         |  |                    | 6,374  
|Capital expenditures                                                              |  |                    | (2,163 
|Other                                                                             |  |                    | 39     
|                                                                                  |  |                    |        
|Net cash provided by (used in) investing activities                               |  |                    | (10,686
|                                                                                  |  |                    |        
|                                                                                  |  |                   
|Cash flows from financing activities:                                             |  |                    |        
|Exercise of stock options                                                         |  |                    | 9,173  
|Shares purchased through stock purchase plan                                      |  |                    | 199    
|Purchase of treasury stock                                                        |  |                    | (3,871 
|Repayments of long-term debt                                                      |  |                    | (4,205 
|                                                                                  |  |                    |        
|Net cash provided by (used in) financing activities                               |  |                    | 1,296  
|                                                                                  |  |                    |        
|                                                                                  |  |                   
|Net increase in cash and cash equivalents                                         |  |                    | 14,342 
|Cash and cash equivalents:                                                        |  |                    |        
|Beginning of period                                                               |  | $                  | 118,038
|                                                                                  |  |                    |        
|End of period                                                                     |  | $                  | 132,380
|                                                                                  |  |                    |        



See accompanying notes
to consolidated financial statements.



5



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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



(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
September 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 three months ended September 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 first quarter of fiscal 2004.



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.



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 its employee stock-based compensation. The pro forma effect on net earnings and net earnings per share is as follows for the three-month periods ending September 27, 2003 and September 28, 2002 (in
thousands, except net income per share):



6



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|                                                                                                                 |  | Three Months Ended
|---------------------------------------------------------------------------------------------------------------- |  | ------------------
|                                                                                                                 |  | Sept. 27,2003     
|Net income, as reported                                                                                          |  | $                 
|Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects     |  |                   
|Less: Total stock-based employee compensation expense determined under the fair value method for all awards, net |  |                   
|                                                                                                                 |  |                   
|Net income, pro forma                                                                                            |  | $                 
|Basic earnings per share:                                                                                        |  |                   
|As reported                                                                                                      |  | $                 
|Pro forma                                                                                                        |  | $                 
|Diluted earnings per share:                                                                                      |  |                   
|As reported                                                                                                      |  | $                 
|Pro forma                                                                                                        |  | $                 



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
February 2003, the Emerging Issues Task Force ratified Issue No. 00- 21, Revenue Arrangements with Multiple Deliverables, (Issue 00-21). Issue 00-21 addresses certain aspects of the accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities and addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. Currently, we are evaluating the impact Issue 00-21
could have on our results of operations, financial position, liquidity and disclosure requirements. Issue 00-21 becomes effective for revenue arrangements entered into after June 30, 2003.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. This Statement improves financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. This Statement is effective for contracts entered into or modified after
June 30, 2003. We do not believe that adoption of this statement will have a material impact on our operating results.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or
an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. We do not believe that adoption of this statement will have a material impact on our operating results.



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):



|
|

|                           |  | Sept. 27,2003 |        |   | June 28,2003 |  
|-------------------------- |  | ------------- | ------ | - | ------------ | -
|Raw Materials              |  | $             | 6,596  |   |              | $
|Work-in-process            |  |               | 9,556  |   |              |  
|Finished parts             |  |               | 8,618  |   |              |  
|Less: Obsolescence reserve |  |               | (8,331 | ) |              |  
|                           |  |               |        |   |              |  
|                           |  | $             | 16,439 |   |              | $
|                           |  |               |        |   |              |  



(3) DEBT



In connection with the acquisition of MNC in Fiscal 2002, we entered into a revolving credit
and term loan facility dated December 31, 2001, which will expire 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.
Currently we have selected LIBOR plus 1.75%, which was 2.875% as of September 27, 2003, as the interest rate on our term loan. During the first three months of fiscal year 2004, we paid down $4.2 million of the term loan. As of September 27, 2003,
$5.8 million was outstanding on our term loan all of which is classified current as it is our intention to pay the debt off early. There is no outstanding amount on the revolving credit as of September 27, 2003.



In connection with our bank agreement, we entered into an 18-month interest rate swap
agreement with the same financial institution. The interest rate swap agreement essentially enables us to manage the exposure to fluctuations in interest rates on a portion of our term loan.



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 September 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 or moving office and production activities and $2.0 million represents severance and other personnel costs. We expect to complete the restructuring by the end of calendar 2003.
As of September 27, 2003, we have expended approximately $1.9 million and $0.7 million of this reserve relating to severance and facility closing costs, respectively. Approximately $0.1 million of the remaining amount relates to severance and other
personnel costs, which will be paid in fiscal year 2003, $0.5 million relates to facility closing costs. During the first quarter of fiscal 2004 we utilized $0.3 million and $0.2 million of the reserve relating to severance and facility cost
closings respectively. 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):



8



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|Balance at June 28, 2003      |  | $ | 1,144 |  
|----------------------------- |  | - | ----- | -
|Utilized:                     |  |   |       |  
|Severance                     |  |   | (331  | )
|Facility closing costs        |  |   | (178  | )
|                              |  |   |       |  
|Balance at September 27, 2003 |  | $ | 635   |  
|                              |  |   |       |  



(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
September 27, 2003, we had repurchased 1.3 million shares for $22.4 million.



In the first quarter of fiscal 2004, additional paid in capital increased $10.4 million as the result of the exercise of stock options, the tax benefit relating to the exercises 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
|--------------------------------------------------------------------- |  | ------------------
|                                                                      |  | Sept. 27, 2003    
|Numerator (in thousands):                                             |  |                   
|Net income                                                            |  | $                 
|                                                                      |  |                   
|                                                                      |  |                   
|Denominator (in thousands):                                           |  |                   
|Weighted average shares outstanding used for basic income per share   |  |                   
|Common stock equivalents                                              |  |                   
|                                                                      |  |                   
|Weighted average shares outstanding used for diluted income per share |  |                   
|                                                                      |  |                   



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
|---------------------------- |  | ------------------
|                             |  | Sept. 27, 2003    
|Net income                   |  | $                 
|                             |  |                   
|Other comprehensive income:  |  |                   
|Foreign currency translation |  |                   
|                             |  |                   
|Total comprehensive income   |  | $                 
|                             |  |                   



(9) INCOME TAX



Our effective income tax rate was 15.7% for the first three months of fiscal year 2004 as
compared to 14.9% 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 $55.2 million liability as of September 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, although no assurance can be made in this regard.



(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 three months of fiscal year 2004, and 21% 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 19% of our sales for the first three months of fiscal year 2004, and 18% 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                  |  | Sept. 27, 2003 |  | Sept. 28, 2002
|----------------------------------- |  | -------------- |  | --------------
|Revenues                            |  | 100.0%         |  | 100.0%        
|Gross margin                        |  | 59.5           |  | 59.6          
|Research and development            |  | 14.3           |  | 14.2          
|Selling, general and administrative |  | 14.9           |  | 17.7          
|                                    |  |                |  |               
|Operating income                    |  | 30.3           |  | 27.7          
|                                    |  |                |  |               
|Interest and other income           |  | 1.3            |  | 1.0           
|Interest expense                    |  | (0.2)          |  | (0.8)         
|                                    |  |                |  |               
|Income before income taxes          |  | 31.4           |  | 27.9          
|Income taxes                        |  | 4.9            |  | 4.2           
|                                    |  |                |  |               
|Net income                          |  | 26.5%          |  | 23.7%         
|                                    |  |                |  |               



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



Revenue. Revenue was $65.3 million for the first quarter ended September 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 15.3%, while the volume increased 33.4%.



Foreign revenue, which includes shipments of products to foreign companies as well as offshore subsidiaries of US multinational companies, was 74.7% of total revenue for the first quarter of fiscal year 2004 as compared to 76.7% 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 $26.4 million for the quarter ended September 27, 2003, an increase of $3.1
million from the prior year quarter. Cost of sales as a percentage of total revenue was 40.5% for the first quarter of fiscal year 2004 as compared to 40.4% 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 $9.3 million for the first quarter of fiscal year 2004, an increase of $1.1 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 14.3% in the first 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 $9.8 million for the first quarter of fiscal year 2004, a decrease of $0.5 million from the prior year quarter.
As a percentage of total revenue, SG&A expenses decreased to 14.9% in the first quarter of fiscal year 2004 as compared to 17.7% in the prior year quarter. The decrease is attributable to a decrease in legal expense 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 $19.8 million in the first quarter of fiscal year 2004 compared to $16.0
million in the first quarter of fiscal year 2003. Expressed as a percentage of revenue, operating income was 30.3% and 27.7% in the first quarter of fiscal year 2004 and the prior year quarter, respectively.



Interest Expense.Interest expense was $0.1 million in the first quarter of fiscal
year 2004 and $0.5 million in the first quarter of fiscal year 2003. This decrease is due to lower debt balances.



Interest and Other Income.Interest and other income was $0.9 million for the quarter ended September 27, 2003 and $0.6 million in the prior year quarter. Included
in other income is the gain of $0.3 million as a result of the sale of 25% of our investment in Maxtek Technology Co. Ltd.



Income Tax Expense.Our effective income tax rate was 15.7% for the first quarter of fiscal year 2004 as compared to 14.9% in the prior year period. The effective
tax rate for fiscal years 2004 and 2003 reflects the tax-exempt status of our



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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 $55.2 million liability as of September 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 September 27, 2003, our principal sources of liquidity included cash and short-term investments of $147.3 million as compared to the June 28, 2003 balance of $123.0
million. Net cash provided by operating activities was $23.7 million in the first three months of fiscal year 2004, as compared to $18.8 million in the prior year period. This increase is primarily attributable to the increase in our profitability.
Our days sales outstanding was consistent at 47 days, while our effort on improving our inventory controls and increased sales volume resulted in inventory turns increasing from 5.4 times in the fourth quarter of fiscal year 2003 to 6.6 times in the
quarter ending September 27, 2003.



Purchases for property and equipment were
$2.2 million in the first quarter of fiscal year 2004 and $1.4 million in the prior year period.



Purchases of marketable securities were $14.9 million compared to $5.0 million in the prior year period. We have invested more funds out in the three to six months 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.



13



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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 three months of fiscal year 2004, and 21% 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 19% of our sales for the first three months of fiscal year 2004, and 18% in the prior year period.



During the first quarter of fiscal 2004, we received $9.2 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
September 27, 2003, we had repurchased 1.3 million shares for $22.4 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 or moving office and
production activities and $2.0 million represents severance and other personnel costs. We expect to complete the restructuring by the end of calendar 2003. As of September 27, 2003, we have expended approximately $1.9 million and $0.7 million of
this reserve relating to severance and facility closing costs, respectively. Approximately $0.1 million of the remaining amount relates to severance and other personnel costs, which will be paid in fiscal year 2003, $0.5 million relates to facility
closing costs. During the first quarter of fiscal 2004 we utilized $0.3 million and $0.2 million of the reserve relating to severance and facility cost closings respectively. 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 MNC, we entered into a revolving credit and term loan facility dated December 31, 2001, which will expire December 31, 2004. The new
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. Currently we have selected LIBOR plus 1.75%, which was 2.875% as of September 27, 2003, as
the interest rate on our term loan. As of September 27, 2003, $5.8 million was outstanding on our term loan all of which is classified current as it is our intention to pay the debt off early. There is no outstanding amount on the revolving credit
as of September 27, 2003.



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



|Contractual Obligations |  | Total |        | Less than 1 year |   | 1  3 years |  | 4  5 years |       | After 5 years
|----------------------- |  | ----- | ------ | ---------------- | - | ----------- |  | ----------- | ----- | -------------
|                       
|Long-Term Debt          |  | $     | 5,854  |                  | $ | 5,854       |  | $           |      |              
|Operating Leases        |  |       | 14,413 |                  |   | 2,114       |  |             | 8,062 |              
|                       
|Total                   |  | $     | 20,267 |                  | $ | 7,968       |  | $           | 8,062 |              
|                       



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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 September 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.



Interest Rate Risk

In connection with our bank agreement, we entered into an 18-month interest rate swap agreement with the same financial institution. The interest rate swap agreement
essentially enables us to manage the exposure to fluctuations in interest rates on a portion of our term loan.



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



The company had interest expense of $0.1 million for the first three months of fiscal year 2004. The potential increase in interest expense for the first three months of
fiscal year 2004 from hypothetical 2% adverse change in variable interest rates would be less than $50,000.



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
September 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 control over financial reporting during the quarter ended September 27, 2003 that materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.



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PART II. OTHER INFORMATION



Item 6. Exhibits and Reports on Form 8-K



(a) Reports on Form 8-K:



On July 30, 2003, the Company furnished, under Item 12, a Current Report on Form 8-K announcing financial results for the fiscal year end and fourth
quarter ended June 28, 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:



| | 10.1 | Revolving Credit and Term Loan Agreement dated December 31, 2001
| | ---- | ----------------------------------------------------------------



| | 10.2 | Modification to Revolving Credit and Term Loan Agreement dated January 9, 2002
| | ---- | ------------------------------------------------------------------------------



| | 10.3 | Second Modification to Revolving Credit and Term Loan Agreement dated February 28, 2002
| | ---- | ---------------------------------------------------------------------------------------



| | 10.4 | Third Modification to Revolving Credit and Term Loan Agreement dated June 14, 2002.
| | ---- | -----------------------------------------------------------------------------------



| | 10.5 | Fourth Modification to Revolving Credit and Term Loan Agreement dated September 25, 2002
| | ---- | ----------------------------------------------------------------------------------------



| | 10.6 | Fifth Modification to Revolving Credit and Term Loan Agreement dated October 22, 2002
| | ---- | -------------------------------------------------------------------------------------



| | 10.7 | Sixth Modification to Revolving Credit and Term Loan Agreement dated January 8, 2003
| | ---- | ------------------------------------------------------------------------------------



| | 10.8 | Term Note with First Union National Bank dated January 9, 2002
| | ---- | --------------------------------------------------------------



| | 10.9 | Term Note with Fleet National Bank dated January 9, 2002
| | ---- | --------------------------------------------------------



| | 10.10 | Revolving Credit Note with First Union National Bank dated January 9, 2002
| | ----- | --------------------------------------------------------------------------



| | 10.11 | Revolving Credit Note with Fleet National Bank dated January 9, 2002
| | ----- | --------------------------------------------------------------------



| | 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
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------



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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.







|      |  |                   |  | INTEGRATED CIRCUIT SYSTEMS, INC.
|----- |  | ----------------- |  | --------------------------------
|      |  |                   |  |                                 
|Date: |  | November 11, 2003 |  |                                 
|      |  |                   |  |                                 
|      |  |                   |  |                                 

|
|

|
|

|
|

|
|



|      |  |                   |  | 
|----- |  | ----------------- |  | 
|Date: |  | November 11, 2003 |  | 
|      |  |                   |  | 
|      |  |                   |  | 



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EXHIBIT INDEX



|Number |  | Description                                                                                                                               
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------
|10.1   |  | Revolving Credit and Term Loan Agreement dated December 31, 2001                                                                          
|10.2   |  | Modification to Revolving Credit and Term Loan Agreement dated January 9, 2002                                                            
|10.3   |  | Second Modification to Revolving Credit and Term Loan Agreement dated February 28, 2002                                                   
|10.4   |  | Third Modification to Revolving Credit and Term Loan Agreement dated June 14, 2002.                                                       
|10.5   |  | Fourth Modification to Revolving Credit and Term Loan Agreement dated September 25, 2002                                                  
|10.6   |  | Fifth Modification to Revolving Credit and Term Loan Agreement dated October 22, 2002                                                     
|10.7   |  | Sixth Modification to Revolving Credit and Term Loan Agreement dated January 8, 2003                                                      
|10.8   |  | Term Note with First Union National Bank dated January 9, 2002                                                                            
|10.9   |  | Term Note with Fleet National Bank dated January 9, 2002                                                                                  
|10.10  |  | Revolving Credit Note with First Union National Bank dated January 9, 2002                                                                
|10.11  |  | Revolving Credit Note with Fleet National Bank dated January 9, 2002                                                                      
|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



18